Time to Button Down Management Hatches

February 28, 2013 11:04 AM
Doug Rupp

When corn prices head for $4, Ohio farmer Doug Rupp has a plan to still come out ahead.

The run of near-record crop prices might be about to end, if not this fall then by harvest 2014, analysts say. "We’re just a crop away from $4 corn," acknowledges Doug Rupp, who grows corn, soybeans and wheat near Stryker, Ohio. "Prices will get softer."

"I can tell you a good $4 corn story or $9 corn story for this fall and it all depends on rainfall," says Chad Hart, Iowa State University economist. He thinks low prices are more likely in 2014 than this year, however, so you might have a little time to make adjustments in your farm business.

When corn prices appear to be heading for $4, Rupp plans to pull key changes out of his management toolbox. To improve cash flow, he’ll pull back on investments he’s made during high-income years, such as new grain bins and tiling. He’ll cut back on input purchases as well as delay buying some inputs, such as fertilizer, chemicals and seed.

In terms of marketing, Rupp plans to be more aggressive about locking in margins when profit opportunities present themselves. "With $4 corn, margin management is paramount," Rupp says. "Forty cents on 200-bu. corn is $80 per acre."

Break-even point. The cost of production statistics are sobering, however. In the next five to 10 years, the break-even corn price is around $4.50, according to the University of Illinois.
The good news: cost-cutting options exist. University of Minnesota data shows a $2 per bushel spread between the top 20% in efficiency and the bottom 20%. In 2011, the top 20% had corn production costs down to $3.39 per bushel. This compares to $5.39 for the bottom 20%. "The top group does a better job on everything, not just one thing," says Dale Nordquist, University of Minnesota economist.

One statistic sticks out: Average yield for the top group was 180 bu. per acre, 26 bu. more than the bottom group. At the same time, the top group’s land rent was $44 per acre less than the bottom group. "The top 20% appear to be better negotiators with landlords," Nordquist says, and the same is probably true with suppliers.

Don’t sacrifice yield. Nordquist cautions against radical cuts on inputs, however, because that can drop yields.

The No. 1 cost that must come down if $4.50 corn becomes a reality is cash rent, says Gary Schnitkey, University of Illinois economist. Negotiating with landlords "could be very painful," he says, and be a multiyear process.

If farmers see a sustained period of $4-something corn, they might want to consider shifting crop patterns, says Michael Langemeier, Purdue University economist. While all crops are likely to decline in value if corn falls, the relative returns of soybeans and wheat could increase. "Corn is a high- cost crop. We could see more wheat in the High Plains and more corn-soybean rotations (less continuous corn) in Illinois and Indiana," he says.

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