It’s time for a reality check on 2021-crop corn, soybeans and wheat. If you haven’t locked in prices (and record returns on investment for many), why haven’t you?
If you are in an area that fell short on 2021 yields and demand has a chance of outstripping supply this summer, holding some crop in the bin for a July basis surge might make sense. But for many growers, it’s probably “OK to be satisfied” with the return on investment available at this time.
For those that already put record crop margins in the bank, you’ve created flexibility for 2022. Market conditions project record expenses to plant an acre of corn this year. Soybean costs will likely be record high, but a surge in crop protection supplies before spring could still bring chemical prices down (some).
Profit Versus Costs
Profit from 2021 crops can be used to cover a higher-than-normal chunk of 2022 operating costs, reducing loan and interest exposure in what will be a tighter margin year. Interest rates on 2022 crop operating costs should be close to last year’s levels. The Fed’s next meeting is Jan. 30-31 and odds are interest rate policy will be unchanged.
Yet, market analysts project three interest rate increases this year. Rates would remain relatively low, but it means interest-rate exposure of two- to three-times the past several years. Now is the time to find the combination of cash and borrowed money that works best for you for 2022, lock in interest rates early and manage what will be “more ordinary” ROIs on corn and soybeans this year.
Record production costs mean record risk levels for the year-ahead. That increases the urgency to reduce risk to manageable levels. Turn-of-the-calendar markets offered about a 10% ROI for corn, and about 6% for soybeans. Those are not “let-it-ride” returns. Use APH yields and anticipate $5.25 cash corn and $12 cash beans (both, conservatively, just under USDA’s national average on-farm cash price projections in December Supply & Demand Report).
Strategies to Reduce Risk
Once input costs are locked in, start to lay-off some of that risk by putting a floor under the market while still maintaining upside price potential. Tools can include:
- Put options
- Minimum price contracts
- Sell-and-replace strategies
You can participate in a weather-driven market this spring and summer and reduce risk during the 2022 crop acreage debate.
Some analysts believe the record input costs for corn will force acres to soybeans and alternative crops. Other analysts argue corn costs may be record large, but potential corn ROI still outpaces that of soybeans. The bean:corn price ratio of USDA’s December projections is 2.2:1 – a level that normally increases corn plantings.
Profit opportunities on 2021-crops are clearly defined, but the moving parts of 2022 crop profits are adjusting wildly! Lock up the 2021 crop profits to give you flexibility on the cost-side of 2022 crop and whittle-down this year’s record risk level by metering bushels to the market.
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