Commodity prices impact farms margins and push land rents lower

The swing in commodity prices has caused farms to adjust spending patterns to generate a positive net margin in their production system. Learn how your farm can move forward with a new spending plan.

For the big three commodities, which are corn, soybeans and wheat, the potential gross revenue dropped drastically during 2014 and 2015. With corn at near $7 per bushel and soybeans over $14 a bushel in 2012, grain commodities reached new market highs. Today commodity prices for most crops have returned to something that is closer to the levels seen prior to the recent five-year price rally. Because of the swings in commodity prices, farms need to adjust spending patterns to reflect their ability to generate a positive net margin in their overall production system.

For most farms this means looking at the price projections. If we compare the market average national corn price for 2011 through 2014 at $5.31 per bushel to the projected price of $3.50 per bushel for 2015 through 2018, it shows a drop of income by 34 percent. You can see that over a corn, soybean and wheat crop rotation is it projected that there may be over a $200.00 per acre change in revenues which will need to be adjusted for. Every farm will need take notice when revenues drop by 34 percent. This revenue change alone will require adjustments to be made to keep the farm viable as other commodities track a similar path.

Table #1 (USDA Market Year Average Prices

Corn

Soybean

Wheat

Average

Market Year Average Price (2011-2014)

$5.31

$12.28

$6.90

Market Year Average Price (2015-2018 est.)

$3.50

$8.86

$4.83

Bushels per acre

165

50

75

Change in Gross Income

-$298

-$171

-$155

-$208

If farms have taken advantage of some of the economic gains earned over the past five years, they may be able to cover the variable cost of the grain crops on the short term. On the plus side, some inputs like fuel and fertilizer are now available at prices on the lower end of their ten year averages which will provide some cost relief for farm producers. But looking down the road, if prices remain low, major changes will need to take place on farms to control overhead costs with adjustments being made to rents paid and capital improvements so that financial situations remain sound. Long term, farms must cover all costs and provide a reasonable return to capital replacement, overhead and management to be sustainable.

As farms move forward, we are seeing that many of the record high land values and land rental rates are moving lower to a more sustainable level, with the highest rents showing the most downward trend and the mid-range rents remaining more stable. Farms have and continue to use several resources to help them estimate their farm’s cost of production and identify what are reasonable and sustainable land costs when developing fair / win-win land rental arrangements. Budget estimate templates are available to be downloaded at the Michigan State University Extension’s Farm Management webpage. You can find the 2016 Crop Budget Estimate excel template on this page. In addition you can find other breakeven estimation templates which can be a handy tool to do a quick “what if” estimate of how inputs and commodity prices will impact potential commodity profitability. With a resource like this, a farm can input their farm’s projected costs and incomes and quickly develop a baseline when making those last minute crop production adjustments for their 2016 planting season or when implementing a commodity marketing strategy.

The basic rule is that over time the cropping system that is put in place on a farm must generate the net revenue above cash costs to cover all land costs. Many farms are now looking at total land cost across all acres and using that calculation to determine the maximum cash rents that can be paid. As many farms go through this process, they are finding that farm land rental rates need to be lower than in prior years to align with current market price. 

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