This week I was asked, “How can you feel comfortable selling so far forward without knowing your future production costs?”
Because I analyze and monitor historical input costs. On our farm, we meticulously keep track of all production costs (as any strong business would) and note trending prices, averages and year over year cost increases. Additionally, I work with all my clients on their input costs, asking them to provide similar records for planning purposes. When you have all the planning tools to help make decisions, it eases anxiety in planning for the future. Largely, I translate all input costs into a cost per acre and bushel perspective. Some years we are under budget and some years we are over. However, when considering a three-year rolling average we tend to always be right on budget.
Let’s look at approximate production costs (without land costs) for my farm operations as an example….
· Fertilizer – 33%
· Seed/Herbicides/Pesticides – 33%
· Equipment/Fuel/Labor/Insurance – 33%
Fertilizer - Historical trends on my farm show fertilizer has the biggest cost swings year after year ($40/acre from the highest to lowest year for my farm the past 3-5 years). That seems like a lot. However, one can put it into perspective and budget for it by understanding its cost per bushel. In reality that swing only represents a $.20-.25 difference on the bottom line (pending average yields). Still significant, but more manageable. We just have to plan for that range of possibility.
Seed/Chemicals – These inputs have largely been predictable inflationary price increases. Every year we budget those increases on the seed and chemicals.
Equipment – Equipment costs have increased significantly over the past few years. To offset these costs, we translate equipment costs into “per hour” usage estimates against acres used. Also, we average equipment purchases and maintenance over a 3-5 year time-frame. This estimating model has worked well. We continue to fall within the farm’s budget perimeters year after year.
Fuel – While fuel is a volatile cost, it’s a relatively low percentage of my overall costs. Accounting for a $.50 change in fuel prices equates to a $.05 change in production costs.
This is just one way to budget input costs yearly, there are many. But to me, this is the simplest way to budget inputs for my farm operation. The most important part is for farmers to understand their input costs, so they can plan for the future. I have found, many don’t take the time. I’ve mentioned this before, most farmers plan to be in business several years from now. Rather than look at the farm operation as a yearly enterprise, it is more advantageous to be forward thinking. Start planning five years out, rather than just next year, and it will change your perspective.
Everyone is expecting a massive crop this harvest. The biggest surprise is how many farmers are still waiting to sell old crop, since prices dipped below $4. Some farmers are delivering old crop against new crop sales, hoping for another rally to come later this marketing year. The trade knows farmers have plenty of money in the bank and are not looking to pay up for grain if they don’t have the need. Many farmers don’t have to sell at perceived lower prices. The rise of on-farm storage is also contributing to farmers not selling early.
This delay in sales is putting a crunch on grain elevators. It has caused them to bid up for quick-ship corn while keeping basis (cash) prices strong. Elevators tell me that if farmers would begin selling cash grain (just 1% to 5% of each elevator’s annual purchases), they would feel comfortable lowering prices to levels that truly represent where they can sell corn today. So, is there a price bubble forming? Possibly, if farmers have to start selling, it’s hard to predict how low prices will go. Some say foreign buyers may provide relief. However, when considering freight spreads, U.S. corn is currently too expensive for more foreign buyers ($.28-$.45 premium) to step in. Some traders question if Dec corn will fall below current levels to $3.50 or even $3.25. Farmers, on the other hand, are waiting for a $4 rally, but will likely start selling at $3.80. A 2014/15 range of $3.50 to $3.80 seems likely.
Pro Farmer released their corn tour estimates at 169.3 national average. Last year their corn yield estimate was 154.1 (vs USDA final 158.9). Some in the industry disagree with Pro Farmer’s approach to yield count estimates on kernels per bushel because it may reflect lower than actual yield. Time will tell but the trade will probably look on this report as neutral.
Old crop beans are extremely tight and soy crushers need a few more bushels before harvest. Cash prices are in a rally, which is propping up new crop beans on the board. The recent rains across the Midwest are easing short-crop concerns. Bean prices are still high relative to corn. When harvest starts many think farmers will sell beans and store corn. I continue to predict that bean prices will retreat in relationship to corn if yields are realized.
Pro farmer released their bean pod counts and soybean yield estimates — 45.3 national average. Last year their US soybean yield was 41.8 vs USDA final 43.3. What if Pro Farmer is that low again this year? I would think we would see some pretty low prices at harvest.
Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.
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