This article analyzes 2023 corn and soybean production costs for Missouri producers, the safety net provided through Federal crop insurance products and commodity support programs, and the probability of negative operating incomes. The probability of revenue not covering expenses has grown over the last four weeks as operating costs remain elevated for Missouri producers and commodity prices adjust downward on expectations of large domestic supplies and competition from South America. Two years of above average operating income allowed many producers to reduce debt and grow working capital reserves to the point broad financial stress is not expected across Missouri in 2023, but lower working capital to gross revenue ratios and higher operating loan demand is a concern heading into 2024.
Missouri Crop Costs and Anticipated Margins for 2023
Soil types, growing conditions, and management practices differ widely across Missouri, which creates relatively large dispersion in yield values. For example, Livingston County (Northwest Missouri) had the highest 2022 average corn yield at 198.6 bushels per acre while Webster County (Southwest Missouri) had the lowest average corn yield at 56.1 bushels per acre. The standard error of Missouri's corn yield mean is 64.4 bushels compared to 40.2 bushels for Illinois. Changes in yield and management practices are two large reasons per bushel breakeven prices differ between regions and producers. This article uses a historical 20-year trend yield for the state of Missouri of 166 bushels per acre for 2023 with a note the author recognizes 166 is way too low for Northern Missouri producers and too high for southern dryland Missouri producers and weather conditions during the growing season are unknown. To capture some regional differences, yield is increased and decreased 20%. Figures 1 & 2 illustrate projected land and non-land costs for low, average, and high yield scenarios for 2023 Missouri corn and soybean production, respectively.
Non-land costs, which include seed, crop protection, fertilizer, interest expense, machinery and fuel use, labor, and insurance are estimated using the March update of MU Extension's 2023 Crop Enterprise Budgets. Non-land cost values are calculated based on two assumptions- price per unit and units per acre. For example: seed and fertilizer costs are a function of productivity and assumed to increase on higher yielding ground. Â Non-land costs for corn are $640, $707, and $773 per acre for low, average, and high yielding scenarios, respectively. Soybean non-land costs for Missouri are $642, $683, and $732 per acre.
Cash rental rates collected by MU Extension during 2022 Agricultural Lender Seminars of $180, $205, and $235 represent land costs by productivity level. Most producers do not rent 100% of their cropped acreage nor is cash rent the only form of a rental agreement; however, the per acre value is included to get an understanding of complete costs, which include opportunity costs.
A positive margin is needed overtime to cover household living expenses, debt repayment and capital improvements. A $60 per acre margin is calculated on the assumption of $66,000 spread out over 1,100 acres. Overtime as farmers pay off land mortgages and equipment the associated opportunity cost accumulation shows up in bank accounts as a form of margin.
Breakeven per Bushel Prices
Dividing costs by anticipated production per acre produces required breakeven prices. Analysis is provided for costs including the $60 per acre margin and costs without margin.
For corn with margin, breakeven prices are $6.56, $5.78, and $5.26 per bushel (table 1). Breakeven corn prices without margin are $6.11, $5.42, and $4.96 per bushel (table 1). The December 2023 corn contract (CZ23) on the Chicago Board of Trade averaged $5.05 during the third week of May. Cash prices for fall delivery have also declined on the anticipation of large local supply.
For soybeans with margin, breakeven prices are $16.05, $13.94, and $12.41 per bushel (table 1). Breakeven soybean prices without margin are $14.55, $12.71, and $11.39 per bushel (table 1). During the third week of May, the November 2023 soybean contract (SX23) averaged $11.97.
The Food and Agricultural Policy Research Institute at the University of Missouri produces an annual baseline report every spring containing production, consumption, and price data for grains, oilseeds, and livestock among other indicators for the succeeding ten years. Variables are re-calculated 500 times under different assumptions of weather and macroeconomic factors to account for a distribution of outcomes. This collection of 500 outcomes should not be confused with a full list of possible outcomes. The University of Illinois' iFarm Price Distribution Tool uses current option market prices from the Chicago Mercantile Exchange to calculate a distribution of prices based on traded futures and options of a specific date. These two methods of price discovery: 1. FAPRI's 500 farm price outcomes for the season average price published in March 2023 and 2. University of Illinois iFARM price distribution tool of new crop futures contracts as of May 22, 2023, provide indication of whether output prices will cover production expenses in 2023.
Markets will change as more information is learned about the size of the 2023 corn and soybean crops in the United States and demand factors adjust to macroeconomics and competition from around the globe. More up-to-date market information can be found on the MU Extension Ag Business and Policy website. FAPRI's season average farm price distribution of outcomes nor the University of Illinois iFARM price distribution tool of Chicago Mercantile Exchange futures and option prices suggest market prices will be high enough to cover expected expenses with margin at any productivity level. However, the distributions would suggest there is a chance prices will be high enough to cover expenses without margin- especially for higher yielding land.
Cash Guarantees from Crop Insurance and Federal Farm Programs
New crop futures positions for corn and soybeans have dropped from values experienced in February when crop insurance guarantees are set. The average of the December futures contract in February was $5.91 compared to $5.05 the third week of May. Likewise, the November soybean futures contract averaged $13.76 per bushel compared to $11.97 per bushel the third week of May. The relatively high crop insurance guarantees do provide some level of cash protection. Table 2 illustrates cash guarantees for crop insurance under a Revenue Protection (RP) policy. There are multiple insurance plans to pick including yield only insurance, margin insurance, and revenue protection with harvest price exclusion but in 2022 Missouri producers selected RP protection on 94% and 91% of corn and soybean insured acres respectively. There are available coverage levels in 5% increments from 50% up to 85%. A weighted average of 2022 insured policies indicated coverage levels of 75% for both corn and soybeans. Seventy-five percent was also the most frequent coverage level for both crops.
A RP corn policy at 75% coverage and an Actual Production History (APH) of 166 bushels per acre would provide $705 per acre in cash guarantee (table 2)- nearly exactly the value needed to cover non-land costs for average yields but nearly $255 per acre lower than the needed value to cover all costs and margin. Similarly, a RP soybean policy at 75% coverage and an APH of 49 bushels per acre would provide roughly $493 per acre in guaranteed cash above the $430 per acre needed to cover non-land costs but $190 per acre less than the needed $683 per acre to cover all costs and margin. Significant losses in revenue minus expenses will occur before crop insurance kicks in for most of Missouri's corn and soybean producers even with a relatively strong spring projected price.
Federal farm programs exist to assist producers during years of relatively low farm revenue (Agricultural Risk Coverage) or low commodity prices (Price Loss Coverage). Neither are expected to make payments in 2023.
Agricultural Risk Coverage (ARC) triggers payments when current year county yields and national prices falls below 86% of a moving benchmark of historical national prices and county yields. Price protection under ARC is $3.42 and $8.23 per bushel for corn and soybeans, respectively. Figure 3 illustrates ARC price guarantees with average yields. The chance of ARC payments triggering increases if local county yield losses are large enough and national prices do not rise to offset the loss in revenue.
Price Loss Coverage (PLC) triggers payments when the national marketing year average price falls below an effective reference price. For 2023, effective reference prices are $3.70 per bushel for corn and $8.40 per bushel for soybeans. Figure 3 illustrates PLC price guarantees.
Estimated prices by FAPRI and the World Agricultural Outlook Board (WAOB) in their May supply and demand update have 2023/24 corn and soybean marketing year prices above the payment triggering thresholds of ARC and PLC for both corn and soybeans. Similar to crop insurance policies, significant financial losses would occur before ARC and PLC triggered payments.
Final ThoughtsCurrent market conditions suggest that financial loses will be experienced on cash rented farmland. There is a 67% and 70% chance market prices will finish below the needed prices to cover expenses without margin on average farmland for corn and soybeans, respectively. Furthermore, significant financial losses would be experience before Federal crop insurance and farm programs triggered payments. A couple other thoughts:
- Two years of above average aggregate farm income have provided adequate working capital to manage this shortfall on most Missouri operations, but increasing debt and declining working capital are concerns for 2024.
- The growing season is just beginning in the United States. Expansion of drought could limit production and increase prices. However, current weather models are forecasting favorable growing conditions and relatively strong yields for large parts of the US.
- Above trend yields are possible in 2023 and would reduce per bushel fixed costs like land and machinery.
- Some producers may have forward marketed their 2023 production at higher prices.
- Many producers have fully paid for land that would allow them to spread losses from rented land over more acres.
- Spring crop insurance guarantees were relatively high and while financial deterioration would occur- loses would have a lower bound for producers with insurance coverage.
Yields, prices, and net returns will become clearer over the next couple months. This analysis is meant to serve as a reminder that there is a lot of price risk associated with the 2023 corn and soybean crop. Additional articles will cover financial management strategies for Missouri producers.
Any comments or thoughts on the analysis presented above would certainly be welcomed by the author. Ben Brown can be reached at firstname.lastname@example.org