Economic Tidbits

Positive Margins Can Still Be Had

High fertilizer prices, tight supplies of chemicals like glyphosate and glufosinate, and extended waits for equipment, parts, and service will be part of next year’s crop production season. No doubt the cost increases and supply chain disruptions will make next year’s production season uniquely challenging. Yet despite the challenges, estimates by faculty at the University of Nebraska (UNL) and the University of Illinois suggest positive margins are still possible, at least for corn.

Cory Walter and Glennis McClure, associate professor and extension educator respectively within the Department of Agricultural Economics, updated UNL crop budgets for dryland corn and irrigated corn with estimated costs for fertilizer, fuel, pesticides, seed, and other inputs for 2022. Walter and McClure write, “When considering all of the above cost increases, total economic costs per bushel increases by $0.95 per bushel (from $3.19 to $4.14/bushel) for the dryland corn budget and increases $0.93 per bushel in the irrigated corn budget (from $3.18/bushel to $4.11/bushel).” Note the estimates do not include cost increases for labor, repairs, insurance, and other expenses.

The December 2022 futures price for corn was trading $5.54 per bushel as of this writing. Assuming a harvest cash basis of -$.30, a corn producer might expect a positive return of $1.37 to $1.40 per bushel. So, a positive margin can still be achievable. Economists at the University of Illinois found similar results when examining projected costs and prices for Illinois farmers.

Given the uncertainties and volatilities in today’s agriculture, understanding the risks and the impacts of higher costs to an operation is important when making decisions. A few things to keep in mind:

  1. Talk to input providers about projected needs. Discuss whether it makes sense to lock in supplies and prices now or wait until later. (A University of Illinois analysis found fertilizer prices increased 72 percent of the time between October and April during 2004-2020.)
  2. Develop production budgets and run the projected price increases though the budgets to know how they impact the bottom line and inform management decisions. To get started, check out the new online budget tool developed by the UNL Center for Agricultural Profitability at cap.unl.edu/abc
  3. Make a marketing plan based on 2022 production decisions and projected costs. Consider forward sales to protect margins.
  4. Be flexible with production plans. Understand 2022 will likely require adjustments and modifications to plans. Engage in “what if” planning. What if a specific fertilizer formulation is not available? What if glyphosate is not available? Such questioning can help one be prepared if the unexpected happens.

Next year will contain unique challenges. Communication, flexibility, and planning will be key for a successful year. More information on the Walter and McClure analysis can be found at: https://cap.unl.edu/crops/2022-cost-production-increases-expected-profit-and-navigating-riskier-financial-environment.

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