Finance Outlook

By Marcia Zarley Taylor
DTN Executive Editor

AUSTIN, Texas (DTN) -- Don't expect much farmer economizing in production costs in 2015, but it's not for lack of trying. Yes, growers can nickel-and-dime their remaining grain and soybean expenses, but most cannot recover the hundreds of dollars of gross income per acre that have vanished since 2012.

A 2,500-acre producer from northeast Iowa has seen roughly $1.45 million "walk out the door" since January 2013, just in reduced corn prices. "It's hard to recover that much in lower production costs," he told DTN. Like nearly half of the 409 readers polled by DTN at year-end, this producer said he is "playing chicken" with his fertilizer dealer and postponing his order because he believes prices could tumble come spring.

In agriculture, worry about breakeven prior to planting tends to be the norm, report economists at Purdue's Center for Commercial Agriculture. Losses were forecast 15 out of the last 25 years from 1991 to 2015, prior to planting, economist Brent Gloy and Purdue University colleagues wrote in a recent essay. (http://bit.ly/…)

What's different about the current outlook is the magnitude of the potential 2015 wreck is the biggest in that quarter century. By their early 2015 budget calculations, average-quality Indiana farmland is projecting a loss ranging from $156 to $317 per acre. "The declines in commodity prices have not been met with subsequent reductions in costs, creating the potential for a very serious margin squeeze," they wrote.

SEEING RED

If grain farmers interviewed by DTN in early January are typical, most have failed to win meaningful concessions on rent, fertilizer, seed or even chemicals. If they haven't pre-priced much of their 2015 crop, they are anxiously bracing for what could be one of the biggest one-year losses in their careers.

"The biggest item that could have had an impact is cash rent, and landowners pushed that off the table," said a Minnesota grower who asked for anonymity. He said he had been quick to deliver bonuses to landowners in the good years with the hope the courtesy might be reversed in years like 2015, but only one of his owners agreed to a $25-per-acre cut, just a drop in the bucket when losses could easily hit $150 to $300 per acre.

Ben Pederson, who farms with his father near Lake Mills, Iowa, worries the operation may not be profitable with average yields in 2015, but he has taken steps to minimize the bleeding. By using strip tillage, he is able to cut P and K fertilizer application rates up to 50%. Applying fertilizer in split applications could reduce total N rates another 20 pounds. He also purchased a tanker trailer to gain flexibility to shop around for liquid fertilizer.

Stepped-up risk management also helps. Pederson presold some of his 2015 corn crop last summer when it was $4.60 and closer to cost of production. He stores most of his grain at harvest to capture 30-cents-or-better swings in basis. Like other Midwestern growers, he's studying farm program signup for the 2014-2018 crops, just in case market prices remain low enough to trigger payments.

DOWN TO THE WIRE

Still, input budgets are getting set in stone this month, and dollars might not add up without some last-minute relief. A Minnesota operator paying a modest $245-per-acre rent on 175-bushels-per-acre corn ground will need $5.11 corn to cover all costs and a $60-per-acre return for labor and management, according to Bob Craven, director of the University of Minnesota's Center for Farm Financial Management.

Sure, seasonal rallies can help, but December 2015 corn futures are only running about $4.08 in mid-January -- and that's after a nice price spike since Oct. 1. USDA expected season-average cash corn prices to run about $3.65 per bushel in its January forecast. Soybeans could average $10.20 and wheat $6.10.

SOME RENT RELIEF

Mark Wachtman of Napoleon, Ohio, has been more successful managing the expectations of his nearly three dozen landowners. Prior to 2008 he wrote a simple one-page flex lease that shared a portion of his actual per-acre profits; when prices and yields were good, that translated into $400-per-acre or better rents some years.

"I warned them not to get used to the big money in years like 2010 and 2011, because farming is usually a low-margin business and this flex formula would adjust," Wachtman said. Few of them have voiced objections to a retreat in 2015, even though Ohio property taxes will nearly double in 2015. However, one 90-year-old widow said it was the first time in her life that her cash rent check would not cover the property taxes on her land and home, as well as her Medicare coverage and supplement.

But Wachtman's flex-lease formula rewards landowners if he produces bumper yields, shops right on inputs or receives government payments, so his partners will fare better when he does. He's 20% sold on corn and one-third sold on 2015 soybeans, expecting to dodge uglier prices should Brazilians produce a decent harvest this spring.

"I'm being very picky on inputs. It's the least amount of prepurchases I've made in my career by early January," Wachtman said. "I don't think seed dealers will blink, since we've got to commit in the next few days, but I'm holding out for fertilizer."

Marcia Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter @MarciaZTaylor

(ES/AG/CZ)

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