Fine tune 2015 profit margins for your farm: Land rental rates, production expenses

As we end 2014, and look ahead to 2015, it appears that we will have tighter profit margins in crop production for next year, as compared to recent years. The combination of lower projected corn prices and soybean prices in 2015, together with nearly steady input costs for seed, fertilizer, and chemicals, will limit estimated potential returns over direct expenses and land costs, at average crop yields. Another major variable in breakeven levels in crop production are loan payments on capital investments such as farm machinery, facilities and land purchases.

Approximately two-thirds of the corn and soybean acres in southern Minnesota are under some type of cash rental agreement. Based on farm business management records for southern third of Minnesota, the average land rental rate in 2013 was just over $250 per acre; however, there was a wide range in land rental rates across the region. Most likely, average cash rental rates for 2014 in many areas of the region were as high, or even higher, than the 2013 average rental rates. Based on early reports from farm operators, it appears that land rental rates for 2015 in many locations across the region have been very slow to adjust downward, in response to the tighter profit margins that are likely for 2015.

The University of Minnesota Center for Farm Financial Management (CFFM) website FINBIN allows farm operators, ag lenders, farm management advisors and others to look at average income levels, direct and overhead expenses and net return levels on farms. The data in FINBIN is based on actual farm management data submitted by producers through the various farm business management programs. The data can be sorted on the basis of whole farms, crop or livestock farms, location, farm size or income levels, owned versus cash rent land, as well as other data sorts. Another FINBIN tool is Benchmark Report, which allows for the comparison of actual individual farm management data from a producer’s farm, compared to average data from similar farm operations in the same geographical area.

Based on a FINBIN analysis for the years 2011-2013 of over 1,100 crop farms on cash rented corn acres in southwest, south-central and southeast Minnesota, the average net return over average direct and overhead expenses, including land rent, was nearly $210 per acre per year. However, further analysis showed that there was a very wide variation between the top 20% net returns on cash rented corn acres for the three-year period, compared to the bottom 20 percent net returns. The top 20% profit farms had an average net return on cash rent corn acres for 2011-2013 of $521.61 per acre per year, compared to an average of negative ($108.40) net return for the low 20% profit farms, which is a difference of $630 per acre per year.

More detailed analysis of the FINBIN data for 2011-2013 looked at the various factors that comprise the large difference in the average net returns per cash rental corn acre, between the 20% high profit farms and the 20% low profit farms. The average corn yield for 2011-2013 was 173 bushels per acre on all farms in the analysis, but was over 186 bushels per acre on high profit farms, and was near 165 bushels per acre on the low profit farms. The average corn market price received for 2011-2013 was $5.63 per bushel on all farms, compared to $6.50 per bushel on the high profit farms, and $4.46 per bushel on the low profit farms.

 

Production costs

There was also a significant variation in average costs per acre between the top 20% profit cash rental corn farms and the low 20% profit farms from 2011-2013. The average corn production expenses were $480.75 per acre for direct crop expenses, including seed, fertilizer, chemicals, etc., $222 per acre for land rent, and $810 per acre for total direct and overhead expenses. The top 20% profit farms had average expenses of around $424 per acre for direct expenses, $200 per acre for land rent, and just under $714 per acre for total expenses. The low 20% profit farms averaged $539 per acre in direct expenses, nearly $259 per acre in land rent, and $929 per acre in total expenses.

The average direct and overhead cost per bushel of corn produced for 2011-2013 was $4.68 per bushel, which compares to $3.83 per bushel on the high profit farms, and $5.63 per bushel on the low profit farms. For 2013 only, the average costs of production for corn in Southern Minnesota were $5.16 per bushel, compared to $4.33 per bushel on the 20% high profit farms, and $6.10 per bushel on the 20% low profit farms.

As we plan ahead for very tight margins in corn and soybean production for 2015, it is a good time to review all aspects of a crop operation. Obviously weather conditions can account for a large portion of the crop yield variation; however, there are other more controllable crop management factors that may also contribute to yield differences. Looking for ways to reduce or control direct and overhead expenses, including land rental costs, is also a key to improving profit potential for crop producers. Decisions that are made on crop marketing, crop insurance, and the new government farm program could also have a significant impact on potential profitability in crop production for 2015.

TAGS: Soybeans Corn
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