Different Price Scenarios and Net Farm Income

University of Illinois agricultural economist Gary¬†Schnitkey indicated recently at the farmdoc daily blog (“2016 Net Farm Income Projections Under Different Price Scenarios“) that, “Recent increases in corn and soybean prices have cast a more optimistic light on the potential for higher 2016 incomes. In this article, net incomes for different price scenarios are examined given that yields are at their expected levels. Even given recent increases, prices near current fall delivery bids will result in working capital deterioration on many farms. Given expected yields, prices need to be above $4.20 for corn and $10.25 for soybeans before working capital stabilizes on typical grain farms. Again all of these projections are made using expected yields. A key period for understanding 2016 net income levels will occur in August 2016 when a clearer picture of yields and prices emerges.”

The farmdoc update explained that, “At USDA’s Agricultural Outlook Conference in February, WASDE forecast 2016 prices of $3.40 for corn and $9.00 for soybeans (see Table 1). At those price levels, Agricultural Risk Coverage at the county level (ARC-CO) will make payments in Champaign County, Illinois at $56 per base acre given that 2016 yields are at trend. This $56 ARC-CO payment estimate is based on half the base acres being in corn and half in soybeans. If these 2016 ARC-CO payments occur, they will be received in the fall of 2017.”

“Given these prices and ARC-CO payment estimates, operator and land return is estimated at $187 per acre for corn and $227 per acre for soybean, both below the projected cash rent of $275 per acre (see Table 1). As a result, farmer return on cash rent farmland is negative. Projections are for a $68 loss on cash rent farmland given that 50% of farmland is in corn and 50% in soybeans (see Table 1).

“Income projections are for a 1,500-acre farm with 15% of the acres are owned, 40% of the acres are share rented, and 45% of the acres are cash rented. Percentages in each farmland control category are typical for central Illinois farms. For this farm, net farm income is projected at -$17,775 per farm, with negative incomes resulting in financial deterioration.”

Dr. Schnitkey added that, “More optimistic prices of $4.20 per bushel for corn and $10.25 per bushel for soybeans result in net income of $55,425 per farm. These prices roughly yield financial stability: farms are not losing working capital but are not building much either.

“As a guide, prices of $4.20 for corn and $10.25 for soybeans will result in financial stability given the cost structure that exists today. This price benchmark, however, depends on yield levels. If yields are below average, a $4.20 corn price and $10.25 soybean price will not result in a stable financial position.”

Also, the farmdoc update stated that, “A critical time will be in August when 2016 yields and prices come into clearer focus. If prices are below the $4.20 corn and $10.25 soybean benchmarks, cost cutting will continue to be important to avoid continuing large losses to working capital in 2017. In particular, below $4.00 corn prices and below $9.00 soybean prices will result in the extreme need to reduce costs as working capital likely will be very limited on most farms. August is particularly crucial because many of the 2017 cash rent and input decisions begin to be made.”

 

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