By Dick Hagen
The Land Staff Writer
September 26, 2008 03:18 am
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Start with a likely $750- to $850-per-acre total production cost for corn. Tack onto that scenario 170- to 185-bushel yields. Then slap on markets of $5 to $7 per bushel.
Is that a money-making venture? Time will tell, but there you have the starting arithmetic for the 2009 crop production year for corn.
Travis Wasmoen is a loan officer at Farmers State Bank in Albert Lea. When The Land visited him Aug. 28 he had just worked up 2009 corn and soybean budgets for a Freeborn County farmer with a three-year rent contract where a landowner was demanding $350 per acre. That $350 land charge is totally unrealistic for his area; the risk versus reward is out of line. But this particular producer definitely needed that piece of land and obviously had positive thoughts about the immediate future of agriculture.
“A $200 land cost is realistic. We were slightly under $200 in our area last year,” Wasmoen said, indicating some 2009 rents will be $250, some will be $150. But even at $200 for land, he said $800 per acre total production costs for corn next year are very real.
Crop farmers already know the big hits for 2009 costs. Land leads the parade. But if your goal is 200-bushel corn, then fertilizer and seed are the next two “budget kickers,” according to Wasmoen. His budget tabs fertilizer at $250 per acre and seed at $115 per acre.
“I just talked with a producer yesterday. He’s plugging in $280 to $290 for fertilizer using current prices, and they’re likely to go up as we get into the fall and spring seasons,” Wasmoen said.
Farmers State Bank deals with more than 150 ag customers. That’s enough “universe” to give Wasmoen a pretty good feel for some average figures across the board. “This lets me point out to an individual farmer that maybe he’s spending a little too much on a particular item. So I ask if it’s justified. Is it giving the additional return needed to cover the additional cost?”
Wasmoen said a modern ag bank dealing with today’s agriculture shouldn’t just be providing financial services. It should also provide some total management ideas, even including the marketing of the next year’s crop six months before the seed is even in the soil.
“Our real mission is not a matter of only providing money,” he said. “It deals with assisting each customer so that he/she can maximize his/her earning potential regardless. And that is why we also provide special forums on crop production and marketing. We’ve used Al Kluis for example at a meeting for our farm customers, and other farmers as well.”
With 2009 certain to be the most expensive farming year in history, are farmers getting to the bank earlier?
“Absolutely,” Wasmoen said. “... we’ve (already) covered several customers already for their 2009 farming program. Also we used to finance for one year; now we’re financing two, possibly three, years of crops because we have producers who are already hedged into ’09, even 2010.
“And to match up with those sales, these producers are buying fertilizer early, even locking in spring and fall 2009 if possible. This year about 30 percent of our customers had their fall N bought before they planted this spring.”
As history already proved, buying 2009 fertilizer needs in February-March 2008 was wise indeed.
He doesn’t necessarily feel he should be the banker advising “yes or no” on hedging a customer’s 2009 and 2010 crop; it’s difficult to match up sales with inputs that far out.
That said, he admits some producers are in a position to market even their 2010 crop. Their land is paid for. They pretty much know what their other fixed costs are going to be. Even if fertilizer and seed prices go up they figure they still can lock-in some profits with hedging 16 months, even 24 months, ahead of delivery.
Care to do some pricing on the 2011 crop? “That’s a little dicey,” Wasmoen said.
For a farm banker dealing in numbers every day, what’s the break-even price for 2009 corn? “About $4 to $4.50 is my figure,” he said. That’s why he’s OK with his producers doing some forward pricing.
Because of the volatility in commodities, local elevators just aren’t in a position to give a decent basis bid one or two years out. Why? Because if corn suddenly ramps up to $8, they’ve got $4 in margin money for two years, and that’s simply too much risk for country elevators is this point. The $4 run-up earlier this year sparked a huge credit crunch for elevators.
“And that’s why they tell farmers that if they want to buy their grain, here’s our price and generally that will be a very wide basis,” he said.
How about those producers who already have a good chunk of their production tied up in shares at a local ethanol plant? Is that a “better” hedge?
“Sure, we recognize that option and most ethanol plants have been very aggressive buyers of producer’s corn, often at a more competitive basis level than local elevators,” Wasmoen said. “So we see these as additional opportunities for producers to get a better basis price, and that bolsters the bottom line for their own operation.”
Is the “new wealth” of American agriculture putting even more squeeze on surviving as a production farmer?
Wasmoen hedged just a bit, saying the current scenario is benefiting even the less-efficient producer simply because technology and commodity markets are tending to “make farming work” just about for all producers. His point being that you don’t have to have the highest yields in the county to make farming profitable. He’s seeing this new economic scenario also generating new interest in young people to take a look at farming.
In the past two weeks he’s worked with two young men, both getting into farming.
The first is buying a crop farm and building site from his grandfather. He’s 22, has a degree in ag business, is currently working off the farm but someday wants to be a full-time farmer. The other “new farmer” customer, also in his early 20s, is buying a farm with hog facilities and intends to carry on the family tradition of a crop/livestock producer.
“Any time you have a profitability potential in any sector,” Wasmoen said, “people are going to be drawn into that venture. And farming today certainly fits that dynamic.”
The traditional economic formula is to encourage diversity, with both livestock and crop operations, to lessen risk. Wasmoen said this may no longer be the case.
“... I can tell you the past couple years there are quite a few farmers who probably wished they weren’t in livestock,” he said. “They could be selling $5 plus corn into the market rather than feeding it through to hogs. Instead that corn probably got valued only at $3.50 to $4 going through livestock.”
Wasmoen, farm-reared on a 150-cow dairy farm west of Albert Lea, is 34-years-old and an ag business graduate of South Dakota State University. His father sold the dairy cows in the mid-’80s and focused on grain farming thereafter. Prior to getting into ag finance, Wasmoen spent four years working in the ag input supply business, but he also farms, running a 200-acre cash grain operation. He’s about 20 percent hedged on his expected 2009 corn and soybean crops.
Wasmoen said he’s excited about agriculture today, with the caveat that it’s more important to understand the numbers of agriculture today than ever before.
“If you don’t know how to manage risk and can’t relate to the volatility of agriculture today, then farming isn’t the best game to be playing,” he said. “But nothing in the past compares with the excitement and the breakthroughs in technology that keep making production agriculture even better and in fact prepares farmers for some of the best retirement years they could ever experience.”
Wasmoen tells of solid, talented farmers in their 70s ready for retirement with every opportunity of “going out at the top.” But they don’t, and their usual reason: “‘I’m having too much fun farming’ is what they usually tell me.”
Postscript
Incidentally, that producer questioning getting into a three-year, $350 land contract has a corn budget just shy of $1,000 per acre; $985 to be specific. With corn pegged at $5.75 and an expected $20 per acre U.S. Department of Agriculture direct payment, even with 170-bushel yields he nets only $12.50 per acre. Getting 200-bushel yields bumps net income to $185 per acre. Hit 220 bushels and net income jumps to $300 per acre.
So it’s doable, but just about everything has to work just about perfect. The reality, however, is that more and more farmers are, in fact, developing the talents to do just about everything just about perfect.
Whether Mother Nature is also on your side is another story.
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Photos
Travis Wasmoen