Grain elevator with ghosted money

Editor’s note: The following was written by Gary Schnitkey and Krista Swanson, with the University of Illinois Department of Agricultural and Consumer Economics, for the university’s Farmdoc Daily website Oct. 30.

The outlook for 2019 corn and soybean returns is lower than returns in recent years. However, higher returns are possible under other economic and agronomic situations than those used to make projections.

Meeting the following two conditions could result in 2019 returns being similar to the levels experienced from 2015 through 2017: 1) corn and soybeans continue to yield above trend, similar to the past three years, and 2) some other “price enhancement” occurs.

This price enhancement could be the end of the trade dispute with China, generally higher prices because of other supply/demand conditions, or a continuation of the Market Facilitation Program.

A return to trend or below yields would have the opposite effect, resulting in extremely low returns.

From 2015 to 2017, operator and land return on farmland that was 50 percent corn and 50 percent soybeans averaged $275 per acre, the cash rent was $273, and resulting farmer return was $2 per acre. These are extremely low farmer returns, unlike those in other recent periods of history, resulting in deterioration of working capital on many Illinois farms.

Trade aid and high yields in 2018

For 2018, operator and farmland return are projected at $320 per acre, higher than the $275 per acre average for 2015-17. Higher returns are projected for 2018 due to three key factors:

  • Market Facilitation Program (MFP) payments. MFP payments are expected to total $1 per acre for corn and $116 per acre for soybeans. These payments are 1 cent per bushel for corn and $1.65 per bushel for soybeans, the full loss estimated by USDA as associated with trade disruptions.

So far, farmers can receive a “first” payment of $.005 per bushel for corn and $.825 per bushel for soybeans. Sonny Perdue, the Secretary of Agriculture, announced that a second round of MFP payments would be coming in December and that the second rates would likely be the same as the first rates.

  • Exceptional yields. Current 2018 projections have yields in central Illinois at 233 bushels per acre for corn and 70 bu./acre for soybeans, well above trend yields for this region.
  • Significant pre-harvest hedging on soybeans. Both the corn and soybean budgets for 2018 have prices well above current cash bids. For example, soybean price for 2018 is projected to average $8.50 per bushel while current cash bids are at or below $8 per bushel. The higher price is based on a significant portion of the 2019 crop being priced in the spring.

The 2018 operator and land return of $320 per acre, less the average cash rent of $264 per acre, results in a $56 per acre farmer return from cash rented farmland.

2019 projections

Projections are much lower for 2019, with operator and land return projected at $180 per acre, a $140 drop from the 2018 projection. At an average cash rent of $261 per acre, farmer return would be a loss of $81 per acre.

The -$81 per acre projected loss for 2019 more than offsets the $56 positive return in 2018. Losses at this level would result in serious deterioration of financial position on many farms.

Four items cause a sharp decline in 2019 projected returns:

  • Yields are projected at trend for 2019. The 2019 projected yields are 210 bu./acre for corn and 63 bu./acre for soybeans. Both these yield levels are well below the abovetrend yields experienced in recent years.
  • Soybean prices are projected at $8.50 per bushel, well below the $9.63 per bushel average from 2015 to 2017. Much of this decline in prices can be attributed to trade disputes occurring between the United States and China.
  • No MFP payments. The MFP payments for 2018 production will add greatly to 2018 incomes.
  • Rising costs. Energy and fertilizer prices have increased, resulting in higher corn and soybean costs.

Positive changes

A number of events could result in significantly higher returns in 2019.

  • Continued above trend yields: Average yields in Illinois have been above trend since the drought of 2012, with yields above trend particularly pronounced for soybeans.

Many are speculating that new, higher plateaus have been reached. This is a good possibility. However, history strongly suggests that downward yield shocks will occur in the future.

  • Trade dispute with China ends: Negotiations between the U.S. and China could result in the elimination of Chinese agricultural tariffs placed on U.S. agricultural products. This elimination likely would increase soybean prices.
  • Continuation of Market Facilitation Program (MFP) into 2019: The Trump administration has indicated that MFP will not continue into 2019. However, there is always a possibility that some extension could occur, particularly given the program structure and the possible longevity of the trade dispute.
  • Higher prices: Higher prices could occur for several reasons not related to the trade dispute in China. For example, Brazil could have poor weather resulting in a poorer crop.