Historic commodity prices, profits balanced by increasing costs, risks

As Iowa farmers move toward completing the 2008 harvest, downturns in markets since Tuesday's election have some reflecting on the uncharted territory corn and soybean prices reached earlier this year. While soybeans topped out at a historic $16.35 on July 3 and corn prices peaked at $7.87 on June 27, they dropped by 16 and 28 cents, respectively, since Monday's market close on the Chicago Board of Trade (CBOT).

But instead of correlating the 2008 commodity-price shifts to the election, one Spencer farm consultant advises market watchers to check out oil prices, because they've directly reflected the rises and drops in corn and soybean prices this past growing season.

"If you want to know the price of corn, just watch oil. Whatever oil does, that's what corn is going to do. Unless all of a sudden corn is no longer competitive. They can't use it to compete with oil then. That would be the only thing that would change it; and we're going through that right now," George Moriarty said, citing an Oct. 31 filing for Chapter 11 bankruptcy by VeraSun Energy, one of the nation's largest producers of ethanol.

A farm consultant since 1977, Moriarty is contracted with the Iowa Farm Business Association and represents land operators throughout eight northwest Iowa counties.

"I've got a mix," Moriarty said of his clients. "I've got from where they rent every acre to where they own every acre,

and then every combination in between. I also have some who custom farm for somebody else."

As a consultant, Moriarty draws on his former accounting classes at Iowa State University and the University of South Dakota. The Rockwell City native's 1964 - 1977 work as a Lake Park grain elevator partner also assist those who seek his advice.

With input costs expected to spike even more this coming year, the market's volatility is only anticipated to continue. (See 2008 and 2009 costs, prices and break-even points on page 1A.)

"The high prices are what's making all these costs go up," Moriarty explained. "Rent is going sky high, and now fertilizer has gone up. But fertilizer is going to have to come back down, because oil has come down. That's what ran the price of fertilizer up."

As cost-to-profit ratios grow even tighter, Moriarty finds himself encouraging land operators to use caution when hedging, or preselling, their crops.

"I have people who did hedge that shouldn't have. The first time beans got to $7, people sold their whole crop. They ended up getting one-third of a crop," he said. "And guess what? Beans went to $10. So they owed $3 a bushel on all those bushels they didn't have."

The Spencer farm consultant also advises operators to buy crop insurance.

"Most people are finding they about have to, with all these inputs and all the risks they're taking," Moriarty said. "You can actually go in and insure dollars per acre of your crop now. So, it doesn't matter whether the price goes down or whether the yield is not there, you're covered. It used to be all you'd protect yourself on was yield."

Meanwhile, there's no doubt that land operators have had the opportunity to make good profits in 2008.

"But that's waning now," Moriarty warned.

While corn closed Friday at $3.46 and soybeans settled at $8.64 at the Farmers Coop Elevator of Pomeroy, this year's historically-high prices compare to those of 1973 -- when soybeans jumped to $10 because of a Russian wheat deal and corn rose to $7.

"We are at historically-high prices now: $7.79 a bushel, or current market value of $8.64 coming out of the field, is really a good price. But expenses have chewed it all up," Moriarty said.

Contrasting today to 1973, he added, "But we didn't have the inflation factor then, like we do today. It was just starting. Inflation got real bad by the early 80s, but the crop prices didn't go up. They went up because we had all this export business, we thought that Russia was going to have to buy all of its inputs from us and that would last forever. So land prices skyrocketed and beans went to $10 that time."

When asked to describe what he projects for 2009, Moriarty admitted he views the country in the midst of a recession now. The farm consultant also predicts the recession to get "kind of deep" into the next two to six months.

"If we don't have a financial market crash, which is possible, and by that I mean a depression, the opposite of that would be rampant inflation. It's going to be one or the other. I think we're going to go through rampant inflation first, before we ever have a crash. But that could bring on a real bad crash. So, I actually think we've got to look for inflation."

"But the land operators I talk with are pretty optimistic right now," Moriarty said, noting increased inflation would not only drive oil prices back up, it would also likely increase commodity prices. "I think most of them are betting the markets will go back up. Right now, I think they're right. But we might test our lows again. ... But then, I think we'll see inflation kick in. Farmers do quite well during inflationary times. There's always a payday, but there's a day of reckoning also. You've got to take advantage of inflation while it's there, but not go out and leverage yourself like some did in the 70s and 80s. And that could happen again."

In regard to the tighter margins land operators are anticipated to be operating under in 2009, the farm consultant acknowledges landlords may tell renters to raise corn instead of soybeans in order to make a better profit.

"But when you raise all corn, your expenses go sky high. Because, first of all, you're getting about 50 pounds of nitrogen from the bean crop that carries over into the corn. But when you go corn-on-corn, you have to add that 50 pounds of nitrogen. That's terrible expensive today. Not only that," Moriarty said, "but your yield on average is 30 bushels less with corn-on-corn."

With 2009 cash rent prices expected to average $220, with some blossoming near $300 per acre, Moriarty maintains the fairest manner of leasing crop ground would be to crop-share it.

"If they don't want to go to crop-share," he advises northwest Iowa land operators, "then a variable lease, where they base it on the yield and price and come up with a percentage. Just to flat out cash rent, the volatility is so great right now that you just can't arrive at a fair number."

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2008 Average Per-Acre Costs to Produce Corn

With a 175 bushel-per-acre average yield, the total cost to produce one bushel of corn is $3.30.

Friday's closing market value for corn on the Chicago Board of Trade was $3.75 1/2. The Farmers Coop Elevator cash bid for corn was $3.46.

Under these current conditions, the break-even point would be to raise 167 bushels-per-acre.

2009 Projected Per-Acre Costs to Produce Corn

With an estimated 175 bushel-per-acre average yield, the total projected cost to produce one bushel of corn is $4.22.

Friday's closing market value for December 2009 corn on the Chicago Board of Trade was $4.41. The Farmers Coop Elevator cash bid for October 2009 corn was $3.87.

Under these current conditions, the break-even point would be to raise 191 bushels-per-acre.

(A compilation of statistics from Iowa State University and George Moriarty, a farm consultant for land operators throughout Clay, Dickinson, Emmet, Palo Alto, Buena Vista, Sac, Pocahontas and Cherokee counties.)