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Input Costs Pressure Profit Outlook
By Elizabeth Williams
Thursday, August 5, 2021 11:12AM CDT

INDIANOLA, Iowa (DTN) -- A central Illinois corn farmer will make a $24 per acre profit in 2022 after paying for inputs and land costs, according to the latest crop budgets from the University of Illinois. The return on soybeans fares better at $150 per acre because fertilizer, seed and drying costs for soybeans are projected to be $226 per acre cheaper than for corn.

As farmers look to negotiate cash rents with their landowners this fall, they are at a distinct disadvantage. Landowners see how high commodity prices have risen this year without noticing how record-high input costs will squeeze profit margins for farm operators.

The last time direct costs (fertilizer, seed, pesticides, drying, storing and crop insurance premiums) were this high was in 2013. Records from the Illinois Farm Business Farm Management group show a direct cost of $432 per acre for highly productive farmland in central Illinois in 2013. By 2020, those costs had dropped down to $372 per acre. For the 2022 crop year, the University of Illinois projects direct costs for corn in central Illinois to be a record $446 per acre -- an increase of $56 per acre compared to 2021.

"Profit margins are getting crushed in row crops right now for the 2022 crop," said Joe Sinclair, president of Quality Ag Service, a national ag chemical wholesaler with four full-service retail centers, based in Albia, Iowa. "You're losing money if you're buying fertilizer now. My advice is to check fertilizer prices before making 2022 cropping plans. There will be some sticker shock for producers. Nitrogen and potassium prices are almost double a year ago prices. Phosphorus doubled last year, so the increase is not as much compared to last year," noted Sinclair. (For more on retail fertilizer prices, please read: https://www.dtnpf.com/…)

He said fertilizer prices will eventually come back down, but it will take a drop in corn price first.

"The last time we saw a big spike in fertilizer prices was in 2008, but then they fell back in 2009. Will we see a similar reality check for corn and fertilizer prices in 2022? I think it might take until 2023 before prices come back down," said Sinclair. "World ending stocks are so low, it may take another year to build up a safety net of grain stocks."

It sets the stage for a tougher than anticipated year, agreed ag business consultant Moe Russell with AgSurion Risk Consulting, formerly Russell Consulting Group.

"With corn above $5 per bushel, cash rents will increase," he said. "However, we are seeing more variable rate leases. Landowners are getting more comfortable with them. They know when the markets are good, they'll benefit with a flex lease. And when profits are down, they want the farmer to be able to make a living."

Sinclair is also a strong proponent of flex leases.

"It makes the tenant and the landowner on the same team. It basically says, if I have a good year, I'll share. If not, it won't put me out of business," Sinclair explained. "Paying the highest cash rent is never a good thing. It makes the landowner and tenant opponents. Like in a custody battle -- who suffers? The kids. In adversarial cash rent negotiations, the land suffers. The tenant farms through the ditches to get every last penny from the farm."

What's key is determining a fair minimum return to the farmer.

"If you consider $60,000 an average salary for a manager of a small business, and you calculate a farmer with 1,000 to 1,500 acres, a net profit after cash rent of $40 to $50 per acre would seem a minimum fair return," said Gary Schnitkey, ag economics professor and farm management specialist at the University of Illinois. Schnitkey released the University of Illinois crop projections on the Farmdocdaily website here: https://farmdocdaily.illinois.edu/…

On the income side, Schnitkey expects cash corn and soybean prices to retrace slightly next year, estimating an average cash corn price of $4.50 per bushel and $12.35 per bushel for soybeans. Schnitkey expects no 2022 government farm payments, which have been significant in the past few years.

Fertilizer prices are projected to be $40 per acre higher in 2022 compared to this year for corn at $193 per acre, factoring in 220 bushel per acre yields (bpa). Soybean fertilizer costs are expected to be $18 per acre higher next year at $63 per acre, assuming a 69 bpa yield. Fuel and machinery costs are expected to rise about $10 per acre in 2022.

Schnitkey's group was conservative in their land costs for 2022, raising the land cost to a projected $289 per acre from $279 per acre in 2020 and 2021, which is only a 4% increase. "I don't want to be the one leading cash rents higher," said Schnitkey defending the projection.

A 10% increase in land cost in the 2022 University of Illinois projections for a central Illinois farm would reduce the farmer return to only $6 per acre profit on corn ground.

"The market has been telling you to grow more soybeans," Schnitkey concluded. "Illinois has been moving in that direction. We'll see what 2022 brings."

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