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Extension > Agricultural Business Management News > Marketing Plan Price Objectives for 2015 & 2016

Tuesday, February 9, 2016

Marketing Plan Price Objectives for 2015 & 2016

By David Bau, Extension Educator

Normally farmers set their target prices in their marketing plans starting at breakeven and move higher. Farmers are determining their 2016 input costs at this time.  Lining up seed, making plans for weed and pest control, and since fall have applied or purchase fertilizer for 2016 and negotiated a rental rate.  These costs have increased at an annual rate of 9.8% per year for corn and 8.5% for soybeans for the past ten years.  Using these percentages the average 2016 corn and soybean input costs would project to $939 per acre for corn and $581 for soybeans.  Current cash prices for 2016 corn are $3.45 and soybeans $8.25.

Using yields of 180 bushels per acre for corn and 50 bushels for soybean cash would generate gross incomes of $621 for corn and $412.50 for soybeans.  This would project significant losses and the need to determine where to cut costs.  If a farmer could get input costs down to $800 per acre for corn and $500 for soybeans, this would translate to $4.44 breakeven price for corn and $10.00 for soybeans in 2016.  If a marketing plan started at these prices, the farmer would not have sold any crops yet.

In order to achieve a breakeven price at current prices available, input costs would have match the gross income of $621 for corn and $412.50 for soybeans.  A decrease from $847 average per acre input costs for corn in 2014 and $529 for soybeans.  This translates into a cut in costs by $226 per acre for corn (27% lower) and $116.50 for soybeans (22% lower).  Average corn ARC County payments are projected to average under $50 per base acre, this translates into 21cents per bushel, lowering breakeven to $4.23 per bushel.  The majority of counties will receive no government payment for soybeans in 2016.

Whatever breakeven price is determined by proposed input costs, these prices become the target prices in marketing plans.  During 2015 the average cash forward contract price for 2016, averaged $3.58 for corn and $8.66 for Soybeans assuming a 50ȼ basis for corn and 60ȼ basis for soybeans.  The maximum price was $3.95 for corn in July and $9.45 for soybeans in January.  The minimums were $3.38 in September and $8.00 in September.  These prices are below the breakeven price, the usual starting point to selling grain.  The 2015 breakeven prices were higher for most farmers and current cash prices are lower than those offered for 2016 crops.

Many farmers had 2015 breakeven costs of $4.50 for corn and $11.00 for soybeans and have not had an opportunity to sell at these prices. So why would a farmer sell below their breakeven price?  A major component of marketing plans is cash flow needs.  When is the operating loan due, when are input payments required along with rent and income taxes?  These cash demand dates become decision dates in a marketing plan if price targets have not been obtained.  Many farmers have had to lower their price targets to adjust to lower current market conditions.  A farmer may have to sell crop below breakeven prices when the cash flow demands need to be met.

Decision dates in a marketing plan force a farmer to examine the current marketing situation and decide whether to sell or not, these decision dates are usually in the March to June period when prices are historically higher.  If a farmer needs the cash for their operation expenses, they add default dates. For example the farmer needs cash to pay for prepay expenses in December, December 15th becomes the first default date.  Taxes are due, February 15th become the second default date.  Then cash is needed for rents in May, so April 15 may be the third default date on a certain amount of bushels to generate this cash.  A farmer’s operating loan can take care of these cash flow demands and then the default dates become more flexible and can be set up to sell the grain in the historically higher price times during the months of March through June.

In 2015 the average cash price for corn in Worthington was $3.48 and $9.06 for soybeans with the high price of $3.86 for corn and $10.00 for soybeans.  This compares to average prices of $3.97 for corn and $12.94 for soybeans in 2014, while the ten year averages were $4.41 for corn and $10.44 for soybeans.   If prices would improve to the 10 year average they would get close to the breakeven prices for most farmers.  The large 2015 crop will slow price increases in 2016.

I keep track of historical prices by crop years, which go through September 30th of the following year.  For the past five crop years, ending September 30, 2015, cash corn in Worthington, Minnesota was $4.50 or above, 62% of the time.  While soybeans were $11.00 or higher 76% of the time, both good odds.  But for the last 10 crop years the corn was $4.50 or higher only 39% of the time and beans at $11.00 or higher 54%.  The odds decline to 16% for corn and 19% for soybeans going back 25 years.

In the past 5 years, the high cash price was $8.22 (2012) for corn and $17.74 (2013) for soybeans while the lows were $2.81 (2014) for corn and $8.07 (2015) for soybeans.

All this historic price information will also help a farmer determine price objectives in the marketing plan. Trying to determine where to start and end. The government has a price floor for farmers in loan rates by county.  In Minnesota they average $1.82 for corn and $4.84 for soybeans. The maximum rates are $1.89 and $4.94 and the minimums are $1.77 and $4.62. These prices are well below breakeven prices. If farmers sell crops below their breakeven price, they can reown the crop with a call options, or hope that later sales will be at higher prices to bring their average above their breakeven before the last of the crop is sold.

2 comments:

  1. Nice information provided about Marketing Plan Price Objectives. Thank you

    ReplyDelete
  2. They are using amazing strategies for marketing.
    Commodity tips

    ReplyDelete

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