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Grain Farm Income Outlook for 2019-Negative Incomes Ahead?

In 2018, many grain farms in Illinois will have incomes above $70,000
per farm, the average from 2013 to 2017. Incomes in 2019 could be
negative on many farms. While scenarios exist that result in near
average incomes, it seems best to plan for negative incomes on grain
farms in 2019. Income from 2018 should be saved to cover potential
losses in 2019.

Income in 2018

Figure 1 shows average net incomes on grain farms enrolled in
Illinois Farm Business Farm Management (FBFM) from 1996 to 2017.
Projections also are shown for 2018 and 2019. As can be seen, income has
varied over time, with three distinct periods. From 1996 to 2006,
commodity prices were low relative to the later periods, and net farm
income averaged slightly over $50,000 per farm. From 2008 through 2012,
corn and soybean price were higher because of increasing use of corn in
making ethanol, continuing growth in exports of soybeans, and shortfalls
in productions in places around the world. During the 2006 to 2012
period, incomes averaged $198,000 per farm. Since 2012, commodity prices
have been lower because of slowing growth in corn used in producing
ethanol and high yields across many producing areas in the world. In
2018, concerns increased over whether soybean exports would continue to
grow. From 2013 to 2017, farm incomes on grain farms averaged $75,000
per farm. In 2018, net income was lower than the 2013-2017 average at
$46,000 per farm.

Illinois FBFM has not summarized incomes for 2018; however, it is
reasonable to expect 2018 incomes to be higher than the 2013-2017
average of $75,000 per farm. Three factors contribute to higher incomes:

  1. Exceptional yields. The U.S. Department of Agriculture (USDA) is projecting record corn and soybean yields in Illinois (see Crop Production,
    USDA). The Illinois state corn yield in 2018 is projected at 210
    bushels per acre, 9 bushels higher than the next highest yield of 201
    bushels in 2017. The 2018 Illinois soybean yield is projected at 64
    bushels per acre, 5 bushels higher than the next highest yield of 59
    bushels set in 2016. These high yields will increase 2018 incomes (farmdoc dailySeptember 5, 2018).
  2. Market Facilitation Program (MFP) payments. MFP is a Federal
    program providing partial compensation resulting from losses caused by
    recent trade disputes (see farmdoc dailyNovember 27, 2018,
    for more detail). MFP makes payments based on 2018 production with per
    bushel rates at $1.65 for soybeans, $.14 for wheat, and $.01 for corn.
    The $1.65 per bushel payment for soybeans adds significantly to 2018
    incomes. WASDE current midpoint of the 2018 soybean price range is
    $8.60. Adding a $1.65 MFP payment to $8.60 results in an effective price
    for soybeans of $10.25, well above average price farmers have received
    for soybeans since 2014.
  3. Opportunities to price 2018 production at higher prices. Before
    May of 2018, there were opportunities to price soybeans in the high $9
    per bushel range, with some rare opportunities to price grain above $10
    per bushel. Since the end of May, cash soybean prices have declined to
    the mid-$8 range, with some cash prices falling below $8 per bushel
    (see farmdoc dailyJuly 31, 2018,
    for a discussion of price declines). Many farmers priced a portion of
    production before May, resulting in a higher selling price then would
    occur if no pre-pricing occurred. It seems reasonable to expect about
    30% of expected production to be priced at higher prices (see farmdoc dailyMay 15, 2018, for a discussion or pre-harvest hedging related to corn).

As always, incomes will vary across farms because of yield variability.
Some areas had poorer yield than other regions. Also, the amount of
grain that was priced before May will impact returns across farms.

Income Outlook for 2019

Expectations are for much lower incomes in 2019 because of two factors:

  1. Rising costs. Non-land costs of producing corn and soybeans will
    increase in 2019, led primarily by fertilizer price increases (see farmdoc dailySeptember 25, 2018).
    Anhydrous ammonia prices were over $60 per ton higher in the fall of
    2018 as compared to the fall of 2017. Ammonia prices have continued to
    increase since the fall. Overall, the era of decreasing per acre costs
    appears to have ended (farmdoc dailyJune 21, 2018).
  2. Lower soybean prices. Soybean prices averaged in the high $9 per
    bushel range in 2016 and 2017. Expectations are for lower soybean
    prices in 2019. Current fall bids place soybean prices near $9 per
    bushel. It is possible for soybean prices to fall further below $9 per
    bushel if yields are at or above trend in either South America or the
    United States.

To illustrate the potential for lower incomes, 2019 projections are made
using a $3.60 per bushel corn price and $8.50 per bushel soybean price.
Non-land costs are increased by $25 per acre for corn and $10 per acre
for soybeans over 2018 levels. Cash rent levels are assumed to remain
the same in 2019 as they were in 2018. Projections are made with $7 per
acre of Price Loss Coverage (PLC) payments. Incomes projections are made
at 1) trend yields and 2) above-average yields.

2019 Income Projections at Trend Yields

From 2013 to 2018, actual yields in Illinois have average 20 bushels per
acre above trend for corn and 6.5 bushels above trend for soybeans
(see farmdoc dailyDecember 11, 2018, and January 3, 2019). These higher yields raised incomes in recent years. A return to trend yields would result in lower profits.

At trend yields — 20 bushels per acre lower than in recent years for
corn and 6.5 bushels lower for soybeans — 2019 average net income on
Illinois grain farms is projected at -$55,000 per farm, a disaster level
of income that would result in substantial reductions in working
capital and severe erosions of financial position. Some farms would face
financial stress. A -$55,000 would be a much lower income than
occurring in the 1980s during the height of the farm financial crisis.

2019 Income Projections at Above-Average Yields

Higher yields like those experienced in recent years would result in
average net income being -$3,000 per farm. This income would be slightly
worse than the 2015 income (see Figure 1). At this income level,
erosion of financial position would occur on most farms.
At this point, many scenarios could cause grain farm incomes to be very
low. Scenarios are evaluated that would cause 2019 incomes to be near
the $75,000 average level experienced from 2013-2017. The following
three scenarios seem the most likely to occur:

  1. Prices increase to $4.00 per bushel for corn and $9.50 per
    bushel for soybeans, with yields above trend like they have been in
    recent years. Prices at these levels are possible. For soybeans, a $9.50
    price likely would require lower than expected yields in both Brazil or
    the United States, and some resolution to the trade dispute with China
    (see farmdoc dailyJanuary 14, 2019).
  2. A continuation of the Market Facilitation Program, with yields
    above trend. Continued MFP payments would add income. The Trump
    Administration has stated that MFP payments will not continue in 2019.
  3. A drought. Drought conditions someplace in the Midwest would
    increase prices. Given that farmers have purchased Revenue Protection
    (RP) crop insurance, yield shortfalls would be compensated through crop
    insurance payments

Summary

At this point, it seems likely that net farm incomes will be very low in 2019. Negative average incomes across Illinois grain farms are possible in 2019.  As often happens in agriculture, conditions can change, resulting in a brighter outlook. Still, it seems prudent to plan for low and negative incomes on grain farms in 2019. Saving 2018 income and building working capital seems like a good strategy for combating potentially low income in 2019.

Source: Gary Schnitkey, Farmdocdaily

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