The time of year to develop corn balance sheet projections for the upcoming crop year is upon us. As the halfway point of the 2016-17 marketing year draws closer, decision-making regarding planting and new-crop marketing are determined. In a new analysis, a University of Illinois agricultural economist predicts lower corn production in 2017, leading to decreased ending stocks in 2017-18 The magnitude of reduced ending stocks provides important implications for corn prices moving through 2017-18.

“Current market consensus projects farmers to plant fewer corn acres in 2017 than the 94 million acres planted in 2016,” says Todd Hubbs. “Numerous factors point toward greater soybean acreage and lower corn acreage in 2017. These include lower winter wheat seedings, a lower cost of production for soybeans, and the current perceived price advantage for soybeans over corn.”

Congressional Budget Office projections for baseline farm programs released last month set planted acreage at 91.5 million acres. Current USDA long-term baseline projections to 2026 have 2017 planted acreage for corn at 90.0 million acres. A reduction of 3.5 million acres from 2016, which places planted acreage at 91.5 million acres, is used in this analysis. Planted acreage at 91.5 million acres would lead to around 83.2 million acres harvested for grain in 2017.

“Yield expectations typically use trend yield analysis to generate yield projections for the next crop year,” Hubbs says. “National average corn yield came in above trend for the last three growing seasons and culminated in an estimated 174.6 bushels per acre in 2016. CBO projections place 2017 corn yield at 170 bushels per acre. USDA long-term baseline projections set 2017 yield at 170.8 bushels per acre. We find a linear trend of actual U.S. corn average yields from 1960 forward to be the best fit. The trend explains 89 percent of the annual variation in corn yields from 1960-2016.

“Weather conditions, as one would expect, impact yields,” Hubbs says. “Bad weather reduces yield to a greater extent than good weather increases yield. Because this is the case, trend estimations can understate yield expectations in an average weather year. The trend estimate for 2017 is 166.8 bushels per acre. By adjusting the trend estimation for weather influences, we generate a national corn yield expectation of 169 bushels to use in this analysis.”

According to Hubbs, at this yield level, the 2017 crop projection is 14.1 billion bushels. By including the current projections for ending stocks by the USDA of 2.32 billion bushels with 50 million bushels of imported corn, the 2017 corn supply comes in at 16.4 billion bushels. The 2017 corn supply estimate is approximately 509 million bushels less than the current marketing year supply estimation.

Expectations for consumption in the 2017-18 marketing year exceed projected production, which leads to a lower level of ending stocks by the end of the marketing year, Hubbs says. “The size of the decline is important for determining price as we move through the next marketing year.”

Hubbs says exports, ethanol production, feed and residual, and other domestic uses determine the consumption of corn. U.S. corn exports vary considerably from year to year. In the last decade, corn exports ranged from a low of 730 million bushels in the 2012-13 marketing year to 2.44 billion bushels in 2007-08. Corn exports are influenced by trade policy, world corn production, economic growth, and exchange rates. Current 2016-17 marketing year corn export projections sit at 2.225 billion bushels, which were helped by lower corn production in South America in 2016. Current corn production projections for Brazil (3.41 billion bushels) and Argentina (1.44 billion bushels) are up 29 percent and 26 percent respectively in 2017. World production projections come in 8 percent higher for 2017. Although U.S. corn exports will continue to be strong, 2017-18 projections reduce corn exports in this analysis to 1.95 billion bushels on larger foreign corn production.

“Corn used for ethanol production will be impacted by EPA rulemaking related to implementing RFS mandates, gasoline consumption, and ethanol exports,” Hubbs says. “An expectation of increased fuel ethanol requirements and slight increases in gasoline consumption with a positive ethanol trade balance provide support to the continued increase in corn used for ethanol. Corn used for ethanol expectations will increase to 5.4 billion bushels in the 2017-18 marketing year. Other domestic uses for corn do not vary significantly from year to year. With a slight increase, other domestic use expectations provide 1.45 billion bushels of corn use.”

The pace of corn consumption for feed likely will continue to show strength in the 2017-18 marketing year, Hubbs says. Livestock production growth in many sectors provides support for corn feed use during this marketing year.

“Despite strong livestock production, several factors may limit corn feed use moving forward,” Hubbs says. “The increase in ethanol production increases distillers grain availability. Increased availability of feed grains across the board may suppress some corn feed use. Residual use of corn could be reduced if the 2017 crop is smaller than the 2016 level. Feed and residual use might be near 5.5 billion bushels.”

Hubbs concludes that current expectations for corn consumption in the 2017-18 marketing year are 14.3 billion bushels. Ending stocks would be 2.131 billion bushels, which is 189 million bushels lower than the current 2016-17 marketing year projections. Based on the analysis of corn production and consumption expectations, season average market price comes in at the $3.65 – $3.75 range for the 2017-18 marketing year.

Source: University of Illinois

Ethanol plants need to be especially cautious of moldy corn this spring due to a humid fall and excessive amounts of corn stored in outdoor piles. According to Charles Hurburgh, grain quality and handling specialist with Iowa State University Extension and Outreach, mid-February will bring reports of moldy corn, hot spots and blue eye mold – a fungus turning the germ a bluish color, especially if temperatures do not decrease.

“Ethanol plants are going to have to be careful,” said Hurburgh, who also serves as director of the Iowa Grain Quality Initiative. “Contrary to popular belief, moldy corn is the worst thing that can be put in an ethanol plant. The fungi that grow on the corn produce lactic acids. These acids react with the enzymes, the yeast is not happy and the fix is to add antibiotics to the fermenter.”

Ethanol coproducts, known as distillers dried grains with solubles (DDGs), are typically used in livestock feed. The presence of antibiotic residues in ethanol coproducts has been difficult to detect, but the issue is important as society becomes more interested in the production of food.

“Ethanol plants don’t like antibiotics or having to alter the fermentation process,” said Hurburgh. “At the same time, processors don’t want to dump a fermenter after only getting two gallons of ethanol per bushel when they’re used to yielding almost three. The best fix for those kinds of problems is better quality corn. Then ethanol producers are not in that situation in the first place.”

September and October 2016 brought only three days of dew points below 45 degrees Fahrenheit. As a result, grain supplies did not reach suitable temperature levels before being placed into storage, which can negatively impact grain quality.

“The issue going forward, will be to get all corn properly cooled and aerated before spoilage worsens,” said Hurburgh.

The Iowa Grain Quality Initiative has developed a set of online learning modules to help producers learn proper grain storage practices. The Iowa Grain Quality Aeration Module (CROP 3083B), produced in cooperation with the Iowa Grain Quality Initiative and Crop Advisor Institute explains how moisture, temperature and time interact to cause grain spoilage. Learn to establish a grain quality monitoring system with frequent temperature checks to prevent spoilage.

Other available modules address grain storage economics, food safety and animal nutrition, supply chain analysis and processing. The modules are free and can be accessed on the Extension Store.

Source: Charles Hurburgh, Iowa State University

Unless he knows what his costs are, and what price and yield he has to get to break even, a farmer can’t know how much money he’s likely to make — or lose — on any given crop in any given season. Math is required. Records are essential.

The process may be a little less intimidating with the use of a Texas A&M AgriLife Extension decision aid tool that simplifies the process, says Extension Economist Jackie Smith at Lubbock, who explained the Crop Profitability Spreadsheet at the recent Red River Crops Conference at Childress, Texas.

“We’ve designed this tool so producers can plug in their own numbers,” he says. The tool is available at http://southplainsprofit.tamu.edu/ and offers some basic numbers, but Smith says the tool is more helpful when farmers add their own figures. “Calculations are pretty simple to identify break-even prices and returns above variable costs.”

The program includes spreadsheets for 24 separate crops. “It also considers ‘what ifs’ to calculate break-even numbers and net returns under different circumstances.” The spreadsheet does the calculations and identifies break-even levels. “The break-even price will cover variable costs,” he says. “Break-even yields will show what’s necessary to cover all costs — fixed and variable.”

It will calculate the break-even price necessary to cover costs, as well as break-even price to cover all costs. “These break-even prices are calculated for the yield entered in the budget, and for two yields below and two yields above that yield.”

The 2017 spreadsheet was made available on the website February 6, “or you can come by my office in Lubbock.”

Facilitates comparisons
The spreadsheet offers a way to measure expenses, compare the advantages of one crop with another, and assess yield and price estimates, Smith notes. “It makes farmers better decision-makers. Producers plug their own numbers into the budget, and the equations come up with the figures.”

Farmers with more accurate records are likely to find more benefit from the tool, he says, but it’s a good starting place for any producer who wants a better handle on the economics of a crop.

As an example, a worksheet showing budgets for irrigated cotton and irrigated sorghum, includes estimated income, including estimated price and yield projections. Cost estimates are detailed, and include fixed and variable expenses.

In the example, cotton, at 65 cents a pound and 1,250 pounds per acre lint yield, plus .888 tons of seed per acre, creates an income of $990 per acre. Variable costs total $773.78 per acre, leaving a return of $216.22 above variable costs. Adding $189.25 in fixed expenses drops the returns over total specified expenses to $26.97.

For grain sorghum, estimating a 55 cwt. per acre yield at a $6.80 price, total income is $374. Variable expenses total $382.68, leaving a loss of $8.68 per acre. With fixed costs adding another $189.25 per acre, the returns above total specified expenses result in a loss of $197.93 per acre.

Smith includes a chart showing break-even prices to cover both variable and total costs for a range of yields for both irrigated cotton and irrigated sorghum.

Covering costs
Budgeted yield percentages show that at 75 percent and 937.50 pounds per acre, cotton needs 62 cents per pound to cover variable costs, 82 cents to cover total costs. At 90 percent of estimated yield, 1,125 pounds per acre, price to cover variable costs drops to 52 cents per pound, and 69 cents to cover all costs. At 100 percent yield, 1,250 pounds per acre, 48 cents covers variable costs and 63 cents covers total expenses. With 125 percent of estimated yield, 1,562.5 pounds per acre, 39 cents covers variable costs and 51 cents covers total costs.

For sorghum, 75 percent of estimated yield, 41.25 cwt. per acre, would need a price of $9.08 to cover variable costs and $13.66 to cover total costs. At 90 percent, 49.50 cwt., $7.66 covers variable costs and $11.49 covers total costs. With 100 percent of estimated yield, 55 cwt., break-even to cover variable costs is $6.96, and $9.51 to cover all costs. With a bumper yield of 125 percent of estimated production, 68.75 cwt., $5.69 covers variable costs, and $8.44 covers total costs.

Producers look at their own yield histories, consider production costs, and possibly look at options to reduce those expenses or whether another crop offers a better opportunity. The process, Smith says, is a lot simpler than working it out in a spiral notebook with a No. 2 pencil and a pocket calculator.

The budget figures help producers adjust cropping strategies, examine expenses, and provide a sound baseline for determining marketing objectives.

Information may be one of the most valuable tools a farmer has when prices are less than robust.

Source: Texas A&M AgriLife