Review your break-even grain prices to secure profits or minimize losses
Following another year of declining prices, marketing strategies may need to focus on minimizing losses
As harvest begins, your farm may be discovering whether actual yields match up with the season’s production goals. Various yield estimate reports are optimistic that many farms will be surprised to find better than expected yields, despite the challenges of drought this year. However, in the background of these revelations there are also concerns about commodity prices and costs of production. In addition, some farms still have much of last year’s grain on-farm, limiting available storage. All of these factors suggest that reviewing break-even prices and focusing on marketing strategies this harvest season can lead to better farm financial outcomes.
Reviewing and updating your break-even prices starts with identifying what your known costs are for the year. Combining known costs with estimated costs for the remainder of the year provides you with a projection for total costs of production. Then, once operating and non-operating costs for the year are estimated, you’ll need to know yield expectations to calculate break-evens. With new break-even prices in hand, consider marketing options to secure favorable basis or futures prices.
Let’s explore each of these factors a little closer.
Cost of Production
Your farm records can help you find the farm’s already existing cost of production. If you already track your major expenses (i.e., fertilizer, seed, chemicals) by each crop enterprise, you can easily find specific costs of production. If you don’t track by enterprises, review where expenses were spent. Then calculate cost values back to a cost per acre based on planted acres (Table 1).
Table 1: Fertilizer costs allocated between corn and soybeans vs. all acres.
Crop |
|
Total Cost |
|
Acres |
Cost Per Acre |
---|---|---|---|---|---|
Fertilizer costs to corn |
|
$30,500 |
÷ |
200 |
= $152.50/acre |
Fertilizer costs to soybeans |
+ |
$12,600 |
÷ |
200 |
= $63/acre |
Total recorded fertilizer costs |
= |
$43,100 |
÷ |
400 |
= $107.75/acre |
Anticipated expenses are the next step in updating your break-evens. If costs are expected to be similar to years past, your farm records can be a good source of information. When expenses are expected to be different, sometimes reviewing custom work rate values can help identify a rough estimate.
For more information on calculating cost of production values, review MSU Bulletin: E3411 Introduction to Cost of Production and Its Uses.
Yield Estimates
With harvest already underway in some areas, there’s an option to use early yield results as a baseline. Early yields are good baselines if they are representative of your remaining acres. Compare yield monitor or moisture testing data against any grain sales to adjust estimates for moisture. A comparison can also help in determining how representative early yields are to the rest of your farm. If yields are expected to vary from field to field, more specific estimates may be needed.
In-field yield estimates are recommended prior to the start of harvest. However, sometimes in-harvest estimates may be needed as well. The benefit of performing a late season estimate is that values become more accurate the closer plants are to maturity. Consider rain or other types of harvest delays as an opportunity to conduct these types of estimates.
Yield estimates are handled differently for corn and soybeans. For more information on soybean yields, review the article, “Estimating Soybean Yields Prior to Harvest.” For more information on corn yields, review the article, “Estimating Corn Yield Potential.”
Calculating Break-Even Prices
The actual calculation of break-even prices should include a minimum of all operating costs. Most break-even calculations tend to focus on variable and fixed operating costs. To obtain a break-even price to cover operating, simply divide the operating expenses by the expected production. However, a more complete break-even also considers non-operating or financial costs to account for repayment needs. Non-operating costs can include family living, property taxes, and debt payments the farm is expected to pay (Equation 1). Determine how much of non-operating costs are expected to be covered by the farm and divide by the total acres. To estimate family living costs, a rule of thumb is to review three months of bank records for household expenses, add together, and divide by three.
A cash flow break-even price helps to ensure you cover operating and financial obligations:
The Cash Flow Break-Even price is also the break-even value your lender would prefer you to consider as you market your grain.
Forming Your Marketing Strategies
Every farm wants to sell their grain for more than break-even. However, there are times when the market will not offer a price equal to or above your cost of production. After a second year of declining prices, this may be one of those marketing years. If prices are too low, your marketing strategies should focus on minimizing losses as much as possible.
Marketing strategies revolve around two main considerations: the desired selling price and the perception of future market conditions. Future market conditions can be especially challenging to predict. Grain markets are a global trading ground that considers both domestic and international supply and demand. Key indicators to follow are futures prices and basis.
The futures price is the world price for each commodity in the market. It is set by the world supply and demand. Many grain elevators and farm news outlets provide updates on the global market. USDA also provides a monthly report called the World Agricultural Supply and Demand Estimates (WASDE) that provides annual forecasts on commodity markets.
Basis is the difference between futures and cash prices. It is based on the costs your local grain elevator pays to ship, storage, and manage purchased grain. Many elevators will post their basis online or have potential grain sellers call-in for updates. Regularly checking with grain elevators that you often sell to is recommended. Another useful tool to help track basis is the Purdue Crop Basis Tool. The basis tool can illustrate current basis in an area compared to historical averages or specific recent years (Figure 1).
Bushel objectives and pricing targets are the next part of your marketing strategies. Once you have an idea of your total production, break the total number down to smaller selling amounts. Set pricing targets that cover your break-even prices – once you determine a price you want to reach, create price targets around that value.
The next step in forming your marketing strategies is choosing pricing decision tools. Decision tools help you lock in basis, futures prices, or a cash price itself. Consider contracts or pricing decision tools that match your market expectations.
- If futures prices look favorable to you, while basis does not, consider a hedge-to-arrive or HTA contract.
- If you think futures may increase and are concerned basis may get weaker, a basis contract may be a better option.
- If the cash price being offered is a good price, a forward contract allows you to secure that price by locking in both the basis and futures price.
- If you’re unsure what futures or basis will do, a minimum price contract could be a good option.
Setting decision deadlines is the final step in creating marketing strategies. If prices don’t meet your price targets, the deadlines ensure you are proactive about pricing. Target prices and decision deadlines work together to help you make sales throughout the year. Cash flow needs are an important factor when selecting decision deadlines. Plan to meet cash flow needs by setting decision deadlines ahead of any payment dates.
To learn more about potential marketing strategies, review the article, “Price Checking Your Grain Marketing Strategies.” To learn more about potential strategies involving stored grain, review the article, “Adjusting Your Marketing Strategies With Old Crop Grain Still On-Farm.”
Join MSU Extension for the Marketing & Input Strategies webinar program
To aid producers in managing their marketing strategies, MSU will be hosting a series of repeat webinar programs in November and December. In the Marketing & Input Strategies webinar program, speakers will discuss current market conditions and optimal strategies for putting your farm plans into action. The first session will be on Thursday, November 7 at 6:30 PM and the repeat session on Tuesday, December 3 at 6:30 PM. Participants are encouraged to attend either or both sessions.
These sessions are part of a new season of the virtual Farm Policy and Risk Management Series, a free program presented by Michigan State University Extension. To participate, registration is required. To register today, visit: https://events.anr.msu.edu/fprms/