January 2, 2008 | 15 Comments
I have had many blessings in my life to learn and grow. One area that I've been exposed to since I bought my farm in 1999 is the economics of farming. What I've learned over the years, I've learned through osmosis, simply paying attention to what was going on around me.
Recently, the young man who owns the farm north of me approached me about helping him farm his own land. They've been renting it out (to another farmer) for nine years, and now he wants to farm it himself and make some extra money now that he is entering manhood.
There are several reasons that he needs my help. He can't read. He's illiterate. You'd be surprised how difficult something can be when you don't know the "code" (the written word). There's no one else to help him. He's been beaten down (psychologically) his whole life and now he's 21 years old and trapped on a farm out in the middle of nowhere. He can't even go anywhere because he can't get a driver's license because he can't read and no one will help him study for it. So one of the first things we'll undertake is that I'll help him get his drivers license.
But let's get back to farming….
This young man and I have spent a lot of time together over the years and this past week was no exception. We've been driving around going to local farm coops, the local FSA office, local banks, and to talk to other farmers, gathering data and information so that I can help him to become a farmer.
Here's what I've found out about corn.
There are many types of seed corn that you can use. Prices range from as little as $45/bag to over $300/bag. The huge difference in price is in how the corn has been genetically altered. The more expensive the seed, the more things it is immune too, as well as being resistant to many various types of herbicides.
We settled on a seed corn that cost around $115/bag. Quite a bit more expensive than the $45/bag seed. But actually, if you want to grow a real crop with the $45/bag corn, you'd have to spend so much money on different sprays that the price differential isn't much.
Each bag will plant about three acres of land, assuming 38" rows.
Here's what you have to do:
In March, you disk the ground smooth — assuming you didn't do it in the fall, which is actually a good thing to do, allowing the snow and moisture to break down the soil and the water to seep into the soil.
You then spread fertilizer. In this area, on this type of soil, a good mixture is 18-46-60 (N-P-K). This will cost around $44/acre.
Next, you spread anhydrous over the land at a rate of about 120 lb/acre. This runs around $0.41/acre for the anhydrous and $0.01/acre rent for the tool bar, for a grand total of $0.42/lb which works out to be $50.40/acre.
Then, when the soil temperature exceeds 50 F, you will plant the corn. This is usually done in the second week of April or later. When you've planted your corn, you now need to spray. You'll do a run of Atrozine spray mixed with cutworm spray. This will cost around $14/acre.
Here is where speculation really begins. If you plant too early, you're taking a chance on having your corn come up and then getting hit with a late frost, possibly killing it. So maybe it's better to wait to plant. But there are problems with that too. If you wait, then the spring rains come and you can't plant because the fields are too wet, and by the time they dry, it's possibly so late that your corn will be doing its main growing during the dry season and won't get enough rain during its crucial "tassling" stage — when the corn is tassling, it is absolutely crucial that it gets water.
Of course, these spring rains hold problems for the farmer who got his crop in early and didn't get hit with the frost. You see, in the spring, rain has a tendency to come in large amounts and all at once. It is not uncommon to see rainfall levels of 5+ inches in a week, sometimes in only a few days. Just as not enough rain can cause problems, too much rain causes problems.
In the bottoms, where the land is the most fertile, moisture gathers. The creeks fill up and sometimes spill over the banks. The higher ground drains all its moisture onto the bottoms, too. This causes water to accumulate in the bottoms. And in these areas of accumulation (large puddles or overly wet muddy areas) the crops won't grow.
So you not only have to beat the frost, you have to beat the rains and then the dry season. If this ain't speculation, I don't know what is!
But let's assume that you got your crop in succesfully. What you have to do now is check on your fields at least once a week to make sure that everything is going well.
In our area, we have problems with grasses and broadleafs, especially fescue grass. I'm pretty certain that cockroaches and fescue are the only things that really would survive a nuclear explosion. So the farmer will have to spray again, this time with Post, which runs around $6.50/acre. But if there's a break of fescue, the farmer will have spray Round-up again, which will cost another $25/acre.
So if you add all this up and figure in all the different things that could happen, here's what you come up with.
$38/acre for seed (figuring in a few different "extra things")
$94/acre for N-P-K and Anhydrous
$20/acre for spray
For a grand total of $152/acre just to put a crop in. The farmer in question has 133 acres of bottoms. So it will cost him $20,000 just to put the crop in.
Now, keep in mind that we haven't even added in the cost of fuel, which is quite substantial. Our best estimate is that it will cost around $5,000/year for fuel to put the crop in, take the crop out, and deliver it to market. So the cost for 133 acres is $25,000.
Now, keep in mind that it also costs you around $25/acre to spread lime on the ground — but you have to do that only every 3 - 4 years on aveage). But I think we've got enough "fat" built into the expenses above to safely assume that lime will fit in these numbers.
If you think we're done now, you are mistaken. What's missing? Does the farmer need to hire some help? Possibly on a small spread like this the son and father working together may be able to do it themselves. But they may need to hire some help. You see, when it comes time to sow or harvest, there is a very limited window to get things done. What if the fields are wet for a week, then dry out, but a heavy rain is forecast in two days? You may have to hire some help to get the crop out in such a short period. So you need to account for some possible cost for hiring some help.
What about bad things happening? You need crop insurance, too. Sure you can go solo and hope for the best — but, losses hurt you more than gains help you! This is especially true of farming. You're better off insuring your crop and giving up some profit so that you can ensure that you don't get wiped out. Frost, hail, disease and pests can wipe you out. It's always best to give away a portion of your profit to ensure that you don't get wiped out.
Further, we have to take into consideration the cost of equipment and the cost of repairs on that equipment. Farm equipment is really expensive, but luckily, my friend has most of the equipment already. But, unfortunately, it's old and will need a lot of repairs. You simply can't believe how things break on a farm. Farming is really, really hard on equipment.
As an aside, when I was planting my own foodplots, I would spend 3 hours repairing equipment for every 1 hour actually spent sowing. That's on the high side, but you get the idea.
Now, on top of all of this, the speculating farmer has to further speculate with grain prices in the futures market.
Right now, in my area (as of last week) corn futures were trading for $4.10/bushel at the local grain elevator. The elevator operator even told us his spread on the deal (I don't know if that is normal or not). He's selling the contracts for $4.60/bushel on the exchange and buying from his farmer clients for $4.10. I simply don't know enough about grain futures (especially at ground level) to know if this is a good deal or not, but my gut tells me that that's a pretty high vig to pay.
So let's say for the sake of discussion that paying help, insurance and repairs is going to run this farmer an additional $5,000/year. A grand total of $30,000 to plant 133 acres in corn, or just under $226/acre.
Now, lets look on the profit side of things.
First, to just break even, assuming that he gets $4.10/bushel, he'll need to bring to market just over 55 bushels/acre. Believe it or not, that's not to hard to do.
Realistically, this farmer expects to get around 125 bushels/acre on average. Now, note the phrase "on average". Some years, he'll get far less than that. We just had a bad year on my farm this year. My bottom land is right next to his, so our bottoms are basically the same, and we got 80 bushels/acre off my place. So it's fair to say that he'll end up with an average annual range of 80 - 150 bushels/acre.
At 125 bushels/acre, and assuming he'll get $4.10/bushel (of course, we have no idea what grain prices are gonna be in the future), he'll gross around $68,000, which will net him out a profit of $38,000 for 133 acres. Not too bad!
But if we look at the ranges of 80 - 150 bushels/acre, we find that he could get as low as $14,000 in profit to as high as $52,000. That may not seem too bad, except when you take into consideration that he could easily get $100 - $150/acre rent for that bottom land, thus guaranteeing a profit of $13,00 - $20,000/year.
Also, most farm land has some sort of government subsidy attached to it. The person who actually does the farming is the one who gets the subsidy. This amounts to around $10 - $25 acre (more or less depending on the land and circumstances).
And keep in mind that in order to get that guaranteed profit (by renting his land), the farmer has to do absolutely no work whatsoever. So, on the margin, his true profit (profit from work - profit from no work) is much less, since by renting out their land and taking the risk free profit, he could free himself up for other, potenitially, more profitable endeavours.
Why would anyone want to rent the land? Farmers who rent a lot of land usually own a lot of big time equipment and farm a lot of land. Their profit margins are smaller, but they make up for it on volume.
But in the case of my neighbor, he sees this as an opportunity to make more money and springboard himself to bigger and better things.
Now, it may look like being a farmer can be very profitable. Well, it could be. If you're saavy and understand the land, you can make a good profit. But it doesn't matter how good you are, if the weather goes against you.
Plus, since grain prices have gone so high so quickly, you may be thinking that there's a lot of profit potential. There is, except that the other costs of everything listed above are going up proportionally, such that the profits available to the farmer are not really growing that much. Actually, the farmer makes a higher profit when grain prices go up quickly (assuming he can sell some contracts) but the providers (of seed, fertilizer, lime, equipment, etc) haven't yet raised their prices. And make no mistake about it, the providers are raising prices to soak up the extra profit now available from increased grain prices.
Times like this (fast rising grain prices) are great opportunities for farmers. However, there is a much darker flip side to that coin. What happens when grain prices go up real fast, then providers raise their prices, and then grain prices go down fast? That is disaster for a farmer.
Now, if all that weren't enough for the farmer to live through, he still has to become an actual speculator, out in the futures market.
You see, $4.10/bushel is a great price for corn, but the farmer can't sell his entire crop since he doesn't know how many bushels of corn he'll actually produce. So he'll sell some of his crop now, and some later. Many farmers sell 25% - 30% of their average crop (which is around 125 bushels) as long as it's no more than 1/2 of their low end worst crop (which is 80 bushels).
So to do this math, 80 bushels X 133 acres = 10,640 bushels of corn, and 125 bushels would be 16,625. So this farmer would sell no more than 25% of 16,625 (4,156 bushels) but would do no more than 5,320 bushels (50% of the 10,649).
Now, future contracts are sold in 1,000 bushel increments. So this farmer would sell either 4,000 or 5,000 bushels at this contract level. So let's say he sells 5,000 bushels at $4.10/bushel. He has locked in $20,500 of revenue, assuming he can deliver.
As the season progresses and he gets a better feel for how his crop is faring, he may decide it's prudent to sell more contracts. Hopefully the price will have gone up, but you simply don't know.
You see, if he's having a good season and growing a good crop, that means the supply of grain will be good…..and the price will usually go down, so the contract prices will go down too. If he's having a bad or off year, the supply of grain will be less and the prices will be higher, but he'll have less crop to sell.
A good scenario is for our farmer to have a good year while other farmers are having a bad year (because things like drought can be very regionalized). However, a bad year is just the opposite — our farmer has a bad year (say a regional drought) while other area's are doing great!
Of course, the goal is to have your first contract be the least profitable contract you sell all year while having a banner year! But hey, isn't a scenario like that the dream of every speculator!
D. J. Kadrmas remarks:
Anything is better than listening to a boss, even gambling on the weather. Some small farmers have outside jobs, but I notice they usually quit them quickly. The wives, now, that is a little different.
Alan Millhone writes:
In Ohio around Columbus there are currently 50 gas stations that offer E-85 alternative fuel (if your vehicle can use it) at 30-40 cents less per gallon than conventional fuel and it is helping the environment. In the summer in my area we look forward to having fresh picked corn on the cob from from Reedsville, Ohio, along the Ohio River. If the E-85 takes hold the big boys will buy up all the locally grown corn for this fuel.
Michael Ott explains:
This is a common mistake. Corn on the cob is sweet corn. Corn made from ethanol is field corn. They are not the same thing, and the price of one has little to do with the other. Sweet corn is much more expensive than field corn because it is sold in smaller units to mostly retail customers. Field corn is sold in massive quantities to industrial producers, like many other commodities. A farmer gets a much greater return on sweet corn, but the market is much smaller and usually local.
Scott Brooks adds:
The article I wrote is about what Mike refers to as "field corn". In my area we call it "feed corn." Sorry for not being more specific about that. Most of the field/feed corn in my area is used for animal feed. Unlike delicious sweet corn, feed corn is definitely not very tasty, no matter how much butter, salt or pepper you put on it.
Also, keep in mind that the economics of growing and selling corn that I presented pertain to my area, northwest Missouri. The economics are different in other areas. For instance, whereas we expect to average around 125 - 150 bushels/acre, certain areas of Iowa can average 250 bushels/acre. I don't know what the input cost are to sow/harvest corn are in Iowa.
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