Farm Horizons, May 2008

Thoughts about agriculture

By Kent Thiesse
Farm management expert and columnist, Lake Crystal

The following are thoughts about all the traditions and advancements that help make the US agriculture industry second to none.

Interesting statistics about today’s agriculture industry:

• The top five agriculture products in the United States are cattle and calves, dairy products, broilers, corn, and soybeans.

The US produces 46 percent of the world’s soybeans, 41 percent of the world’s corn, 20 percent of the world’s cotton, and 13 percent of the world’s wheat.

• It takes the average American about 35 days to earn enough disposable income to pay for all the food that is consumed at home and away from home during the entire year.

By comparison, it takes consumers more than 100 days of earned income to pay all federal, state, and local taxes each year.

• About 19 cents of every consumer dollar spent on food actually goes to the farmer. The other 81 cents is spent on processing, packaging, marketing, transportation, distribution, and retail costs.

• One acre of wheat will yield about 35 bushels per acre, and will produce about 1,960 loaves of bread, or about 56 loaves of bread per bushel of wheat.

A three-fold increase in the price paid to a farmer for a bushel of wheat, from $4 per bushel to $12 per bushel, only increases the wheat cost for a loaf of bread by 14 cents per loaf.

• The US agriculture industry employs more than 22 million Americans to produce, process, sell, and trade the nation’s food and fiber. This represents approximately 16 to 17 percent of the total US workforce.

• The soil erosion rate on US cropland has declined by more than 40 percent since 1982. Today, conservation tillage methods are utilized on approximately 103 million acres of the total of 281 million crop acres in the US.

• Fresh beef sold at the retail meat counter in the US has 27 percent less fat content than 20 years ago. Today, an average pork tenderloin only has about one gram more fat than a skinless chicken breast, which is considered among the leanest of meat products.

• One dairy cow produces enough each day for seven gallons of fluid milk, 2.9 pounds of butter, and 6.0 pounds of cheese.

This daily production is accomplished by the dairy cow’s average daily consumption of 35 gallons of water, 35 pounds of hay and silage, and 20 pounds of grain and concentrates.

• Today’s modern combines harvest about 900 bushels of corn per hour, or 100 bushels every seven minutes. By comparison, in the 1930s, before modernized harvesting equipment, a farmer would harvest about 100 bushels of corn in a nine-hour day.

Interesting facts regarding today’s farmer:

• The average US farmer produces enough food and fiber for about 150 people. This number was 19 people in 1940, 46 people in 1960, and 115 people in 1980.

• Ninety-nine percent of all US farms are family farm businesses owned by individuals, partnerships, and family corporations. These family-based farm enterprises account for about 94 percent of all the US agricultural products that are sold each year.

• The average age of the US farmer is 55 years of age.

• From 1997 to 2002, the number of farms operated by women increased by 12.6 percent.

• There are 2.13 million farms in the US today. This compares to a high of 6.8 million farms in 1930, 4.0 million farms in 1960, and 2.4 million farms in 1980.

• Today, about 65 percent of farms have computers, and more than half of all farms have Internet access. Almost 90 percent of farmers use cell phones.

Grain markets tumble

Grain marketing in this highly volatile marketing environment continues to be a big challenge for farm operators. Many grain producers are coming off a very profitable year in 2007; however, there is still a considerable amount of 2007 corn and soybeans that are not priced.

Many farm operators have taken advantage of some very favorable grain prices in recent months to forward price a significant amount of the anticipated 2008 corn and soybean production, and even some projected 2009 production.

However, making grain marketing decisions beyond 2008 can be very difficult, without knowing what input costs and land rental rates will be, and now the strategies available to producers for forward pricing grain may be changing.

For the short-term, grain prices topped out in early March and have been on a decline ever since, and, in-fact, a rather dramatic decline in the soybean market.

Current soybean futures on the Chicago Board of Trade (CBOT) closed at $15.22 per bushel March 3, and closed at $12.07 per bushel March 20, a drop of $3.15 per bushel, or 20 percent in just more than two weeks.

Similarly, the November CBOT soybean futures for 2008 new crop soybeans dropped from $14.26 per bushel March 3 to $11.14 per bushel March 20, a drop of 3.12 per bushel, or 22 percent.

Cash soybean prices at Lake Crystal dropped from $14.38 per bushel March 3 to $11.09 per bushel March 20. New crop forward contract soybean prices for 2008 were $13.28 March 3, and declined to $10.12 per bushel by March 20.

Current corn futures on the CBOT were at $5.55 per bushel March 10, and were at $5.07 per bushel March 20, while December 2008 corn futures were at $5.79 per bushel March 10, and were at $5.21 per bushel March 20.

The local cash corn price at Lake Crystal dropped from $5.35 per bushel March 10 to $4.65 per bushel March 20, and the local new crop corn price for 2008 was reduced from $5.28 March 10 to $4.68 March 20.

In addition to the drop in corn prices, it appears that local grain markets have widened the basis on the current cash corn market, which is the difference between the CBOT corn price and local corn price on any given day.

The cash corn basis in early March at many local grain markets in southern Minnesota was 20 cents to 25 cents per bushel under CBOT corn prices, which had widened to a basis of 40 cents to 45 cents per bushel under CBOT prices by March 20.

Grain marketing is changing

Farm operators are being put into a tough dilemma – there are still some good grain marketing opportunities for 2008, 2009, and beyond; however, easy access to market the grain is slipping away.

Many local grain elevators and some larger grain merchandisers are no longer offering simple cash grain contracts for 2009 corn and soybeans, and some have put restrictions on 2008 forward contracts.

Some local grain elevators are requiring producers to have a separate “margin account” in order to forward contract grain. This means that a producer will have to cover all or part of futures market margin calls that may occur if the futures market increases above the forward contract price.

This type of arrangement will require a producer to have a line of credit with an ag lender, very similar to grain hedge accounts with the CBOT.

Just like a grain hedge, these contract arrangements should clear out by the time the forward grain contract date is reached; however, the interest paid to finance the “margin account” will be an added cost to the producer, thus reducing the net price that they received for the grain under the original forward contract.

For example, if a producer forward prices 2009 soybeans at $10 per bushel, and the CBOT price averages $4 per bushel higher than the CBOT price from the day of the contract (April 1, 2008) until the date the soybeans are delivered (October 1, 2009), the added interest cost at 7.0 percent interest would be 42 cents per bushel for 18 months, and the net price of the forward contracted soybeans would be reduced to $9.58 per bushel.

Some grain elevators and grain processors are pushing “basis contracts” to forward price corn and soybeans. With a basis contract, a producer is locking in the basis on a particular date, which is the difference between the CBOT price, and the local cash price.

The basis March 20 for October delivery was about 50 cents to 55 cents per bushel for 2008 corn, and about $1 per bushel for 2008 soybeans at local grain elevators in South Central Minnesota.

It is important to remember that a basis contract does not protect against sharp declines in the grain markets; however, it does allow for upside potential in the markets.

If we get into a situation of short grain supplies again later in 2008 or in 2009 that cause the basis to tighten, due to strong local demand for grain, a producer with a basis contract will not realize that market improvement.

As mentioned earlier, the cash corn basis in early March was only about 20 cents per bushel, compared to the current cash market basis of more than 40 cents per bushel, and the new crop basis of more than 50 cents per bushel.

There are times when a basis contract is a very good grain marketing strategy, but not at all times. It is important to recognize the difference.

The bottom line is that grain marketing for 2008, 2009, and beyond is becoming extremely complex, and there are many newer type grain marketing alternatives and contracts being offered to producers.

It is very important that farm operators understand these grain marketing alternatives and implications before entering into grain marketing contracts.

It is a good idea for a producer to review potential grain marketing strategies and contracts with a trusted grain marketing consultant, their farm management advisor, and their ag lender before finalizing a newer type of grain marketing contract in order to understand all the grain marketing and financial implications for their farm business.

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