The profit formula on corn or soybeans seems simple: yield multiplied by price minus cost. But the plans made in winter and the reality at harvest can turn into something completely different.
The three variables of the profit equation are just beginning to be worked out for the 2023 crops.
Over the past few weeks, the USDA has provided initial indications for the year ahead in reports from two of its wings that have mostly flown under the radar as traders focus on the here and now. . First, the World Agricultural Outlook Board released its Advance Release Tables of USDA agricultural projections through 2032 on Nov. 7. This so-called baseline on the future is rightly ignored, except for except for a set of key figures: early supply and demand forecasts for the coming year, including acreage, yields and prices.
Then, on Nov. 15, the Economic Research Service released an updated production cost forecast with guidance on what to expect in 2023.
Both of these reports are based on statistical guesswork, not farmer surveys. The baseline forecast used 2022 crop data from the USDA’s October World Agricultural Supply and Demand Estimates as a starting point for 2023, so it’s already a bit dated. World events – the war in Ukraine, tensions with China, a faltering global economy – make all price and cost assumptions highly variable. And the weather, as always, is difficult to predict six months before a long growing season.
Fine print aside, pushing a pen through your fields sounds promising. Corn and soybeans project profits – if USDA projections come true. Here’s what the new crystal ball says, and what might get better or worse in the outlook.
Corn beats soy
For corn, the 2023 base yields of 181.5 bushels per acre and the average cash price of $5.70 generated revenues of $1034. Total costs of $870 per acre would generate a profit of $164, compared to an estimated $290 this year and a record $323 in 2021.
Soybean yields of 52 bpa and average cash prices of $13 produce revenue of $676 less costs of $591 for profit of $85, compared to a 2022 estimate of $100 and a record high. $156 for 2021.
What to think of these first projections?
The USDA uses an adjusted trend yield in its estimates until its first survey of farmer opinions in August. This forecasts yields over time to account for increased productivity, assuming normal weather conditions during the growing season. The yields published in November appear to be a rounded average of the statistical and weather-adjusted yields. In my first forecasts, I only rely on the projection of the trend of the last 20 years. For corn this is lower than the USDA at 177.6 bpa, for soybeans a bit higher at 52.5 bpa. Of course, these trend returns could change a bit depending on the final 2022 returns released in January.
Total 2023 supplies combine production and imports with old crop stocks remaining at the start of the September 1 marketing year. so much from year to year.
Production is a function of harvested area multiplied by yield. Assuming normal dropout rates, the USDA estimated corn seedlings at 92 million planted with 84.1 million harvested. Soybean plantings were 87 million, with a harvested area of 86.2 million.
Surprise corn acreage?
On the supply side, acreage is where the real debate begins. Projected earnings differentials aren’t the only factor affecting farmers’ planting decisions, but they are significant, accounting for 61% of the variance in the ratio of corn and soybean planting intentions reported at the end of March. The USDA baseline called for 6% more corn acres than soybeans, but the profit differential suggests corn’s advantage could be much greater. While soybean acreage could drop, farmers are more likely to choose to add corn with good returns to get rotations back in line after cutting ground corn in 2022.
More acres would increase corn supply if yields hold, putting additional pressure on demand to keep stocks and prices in line. Early forecasts call for a recovery in global acreage and production in 2023, limiting our exports, inflating the US surplus and driving down spot and futures prices by $1 or more.
Rising soybean production in South America could have a similar effect on prices. Of course, it will even be months before the 2022-2023 crops are harvested in Brazil and Argentina, where there are already concerns about dry conditions – another variable that could confuse early price calculations.
The other side of the ledger
Costs per bushel vary with yields, but total expenses could also change from recent USDA estimates. Rising interest rates could affect loan repayments more than expected, and energy costs are also subject to the vagaries of the market. But the USDA predicts lower costs per acre in 2023, in part due to lower fertilizer bills from record highs set this year.
While the USDA sees only a modest 3% reduction in nutrient expenditure, the actual numbers could be lower. Farmers buying N, P and K for fall applications paid 10-15% less than the records set this spring after Russia invaded Ukraine.
Whether prices continue to fall largely depends on global food prices, with acreage and demand also impacting the market. Based on current cereal price forecasts, the UN Food Price Index could fall 17% from the record set this year – it has already fallen 9%.
International fertilizer markets appear to be pricing in this decline, but these reductions have yet to show up in the agricultural supply chain. If they trickle down – a big if, given the potential for shipping and other disruptions – costs could come down. Ammonia could trade for $1,065 to $1,130 at the farm level under this scenario. Retailers in parts of the Southwest Plains closer to the main production areas are already in this range, so it’s not an impossibility. December ammonia contracts in the Gulf are expected to settle at a substantial discount from the current price of $1,045.
Potash prices could also fall from current on-farm averages of around $825, but price declines could depend on what happens to exports from Russia and Belarus. Russia is pushing to remove obstacles to deals and could hammer out a framework with the West similar to its fragile grain deal to allow Ukrainian shipments out of the Black Sea. If trade normalizes, retail potash could drop to the $615-$695 level.
Phosphates could also be heading for a drop from recent retail levels above $900 to around $670-$740 if all goes well. Gulf swaps showed a $50 break in the spring last week.
Phosphate compounds, as well as urea, could be influenced by China’s aggressive return to the international market. China’s fertilizer production has been essentially flat since 2020. First, the government pressured manufacturers to limit sales and maintain supplies at home as its corn surplus dwindled. Then the COVID lockdowns hit many factories. Overall fertilizer production recovered in September, but year-to-date phosphate exports are down 55%, while urea sales are down 61%.
For clues on the international market, look at what’s happening with US stocks in the Gulf. U.S. nitrogen exports are down 22% so far in 2022, but net ammonia sales rose 41% in September, with prices here low enough to encourage overseas buyers to take on shipments. For better or for worse, fertilizers are an international market. U.S. natural gas prices remain low relative to the rest of the world, which could create headwinds for producers looking for lower costs.
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Knorr writes from Chicago, Illinois. Email him at [email protected]
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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