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Declining input costs may boost farm profits in 2018
By TIM ALEXANDER
Illinois Correspondent
 
URBANA, Ill. — Individual farm income in Illinois will plunge from around $90,000 per year in 2016 to the $50,000- $60,000 range for 2017, according to University of Illinois agricultural economists, and will likely remain in the same range during 2018.

The good news, said the U of I’s Gary W. Schnitkey, is that declining input costs could boost farm profits this and next year. The projections are based on FBFM farms of 1,500 acres from around the state.
 
“The major factor causing it to come down is lower yields (and prices),” Schnitkey said during a recent U of I farmdoc webinar offering a look at 2017 income projections and a peek ahead into 2018.

“USDA’s projection surprised a lot of people as being pretty high, but as we are starting to look at some of the yield estimates coming in, a lot of them support what USDA found. Soy Capital just found 198 bushels per acre in McLean County in their yield survey,” Schnitkey said. “It’s pretty safe to expect that both corn and soybean yields will be down in Illinois for 2017, however, prices have not rebounded accordingly. USDA has projected a (corn) price of $3.30 for 2017 and looking into the futures market into 2018 we’re seeing something like $3.60.”

“The other thing we’re looking at is lower ARC payments,” he continued. “In Mc Lean County we are expecting just $18 per acre ARC payments for this year, compared to over $50 in 2015. With a $3.30 price and 195 bushel yield, it would be a $36 payment for 2017 which would be received in (August) 2018.”

Lower prices, lower yields and lower ARC payments received in 2017 for 2016 crops translate into lower farm income for this year, the economist concluded, though some counties received up to $60 per base acre in 2016 ARC payments for corn this year.

“Corn payments can range from zero to $60 with some of the higher payments coming in southern Illinois. Soybean payments will be near zero to mid-$30 per base acre. You can expect less than last year particularly in northern and central Illinois.”

But the lower revenue projected by the U of I farmdoc team for 2017 and 2018 could be slightly offset by falling nonland costs. “It looks like we are going to have lower costs continue into 2018, with 2018 costs likely lower than 2017" costs, particularly in the fertilizer area, Schnitkey said. “We’re seeing costs go down, but not as fast as our revenue is going down.”

Seed costs are a big reason that overall input costs have not fallen on a reasonably commensurate level with revenue, staying roughly the same or costing more than in 2013. During that same time period, fertilizer prices have declined.

Farmers are left to wonder whether lower yields translate to a favorable market price response, Schnitkey concluded, saying: “If we see (the predicted) $60,000 of net income, we’re going to have tight economic cashflow, tough decisions with lenders and still some continued emphasis on cutting costs.”

The Sept. 1 webinar, available at the farmdocDAILY website, also covered the topics of farmland cash rents and agricultural credit. Dave Klein of the Illinois Society of Professional Farm Managers and Rural Appraisers joined Schnitkey and fellow U of I economist Todd Kuethe on the broadcast to discuss the findings of ISPFMRA’s latest report on Illinois farmland values and cash rents, based on a survey of their membership.

“Excellent farmland from our survey came in at $10,900 per acre, just slightly below the $11,000 we were at a year ago. So it is down roughly two percent for the entire year, a very small decrease and pretty much holding steady. Good and fair and average farmland values are seeing some drop-off, as we are seeing across the country,” said Klein.

“Good productivity land came in at $8,900, roughly a $500 per acre drop. Fair productivity land is at $6,900, which is a 3.8 percent drop from the beginning of the year. A year ago we were looking at $7,600. Average productivity land is at $5,000 per acre, a four percent drop from the beginning of the year.”

Land values in 2017 are very similar to the last half of 2016, Klein continued. “The supply side to the market is pretty stable. A tight supply helps keep prices relatively stable. Farmers continue to be the major buyers of farmland, at 65 to 70 percent. There are some 1031 exchanges starting to happen again, because the general economy seems to be picking up a tad,” he said. 
 
On the cash rent front, Klein said that members’ bullish outlook on corn prices has helped keep rent rates nearly consistent with 2016. “Excellent quality land classes in 2016 we had at $305 per acre and we expect a slight decrease there-- maybe $5 per acre. Good and fair classes, also a $5 to $10 per acre drop, averaging about a $6 to $8 per acre drop across the different land classes.”

ISPFMRA projects average cash rent amounts for all land classes to average $160 per acre for 2017 in their mid-year survey, compared with $166 per acre in 2016.

“Most farm managers are comfortable that variable cash rent leases are adjusting rents properly, and I will say we have a number of those where we set a base rent and have an adjustment off of that,” said Klein. Most farm managers expect costs to remain fairly consistent from 2017 to 2018, he added.

Kuethe said during his ag credit update segment of the program that there is evidence the short-term farm credit market is “strengthening a bit” after a shaky period, based on surveys conducted by the Federal Reserve.

“Demand is coming down a bit and we are seeing a little bit less in terms of repayment issues,” Kuethe said. “Shortterm agricultural interest rates have increased slightly this year. We are expecting further increases in interest rates going forward which means increased interest expenses.”

To hear the entire webinar and to download presentation slides, visit www.farmdocdaily@illinois.edu 
9/12/2017