The Peterson brothers were rolling early this year, with Chris planting corn on one field near Northfield, Bruce planting soybeans about a mile away, and Brian racing between the two of them to supply extra seed, oil and other needs.
"It’s sure nice this year to be able to get going early,” said Chris with a broad smile. He watched monitors in the cab of a GPS-guided John Deere tractor as the planter behind it sowed 36 rows of corn at a time, 34,000 seeds per acre. This year more than ever, the early start thanks to good weather is important.
Putting in a crop is not cheap. In 2014 it cost about $750 an acre for corn and $470 per acre for soybeans in direct expenses, according to reports from nearly 1,600 farms in a University of Minnesota Extension database.
Yet for months, the price that farmers receive for those crops has remained stubbornly low: for corn, about $3.40 to $3.60 per bushel.
Economists, lenders, and crop farmers who have done the numbers come up with the same conclusion, not only for corn, but also for soybeans and some other crops: Prices are not high enough to cover the average costs of production.
“Right now there’s many farmers that at current prices might be looking at losses of close to $100 per acre,” said Kurt Lensing, grain industry specialist for AgStar bank.
The one saving grace may be that two- to three-week early start, which could translate into better yields at harvest if the weather continues to be ideal.
The big three
More than 70 percent of the expenses to grow corn were for three items, according to the Extension data: $128 per acre for seed, $167 per acre for fertilizer and $250 per acre for land rent. Those costs represent a huge investment, since growers in Minnesota are projected to plant 8.5 million acres of corn and 7.5 million acres of soybeans this spring.
Wells Fargo & Co. agricultural economist Michael Swanson pictures it as laying dollars across the landscape.
“Think about spreading $20 bills on the ground and these guys are spreading about 40 of them on each acre, just to pay for direct inputs,” he said. “How many of us are willing to stack that many $20 bills on the hope that it’ll rain enough this year, or that the crop’s going to make a profit?”
Jeff Swanhorst, chief credit officer for AgriBank in St. Paul, said there’s no question that 2015 is shaping up to be a tight year. “Farmers have to get as entrepreneurial as they’ve ever been and figure out all different kinds of ways to reduce their cost per bushel of production,” he said. “It’s sharpen-the-pencil time.”
Joel Schreurs, a corn and soybean farmer near Tyler in southwestern Minnesota, puts it more bluntly: “We’ll be operating at a loss, and I’d say that’ll probably be true for 90 percent of the grain farmers this year.”
The impact will spread, he said, and has already reduced sales and production of farm machinery.
“Ag is what runs Minnesota,” Schreurs said. “If you take 50 percent of the gross income out of ag and all the dollars that are spent on different services and items, a lot of other people are going to hurt.”
Aftermath of success
Much of the reason for the gap between expenses and revenue is because Minnesota farmers have been so successful during much of the past decade. Crop yields mostly have been solid but not record-breaking, and prices were unusually high for several years, especially from 2011 to 2013. Seed costs, fertilizer prices, and land rent increased in lockstep with the healthy profits.
Now crop prices have dropped below the cost of production and seem destined to remain low in the near future, but the expenses — which farmers call “inputs” — remain high.
“Everybody’s hoping for a bumper crop,” said Jim Kukowski, a wheat and soybean farmer in Roseau County. In northwestern Minnesota where farmers can grow wheat, corn, soybeans, canola, sunflowers and sugar beets, Kukowski said producers have struggled in choosing what crops to grow this year.
The gap between expenses and revenue is not a surprise. Corn prices began falling in 2013 and many farmers finished 2014 with minimal profits, depending on when they sold their crops.
One indicator of economic strain is the farmer-lender mediation program run by the University of Minnesota Extension. It enables creditors and willing farmers to meet with a mediator to work out unpaid bills.
“For about the past five months, we’ve seen a tremendous spike in the number of mediation notices coming in, roughly double the numbers that we’ve seen the last two years,” said David Werner, the Extension’s chief financial officer.
“It does indicate that there’s a concern, and that there’s a trend that’s looming out there,” he said.
Another indicator is skyrocketing crop insurance payments. In 2014, Minnesota corn farmers received $3 in payments for every $1 they paid in premiums, the highest among 11 Midwestern states, according to a University of Illinois analysis.
Insurance payments are based upon an expected corn price set early in the year, which in 2014 turned out to be about $1 higher than the actual harvest price. Many farmers who had purchased insurance collected enough to offset much of their losses.
That won’t be true for 2015, said Wells Fargo’s Swanson, because corn’s price for insurance purposes has now been adjusted down to reflect the recent market.
“It’s been an extraordinarily generous program for the last couple of years, but that’s kind of run its course here,” he said.
Farmers and lenders have scurried in recent months to work on ways to cut expenses.
AgStar’s Lensing said his bank has tried to help farmers prepare financially.
“For some clients we’re rebalancing some of their debt, and increasing their cash flow and working capital for them to be able to handle a year or two of losses,” he said.
Bruce Peterson, also president of the Minnesota Corn Growers Association, said some growers have tried to renegotiate land rental prices, and others might be able to cut back slightly on some fertilizer without jeopardizing yields.
Others are adopting precision farming techniques, where producers use computers and GPS systems to customize their planting so they don’t waste seed or overapply fertilizer and herbicides.
“It kind of gets back to getting by with only the bare essentials and not anything more,” Peterson said.
Schreurs, the farmer in Tyler, said the problem will be if the trends carry over to 2016.
“A year of low prices is not going to be detrimental to most people unless they have a really high debt load,” he said. “If it happens for two years in a row, it’ll be crisis.”