Can high prices and high incomes in 2006 and 2007 give way to lower prices and lower incomes in the near future? With the prospect for higher production costs, in 2008, there is an even greater chance for profit margins to be squeezed, and profits become a small percentage of total farm budgets which have grown significantly.

In the euphoria of $4 corn and $9 soybeans, there may also be the depression of profit margins that have nearly evaporated. Even without the flooded fields of the western Cornbelt and the droughty fields in the eastern Cornbelt, farmers who enjoyed near perfect production this year will be financially challenged say University of Illinois ag economists Gary Schnitkey and Dale Lattz. Their recent publications on financial prospects and on 2008 crop budget prospects will lead many farmers to wonder why their bank accounts do not reflect the results of record high prices.

Crop prices that began to climb late in 2006 provided farmers with the stairway to net incomes in excess of $100,000 for farms enrolled in Illinois Farm Business Farm Management (FBFM) which assists farmers with records and taxes. And 2007 is expected to be similar, thanks to high prices and above average yields. These levels have never before been seen, but Schnitkey and Lattz are concerned that such income levels are vulnerable to declines in commodity prices as supply and demand conditions change.

Additionally, production costs have increased. The Illinois economists are projecting $380 per acre cost for corn and $228 for soybeans. On top of production costs, they believe cash rents will average $40 more per acre for 2008 than they were in 2006. That magnitude of production costs will require corn prices above $3 and soybean prices above $8 to break even, even with exceptional yields. Their fear of commodity prices near those benchmark levels, resulting from routine price variations, point to net farm incomes well under the past two years, and even below the $50,000 levels seen just 5 to 10 years ago.

While market prices are beyond the controls of farm operators, production costs can be controlled to some degree, and economists Schnitkey and Lattz have calculated the non-land costs of corn and soybean production in the northern part of Illinois, which has relatively good soils. The $380 per acre cost they project for corn is a $42 increase over 2007. $38 of that comes from the direct costs of seed, fertilizer, pesticides, drying, storage, and crop insurance. Their $228 projected cost of soybean production in 2008 is up $18 from the current year, as the result of the direct costs previously noted.

In addition to the direct costs for corn, there has been a $2 increase in machinery and power costs up to $75 and a $2 increase up to $57 per acre for other expenses, including labor, building rend, depreciation, insurance, and non-land interest. Increases are similar for soybeans.

To cover those costs and break even in the farming operation, Schnitkey and Lattz say farmers will need to obtain higher market prices. Break even levels for corn have risen $ .60 per bushel in just the past 5 years. However the break even price for soybeans has not increased quite as much because of the soybean production costs. At a $225 cash rent, the break even price is $3.40 per bushel for corn, and $8.88 for soybeans. While current commodity markets are offering high prices for 2008 production, any decline to typical levels of $2.40 for corn and $6 for soybeans will create low and negative income for many farms.

Summary:
Despite high commodity prices, farm incomes face financial challenges because of higher production costs and higher cash rents that are being paid. Net incomes that have been over $100,000 for the past two years may well decline to $50,000 or less if commodity prices return to more normal levels. The higher production costs are being seen for both corn and soybeans, and will require commodity prices above $3 for corn and $8 for soybeans to break even for many farms, even with good soils and exceptional yields.