Low corn and soybean yields are increasingly likely as hot, dry weather is forecast to continue over much of the corn-belt during the critical corn pollination period. Lower yields then lead to questions about grain farm incomes in 2012.
Grain farm incomes likely will be above projections made in winter of 2012, assuming that crop prices increase if crop yields are below trend-line levels. However, some farms will suffer losses. Farms that did not purchase crop insurance could face losses. Also, grain farms that have hedged a great deal of expected production could have lower incomes than those farms that have not pre-harvest hedged as much grain.
These conclusions are reached by simulating 2012 net farm income under drought conditions for a farm typical of northern and central Illinois. This farm has 1,200 tillable acres, with 10 percent of the acres owned, 60% cash rented, and 30% share rent. Cash rent is $295 per acre.
The farm has non-land costs of $514 per acre for corn and $306 per acre for soybeans. Debt level is $480,000. The farm purchases Revenue Protection (RP) crop insurance at an 80% coverage level for both corn and soybeans.
The Trend Adjusted Actual Production History (TA-APH) yield is 180 bushels per acre for corn and 50 bushels per acre for soybeans.
Net farm incomes under drought conditions are compared to two base cases.
1. 2012 winter expectations of net incomes. During winter, 2012 income for the farm was simulated using a corn yield of 185 bushels per acre and a soybean yield of 58 bushels for soybeans, the expected yields for this farm. These expected yields likely would have led to a reduction of corn prices from 2011 levels. Prices of $5.00 per bushel for corn and $11.00 per bushel for soybeans were used for winter projections. In May when yield prospects were favorable, forward bids for fall delivery of corn reached $5.00, suggesting that the winter projected prices were reasonable given that trend line yields occur. The winter yields and price result in net income of $167,200 (see Table 1).
2. Incomes given long-run prices. Below trend yields for corn in 2010 and 2011, severally reduced wheat yields in Russia in 2010, and low soybean yields in South America in 2011 have led to prices above long-run projections in recent years. Estimates of long-run prices are $4.50 per bushel corn price and a $10.50 per bushel soybean price in projections. These prices result in $94,500 of net farm income, below the $167,200 income in the base case (see Table 1).