Was 2020 bad for agriculture? Farmers have struggled against low prices for half a decade waiting for ample or record supplies to dry up. Farmers have become experts at patiently waiting in order to survive until relief arrived. Finally, it has come.
The soybean price on Dec. 31, 2019, was $9.56/bushel but now is $12.50/bushel. The price of hard red winter wheat was $4.86/bushel but now is $5.79/bushel The price of corn was $3.88/bushel but now is $4.44/bushel. These are not trivial changes; the magnitude of commodity price increases in the past year is profound.
If percentages can paint a better picture, soybeans prices have increased 31%, hard red wheat increased 19% and corn increased 14%. Basis bids also have increased substantially on a local level bringing cash prices for grain sorghum, corn and wheat closer to the futures price increase of soybeans.
What does this mean for profitability? Time and again producers see inputs increase with increasing crop prices. However, the recent price increase has been fast and that gives opportunities. Consider prepurchasing inputs in order to take advantage before input prices can react.
If it is assumed that input costs are similar to past years, then farmers have much more leverage in the 2021 growing season. A soybean crop that may have broken even at 20 bushels now only requires 14 bushels to generate the same desired revenue. A 30 bushel wheat crop drops to 24 bushels or a 60 bushel grain sorghum crop now falls to 52 bushels to generate the same revenue on changes in futures prices alone. Farming is not simple but higher prices simplify things.
Never consider that prices or input costs or weather predictions are set in stone. If 2020 has taught producers anything it’s that volatility in production and prices continues to grow. Soybean prices are on the precipice of trading into a new trading channel. As mentioned earlier, it has been more than five years since that has occurred. Excitement after years of suppression is not terrible but be cautious in planning.
There are many decisions to make with this new price structure. Should cropping systems be changed? Higher prices assist lower yields to breakeven but is it worth the risk of adopting a more difficult crop like soybeans? With high risk comes high reward, but some producers are tired of the risk. Higher prices will shift acres in Oklahoma back to wheat, but those decisions won’t be made for another year. The current wheat crop already has been determined.
Flexibility and attention to price risk management is more paramount now than in the past. As prices increase price volatility invariably increases. If volatility is measured as a percent change then it follows that higher prices will see larger daily price moves. This causes a great deal of stress when marketing grains, so have a plan to deal with those marketing decisions. Selling 5,000 bushels of soybeans and seeing the price increase by $0.50/bushel the next day can be damaging to marketing self-esteem.
Knowing break evens and having a goal in place before the growing season can help offset some, but not all, of that stress. Making a profit is a good start, but knowing the potential home-run price allows for some understanding of realistic marketing goals.
The important first step is to plan to sell into this bull market. That is the simple part. If you will change cropping systems drastically, consider the additional risk and strain that will put on your operation. Will forward contracts alleviate that stress? Will revenue crop insurance cover those forward contracts if weather is poor?
It is good to have options and the opportunities in 2021 will be embraced by the agricultural community. Now more than ever the Oklahoma Cooperative Extension Service is here and ready to help you with your farm business planning. Stop by to chat and formulate a plan to be successful in the coming year.
Milacek is Oklahoma Cooperative Extension Service northwest area ag economics specialist.