I have been reminded during recent visits to the United States why the farm machinery and inputs companies continue to do well in what should have been a drought disaster for most of the country.
Four years of high corn and soybean prices have helped create a financially secure grain and oilseed sector, and this is backstopped by federal crop insurance.
In most cases, American producers can receive a profit over and above their operating costs, even in a wreck such as 2012.
An American farmer can insure up to 85 percent of revenue or yield in most crops for about $40 per acre, plus a 49 percent government subsidy that he doesn’t pay. A producer who might normally grow 147 bushel corn and see $5.50 per bu. at the farmgate would be assured of receiving $650 an acre.
The value of the insurance indemnity varies greatly based on crops and regions, but the crop insurance payout would have been about $190 per acre last year for a Minnesota producer in the above example who grew a drought-damaged 90 bu. corn crop.
The cost of production, including machinery and a return for labour, should be about $420 in a corn and soybean rotation. Land ownership returns or rental have to be taken from the $230 margin.
However, most producers I have spoken with said crop insurance would leave them in the black for 2012.
They won’t be making any changes to their farm machinery buying or input planning for this year, despite a 40 percent reduction in their yields.
If that farmer is able to harvest his normal 147 bu. corn this year, he will be looking at a margin of about $300 per acre, even with a price drop to $4.80.
He might need it with land rentals in the $130 to $190 range and prices at about $4,000 per acre in Minnesota, but he won’t sweat it if it doesn’t work out.