Farming 101:  What difference do a few pennies make?

Farming is an expensive occupation.  Whether the farm raises cattle on 20 acres or raises corn and soybeans on 5000 acres, the expenses and risks are high.

That being said what difference do a few pennies make?

All the difference in the world.

Today the USDA released its monthly report showing the status of cash crops grown in the U.S. such as corn and soybeans.  At this time of the year (prior to most farmers planting the current years crop) the reports can show esitimates of how many acres will be planted into certain crops, estimates showing how many bushels of grain are sitting in storage in the country and the demand for their eventual usage.  All of these factors and many more go into determining the price of the grain for local and worldwide market levels.

When reports like this come out the market often reacts quickly. Sometimes it rises quickly and stays there offering the farmer a opportunity for increased revenue, other times it’s not so positive. To a farmer, that move in the market prices can mean the difference between turning a profit for the year or being in the red.

Here is a screen shot of the markets reaction to the USDA’s report today. Showing a $0.13 cent drop in the Corn price shortly after the report was issued. 

Let’s pencil this out:

A farmer farms 1000 acres of Corn

After paying the landlords rent, or making land payments (if he/she owns the land) and paying for all input costs like seed, fertilizer, machinery, fuel, etc, he/she may have a total per acre expense of $750.00/acre of corn.

That same acre of corn has been known to produce an average of 190 bushels per acre (bpa) of corn grain at the years end.

Using the prereport price per bushel of corn for $3.98 the potential income equals

190 x 3.98 = $756 income per acre.

Now let’s Subtract the $750 he/she spent to plant the acre.

$756 – $750 =  $6/acre return on investment.

Remember: there are 1000 acres of corn,

This results in a mere $6,000 profit for the year.

As you can see there is income but isn’t enough to support the farm or the farm family, but, this is a real life situation.

So what financial effect did the reports initial reaction have on this farmer?

At the time of this screen shot the market price for corn was $3.85. So let’s calculate the farmers income.

190  x $3.85 = $731 income per acre.

Remember the farmer needed $750/acre income to turn a profit.

$750 – $731.50= $-18.5 per acre loss.

1000 acres x $-18.5 per acre income = $-18,500 loss for the year.

Harvesting Corn

Harvesting Corn

Sure the market moved only 13 pennies per bushel of corn but the result to the farmer was a $24,500 change in potential income and a $18,500 loss, all in a matter of minutes.

  I bet the pile of change you have in your cars cup holder looks a little different now!

Interested in watching how the market performs in the coming days?  You can watch the price of May Delivery Corn fluctuate by up to $0.40 per day by clicking here to visit the Chicago Mercantile Exchange website.

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