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Illinois Grain Farm Incomes in 2020



by Gary Schnitkey, Ryan Batts, Krista Swanson, Nick Paulson, Jonathan Coppess - University of Illinois and Carl Zulauf, The Ohio State University

link to farmdoc Daily article

We project net incomes for a typical Illinois grain farm in 2020. Before the onset of COVID–19, 2020 net incomes were expected to be low without a turnaround in exports, likely resulting in pressures to continue Market Facilitation Program (MFP) payments. With COVID–19 at the forefront in 2020, the Coronavirus Food Assistance Program (CFAP) was implemented to provide relief to offset losses due to the virus and COVID–19 control measures. Even with CFAP payments and larger payments from commodity title programs, incomes are projected to be negative in 2020. More Federal aid could result in 2020 incomes being close to 2019 incomes. Looking ahead, the recent increases in Coronavirus outbreaks suggest this environment may not improve soon and could result in very low incomes in 2021.

Incomes in Historical Perspective

Figure 1 shows the average yearly net incomes on grain farms enrolled in Illinois Farm Business Farm Management (FBFM). Overall, incomes have been much lower since 2013 as compared to the period from 2006 to 2013. Incomes averaged $189,000 per farm for the years from 2006 to 2013. From 2014 to 2019, incomes have been over $100,000 less per farm, with a $78,000 yearly average. From 2006 to 2013, corn use in producing ethanol was growing, leading to higher corn prices. Soybean prices also were high, as the market signaled the need for soybean acres as soybean exports from the U.S. to China were increasing. Since 2013, corn use in ethanol has stabilized, leading to lower commodity prices. In 2018, exports of soybeans declined, further lowering commodity prices.



Average incomes were $147,000 in 2018 and $74,000 in 2019. Compared to other years since 2013, the years 2018 and 2019 were not particularly poor income years. However, much of the income in 2018 and 2019 resulted from the Market Facilitation Program (MFP), which was put in place to counter lower prices caused by trade disputes. MFP accounted for 13% of revenue in 2018 and 10% of 2019 revenue (see farmdoc daily, June 10, 2020). Without these payments, incomes would have been very low in both 2018 and 2019.

Approach Used to Estimated Historic Incomes

The incomes in Figure 1 are calculated by FBFM using a modified cost approach for a calendar year. Each year’s income statement attempts to match production with sales. In 2019, costs of 2019 grain production are given along with “revenue” from 2019 production. To match revenue with production, values are placed on a number of items for which the revenue has not been received. These items include:
  • Grain inventory. Much of the grain produced in 2019 has not been sold as of the end of the year. The unpriced inventory is placed on the end-of-year balance sheet for 2019 at an estimated value.
  • Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) payments for 2019. The ARC/PLC payment for 2019 is based on 2019 production but will be received in October 2020. These payments are not known on December 31, 2019 because the payments are based on a Market Year Average (MYA) prices, which run from September 2019 to August 2020 for corn and soybeans.
These two values will take on a large importance in 2020 cash income. Inventory prices used to place grain in inventory on December 31, 2019 were much higher than actual sales on many farms. FBFM used inventory prices of $3.75 for corn and $9.30 for soybeans. In May, cash prices were near $3.00 for corn and $8.30 for soybeans. The difference will result in an unrealized loss on grain held in December 31, 2019 inventory on many farms.

ARC/PLC payments likely will be higher than the December 31, 2019 receivable. Lower MYA prices will result in higher ARC/PLC payments than estimated on December 31, 2019.
To summarize, three items will take a larger role in 2020 income projections than usual:
  • Unrealized loss on 2019 crop. Farmers who held 2019 grain inventory likely will have large losses on holding that crop into 2020. Marketing weights suggest that 60% of the corn crop and 46% of the soybean crop is held into the next year.
  • Changes in 2019 ARC/PLC payments. Expectations of the size of these payments increased because of lower prices.
  • Coronavirus Food Assistance Program (CFAP) payments (see farmdoc daily, May 22, 2020). CFAP provides partial compensation for losses on grains held unpriced on January 15, 2020.
Income Projections for 2020

Income projections for 2020 are made using output from the Farm Projections Tool, a Microsoft Excel spreadsheet that can be downloaded from the FAST section of farmdoc. Farmers can use this spreadsheet to make projections for their individual farms. Special adjustments are made to the output to account for the above three items, which are not accounted for by the program automatically.
In this article, the farm for which 2020 projections are made represents a typical farm in central Illinois:
  • A 1,600 acre grain farm with 200 acres owned, 400 acres share-rented with a 50–50 share lease, and 1,000 acres are cash rented at $260 per acre.
  • The farm is located in central Illinois and has non-land costs equal to those contained in central Illinois budgets for high-productivity farmland: $561 per acre for corn and $359 per acre for soybeans.
  • Yields for 2020 are projected at trend-levels of 216 bushel per acre for corn and 68 bushels per acre for soybeans.
  • The farm has $1,200,000 of debt.
Pre and Post-COVID Net Incomes

Incomes are estimated for a pre-COVID scenario and a post-COVID scenario (see farmdoc daily, April 28, 2020 for a discussion of price scenarios). Prices used for the pre-COVID scenario are $3.90 per bushel for corn and $8.75 per bushel for soybeans. Under this scenario, net income is projected at $44,330, which is down from 2018 and 2019 levels. A $44,330 income would be at an insufficient level to maintain the financial position of most farms. Most farms would use working capital to provide for cash needs, resulting in reductions of working capital. Many farms would see net worth declines. This pre-COVID income estimate does not include any MFP payments. Due to low incomes, pressures likely would have built for a continuation of the MFP program into 2020, particularly without improvement in trade relations and growth in exports. Whether or not MFPs would have occurred in 2020 given the pre-COVID scenario is an open question.

Under the pre-COVID prices ($3.90 for corn, $8.75 for soybeans), ARC/PLC payments would not result for 2020 (payable in 2021), and the pre-COVID income statement in Table 1 does not include any ARC/PLC payments. Note that many Illinois farms would have received 2019 commodity title programs. These payments will be received in 2020 but should have appeared on the 2019 income statement, and been a receivable on the year-end 2019 balance sheet.



Post-COVID income is projected using 2020 cash prices of $3.20 per bushel for corn and $8.60 per bushel for soybeans. These prices are close to current bids for 2020 fall-delivery. As a result, crop revenue is reduced from $1,005,830 for the pre-COVID scenario to $890,960 for the post-COVID scenario, a decline of $114,870 (see Table 1). A number of other changes also are incorporated into revenue:
  • Coronavirus Food Assistance Program (CFAP) payments are included at $29,187 (see farmdoc daily, May 22, 2020). These payments are in the process of being paid. Our estimates represent CFAP payments of 40% of 2019 production (208 bushels per acre for corn and 64 bushels per acre of soybeans).
  • Marketing loss on 2019 crop. Grain held into 2020 likely was sold at lower values than that placed on year-end 2019 balance sheets. The -$43,680 loss is based on 40% of 2019 production being sold in 2020 at a loss of $.55 per bushel for corn and $.65 per bushel for soybeans.
  • Increase in 2019 ARC/PLC payments. Lower Market Year Average (MYA) prices will result because of the lower, post-COVID prices, increasing ARC/PLC payments for 2019. This will show as a gain on 2020 income statements because 2019 ARC/PLC payments would have been under-estimated for 2019.
  • 2020 ARC/PLC payments. These payments were unlikely in the pre-COVID scenario but are likely in the post-COVID scenario. The post-COVID scenario includes $43,000 of 2020 ARC/PLC payments. We estimate these payments at roughly $60 per base acre for corn and $0 per base acres for soybeans.
After considering all adjustments, gross revenue declines from $1,015,830 for the pre-COVID scenario to $946,467 for the post-COVID scenario, a decline of -$69,363. Net farm income is projected to decline from $44,330 per farm for the pre COVID–19 scenario to -$25,033 for the post-COVID scenario (see Table 1).

Commentary

A -$25,053 net income would be very low, and result in negative net incomes on most Illinois grain farms. However, the -$25,033 does not include other forms of assistance such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) programs administered through the Small Business Administration (SBA). Both are loan programs, not direct payments. However, PPP loans are forgivable provided used for qualifying business expenses (see farmdoc daily, April 14, 2020). Though EIDL loans are not forgivable, an emergency advance portion, for those who received it, did not have to be repaid (see farmdoc daily, May 12, 2020). A significant number of farms have enrolled in these programs, but likely not the majority of grain farms in Illinois. Moreover, any forgivable aid from these programs likely will not be enough to cause incomes to be positive.

Also not included in the -$25,033 is additional Federal aid currently being discussed in Congress and at the USDA. Given the above projections, additional aid at the levels of last year’s MFP program would be needed to bring incomes close to 2019 levels, with last year’s income levels not being at a particularly high level.

Of course, much could change projections. Favorable market news is possible, perhaps leading to higher prices. Surprises often occur in agriculture. Of course, more negative results are possible as well.

Much of 2020 income is dependent on Federal aid. More Federal aid could cause 2020 incomes to be near or above 2019 levels. More worrisome is 2021, which likely will have lower levels of Federal aid. Given recent setbacks in Coronavirus control, it seems reasonable to expect social distancing measures to be relatively long-lasting, quite possibly into next summer and beyond. If this is the case, ethanol demand could remain low, and the economy will not be in full recovery. Demand for crops could remain low going into 2021, and 2021 could be a very low-income year for Illinois grain farms.

Prevented Plant Impacts on 2019 Illinois Grain Farms Incomes

link to farmdoc Daily article

In 2019, spring weather was very wet, and many farmers in Illinois had prevented plant (PP) acres. Compared to 2018 incomes, 2019 incomes declined more for those farms that had a larger proportion of their acres in PP. While some have suggested that PP payments may overcompensate farmers, the income results presented in a new paper from the University of Illinois do not support the contention. Todd Gleason has this discussion with ag economist Gary Schnitkey.




Farms Included in Study

Table 1 shows 2018 and 2019 incomes on Illinois grain farms enrolled in Illinois Farm Business Farm Management (FBFM). To be included in Table 1, a farm had to meet the following criteria:
  • Receive the majority of their incomes from grain operations,
  • Have over 500 acres, and
  • Have records that were certified useable by Illinois FBFM staff in both 2018 and 2019.
A total of 1,483 farms meet these criteria, with results for all farms given in Panel A.
For all farms, tillable acres averaged 1,525 per acre, with a range of 500 acres to over 13,000 acres. Net farm income averaged $184,460 in 2018, declining by 51% to $89,866 in 2019 (see Panel A of Table 1)



Income Declines as Percent Prevented Plant Acres Increases

In Panel A, the 1,483 farms are divided into five categories based on the proportion of PP acres. In 2019, 73% of the farms had no PP acres. Even given the wetness of 2019, most Illinois grain farms planted all acres in 2019. Still, of the farms in this sample, a sizable proportion (26%) has some PP. Of those farms that had PP, 15% had less than 10% of their acres in PP. Percentage of farms then declines as the proportion of PP acres increased: 8% had between 11 and 30% of acres in PP, 2% had between 31% to 50%, and 4% had over 50%.
Incomes declines became more negative as the proportion of acres of PP increased, as shown in the last column in Panel A of Table 1. With no PP, the average income change was –45% from 2018 to 2019. The income change was
  • –53% when PP when less than 10%,
  • 97% when 11% to 30% of acres were PP,
  • –103% when 31% to 50% of acres were PP, and
  • –112% when over 50% acres were PP.
On average, net incomes in 2019 were negative when over 31% of acres where PP: -$3,832 per farm when PP was between 31% to 50%, and -$12,638 when PP was over 50% of tillable acres.
Incomes in Table 1 include all sources of revenue, including that from additional government payments offered in 2019 to counter incomes lost due to trade difficulties. Market Facilitation Program (MFP) payments are included in revenue (farmdocDaily, July 30, 2019). Also included is the 10% increase in PP payments.

Income Declines by Region in Illinois

Northern Illinois had more delayed planting than other areas of Illinois. Only 43% of the farms located in northern Illinois got all their acres planted, compared to 81% for central Illinois and 60% for southern Illinois. Over 10% of northern Illinois farms had over 30% of their acreage in PP (6% in 315 To 50% and 4% in over 50% categories) Income declines were larger in northern Illinois than in other parts of Illinois. The average income change in northern Illinois was –76%, compared to –45% for central Illinois and 53% for southern Illinois.

Commentary

The above results do not present an analysis of whether taking PP or planting was the correct decision. To conduct that PP/plant comparison, one would have to link up farms with the same growing conditions who made different PP/plant decisions and then see corresponding results. In this article, we compare incomes with different levels of PP. Given the reluctance of Illinois farmers to take PP, we assumed that most farmers who took PP had no alternative but to take PP. 
There has been some thought that PP payments may provide more than adequate compensation (see Brasher, https://www.agri-pulse.com/articles/12390-coverage-changes-could-limit-prevent-plant-payout ). In 2019, for example, the Risk Management Agency lowered the standard PP payment factor on corn from 60% of the guarantee to 55% (see Risk Management Agency, https://www.rma.usda.gov/en/News-Room/Frequently-Asked-Questions/Prevented-Planting-Coverage-Factor-Changes-for–2019 ). As incomes decline with more PP, income results in this article do not support the contention that PP provides overcompensation. Of course, results could vary by across years.

Gary Schnitkey on the ARC/PLC Decision

Farmers will be making two government program decisions on or before March 15th. What to do about crop insurance is one of them. The other is to enroll in the updated farm safety net programs.


The 2018 Farm Bill included some changes that require farmer to do a couple of things. First, they'll want to update their yields with FSA, if and only if the current set is higher than those already on record. Second, a decision must be made about which farm safety net to use for the crop harvest last year, and the one that will be harvested this year. Gary Schnitkey from the University of Illinois has some advice, "If you have a farm that is complete Prevent Plant, I think you are going to want to do ARC-IC. One FSA farm. If they are yielding at all, you'll probably lean to PLC for corn, ARC-CO for soybeans and PLC for wheat".

You may learn more about ARC-IC on the farmdoc website. ILLINOIS has developed a set of tools farmers can use to help them make the best possible ARC/PLC decision no matter where they live. It includes, says Schnitkey, a calculator that runs on a super-computer, "The calculators are online. The Gardner ARC/PLC tool will allow you to look at the probabilities of these things making payments. Again, corn is not likely to make payments in 2019. Soybeans similarly. Wheat will make a PLC payment for 2019. So, you can look at the Gardner ARC County / PLC calculator for that. There is a 2018 Farm Bill Tool that is a Microsoft Excel speadsheet and you can use that to look at different prices and yields to see what ARC-County, ARC-IC, and PLC will do in those situations".

The ARC/PLC safety net decision is due to be made at the Farm Service Agency office by March 15th. The ARC/PLC calculators are online at https://farmdoc.illinois.edu/2018-farm-bill.

MFP Payments and 2020 Cash Rents


MFP payments have had impacts on land rental rates. Moreover, uncertainty about the continuation of MFP in 2020 presents issues in setting cash rental rates. Given this uncertainty, we present the idea of setting cash rents at appropriate levels given the price and yield environment, likely lower than 2019 cash rent rates, with contingencies for cases in which MFP payments occur. By doing this, base cash rent is set at a level that allows the farmer to generate profits and leaves open the option for both parties to benefit if MFP payments occur in 2020.

by Gary Schniteky, ILLINOIS Extension
link to farmdocDaily article

Market Facilitation Program (MFP) payments have served as a significant source of revenue on grain farms in 2018 and 2019. Without MFP payments, average farmer returns would be negative in 2019, and far below any level since consistent records began in 2000. Without MFP payments, 2020 returns are projected to be negative. It is unknown at this time if MFP payments will occur in 2020, or the potential level of an MFP payment if the program continues. When developing cash rental rates, we suggest lowering cash rent levels if they are at or above averages for a productivity level, and then having the possibility of higher cash rents if MFP payments occur.

Historic Returns to Central Illinois
Figure 1 shows average operator and land return and average cash rent on high-productivity farmland in central Illinois, with historical values representing actual returns from grain farms enrolled in Illinois Farm Business Farm Management (FBFM). Documentation for values shown in Figure 1 is provided in Revenue and Costs for Illinois Grain Crops (click here for download). Historical and projected revenue assumptions also are given in a November 19, 2019 farmdoc daily article. Figure 1 shows returns for farmland given that 50% of the acres are in corn and 50% are in soybeans.



Two lines are shown in Figure 1. The first is operator and land return, representing a return to both the farmer and land owner. Costs for farmland are not included in operator and land return. If farmland is cash rented, the cost to the farmer is cash rent. Figure 1 also shows average cash rent in central Illinois. When operator and land return is above cash rent, a farmer will have a positive cash return on cash rented land. Losses occur when operator and land return is below cash rent.

Between 2006 and 2013, a period in which corn and soybean prices were relatively high, operator and land returns exceeded cash rents by large margins. This period was characterized by higher net incomes (see farmdoc daily, November 19, 2019). Cash rents were rising during this period in response to higher operator and land returns.

Average operator and land returns have been roughly the same as average cash rents since 2013:
  • 2014: Operator and land return was $290 per acre, cash rent was $293 per acre, and farmer return was -$3 per acre.
  • 2015: Operator and land return was $265 per acre, cash rent was $278 per acre, and farmer return was -$13 per acre.
  • 2016: Operator and land return was $291 per acre, cash rent was $273 per acre, and farmer return was $18 per acre.
  • 2017: Operator and land return was $250 per acre, cash rent was $267 per acre, and farmer return was -$17 per acre.
  • 2018: Operator and land return was $355 per acre, cash rent was $274 per acre, and farmer return was $81 per acre.
  • 2019 Projections are for an operator and land return of $273 per acre, cash rent of $274 per acre, and farmer return of -$1 per acre.
Lower returns after 2013 largely occurred because of declines in commodity prices. Returns shown in Figure 1 suggest that cash rents should decline because farmers need to obtain a positive return for the risks, labor, and management of farming. Likely reasons that cash rents farmers are paying have not declined are 1) financial reserves built during the period of high incomes from 2006 to 2012 are allowing farmers to continue paying high rental rates in hopes that higher commodity prices in the future will make those rates profitable (farmdoc daily, October 4, 2016 and October 23, 2018), and 2) positive returns from owned and share rented farmland are used to subsidize cash rent farmland (farmdoc daily, August 22, 2017). Trade disputes, and other factors such as African Swine Fever in China, have considerably diminished chances of higher prices in the near future.

Impacts of MFP payments
In 2018, trade disputes between the U.S. and other countries began impacting agriculture, with the tariff battle between China and the U.S. receiving a great deal of attention. Soybean prices declined throughout the year as the trade dispute continued. On central Illinois farms, prices averaged $8.85 per bushel for soybeans produced in 2018, down from the $9.81 average from 2013–2018.

Although soybean prices were down, returns were positive for central Illinois farmers, at the highest level since 2013 (see Figure 1). In 2018, operator and land return exceed cash rent by $81 per acre. Both exceptionally high yields and MFP payments contributed to this higher return. In 2018, MFP payments accounted for $62 per acre of return, with most of that coming from soybean acres (see farmdoc daily, November 19, 2019). Without the MFP payments, farmer return in 2018 would have been $19 per acre, in the range of returns in other years since 2013.

In 2019, farmer return is projected at -$1 per acre. Returns are down in 2019 because of much lower yields. MFP payments have a large, positive impact on returns. For 2019, MFP payments for central Illinois grain farms are estimated at $82 per acre, up by $20 from average 2018 levels (see farmdoc daily July 30, 2019 for a list of payments by county). This $82 level assumes that all three tranches of MFP payments are paid. Two tranches totaling three quarters of the payment amount have been paid.

The third tranche, if confirmed, would be distributed in early 2020 with the remaining quarter of the payment. Without a MFP payment, 2019 returns are estimated at -$83 per acre, the lowest farmer return since 2000 (see Figure 1).

Figure 1 also includes projections for 2020. Operator and land return is projected at $232 per acre, cash rent at $270 per acre, and farmer return at -$38 per acre. The 2020 projection is based on a return to trend yields. Exceptional yields like those in 2018 would be needed to get positive returns given prices of $3.90 per bushel for corn and $9.00 for soybeans. However, prices may fall to lower levels if exceptional yields occur. As a result, crop revenue increases alone likely will not lead to higher farmer returns. Positive returns in 2020 may be dependent on some level of support, such as the continuation of the MFP.

MFP Payments in Perspective
In the last two years, MFP payments have been a significant source of revenue on Illinois grain farms. In 2018, MFP payments represented 8 percent of total gross revenue received from corn and soybeans production. In 2019, MFP’s share is presented at 11 percent (see Figure 2).



Government payments have not accounted for that large of a share of gross revenue on Illinois grain farms since the early 2000s. In the early 2000s, government support to farmers through the Agricultural Market Transition Act, Market Loss Adjustment, and marketing loan programs represented a higher share of gross revenue. For example, government payments were 25% of gross revenue in 2000, 23 percent in 2001 (see Figure 2)

Cash Rents Corn and soybean prices fell and were at lower levels in both the early 2000s (beginning in 1998) and since 2018. Those lower prices then led to governments payments. In the early 2000s, those payments were legislated through Congress. The MFP payments come through different authority, with levels determined through a process that is not transparent (see farmdoc daily, November 21, 2019 for more discussion of the MFP program). Also, the levels of MFP payments from one year to the next are not known. For 2019, administrative officials indicated that MFP payments would not occur up to May 2019. In actuality, MFP payments on most farms will be higher in 2019 than in 2018.

Counterfactuals are difficult to prove, but it seems likely that farmers in the early 2000s would have had to make larger adjustments in response to lower commodity prices had government support not existed. In the end, land returns likely would have declined, and cash rents fallen.

Similarly, cash rents likely would have fallen in 2019 as a result of lower commodity prices in 2018 had MFP payments not existed. The extent to which they would have fallen depends on how participants view the permanence of lower soybean prices. If soybean prices will continue below $9.00 for several years, cash rents need to adjust downward if MFP payments do not continue.

2020 Cash Rents
The uncertainty of MFP payments presents an issue for setting 2020 cash rents. If MFP payments do not occur, farmers could face large losses if cash rents levels are set as if MFP payments will occur. On the other hand, MFP payments at the 2018 and 2019 levels could result in good farmer returns, particularly if yields are exceptional. This uncertainty obviously adds to the difficulty in making cash rent decisions for 2020.

As farmers and landowners negotiate rental rates for 2020, several factors should be considered. Cash rental rates have remained relatively flat despite a lower price environment since 2013. The average central Illinois cash rental rate has put farmer returns below break-even in three of the last five years, and likely right at break-even in 2019 including the full MFP payment.

Given the uncertainty about MFP payment, an appropriate approach would be to set a cash rent without the MFP considered in budgeting and allowing for an increase in the rent if the MFP occurs.

As an example, consider 2020 projections. Without an MFP payment, 2020 operator and land return is projected at $232 per acre. This $232 per acre is considerably below the 2018 average rent of $273 per acre. Setting a cash rent at $230 per acre would result in a $2 projected return to the farmer, not a desirable return, but better than a loss that would result with a cash rent at the $273 average for 2019. The lease could then have a clause that shares the MFP payments 50–50 between the land owner and farmer. If an $82 per acre MFP payment is received — equivalent to the average projected payment for 2019 — the farmer would make an additional payment of $41 to the land owner, resulting in total rent to the land owner of $271 per acre ($230 base cash rent plus $41 payments from the MFP payment), and a $43 return to the farmer ($2 projected return with MFP pulse $41 from MFP).

Several notes about the above lease:
  1. A share-rent arrangement has risk sharing directly built into the lease. As a result, MFP payments already are considered in share-rent arrangements
  2. The above lease is very close to a variable cash lease (see farmdoc daily, September 9, 2015 for a discussion of one-type of variable cash leases. Click here for a lease). Variable cash leases would consider possible higher returns due to higher prices or yields. Inclusion of MFP like payments in variable cash leases seems warranted if base levels are low enough such that farmers do not take large losses at base rent levels.
  3. Base levels need to be set low enough so that farmer risks are reduced. Putting a clause for MFP sharing without lowering cash rents simply shifts returns from farmers to land owners, and adds risk to the farmer.
  4. The 50–50 sharing percent is dependent on having the base level low enough that farmer risks are reduced. Given the current economic environment, base rent levels should be well below cash rent levels. A method for determining average cash rents for different cash rent levels is presented in a November 7, 2017 farmdoc daily article.

Projected Net Incomes on Illinois Grain Farms in 2019 and 2020



by Gary Schnitkey, ILLINOIS Extension

Due to lower corn and soybean yields, 2019 net farm incomes on Illinois grain farms are projected to decline more than $80,000 per farm from 2018 levels. The low yields are partially offset by higher corn and soybean prices and higher MFP payments in 2019 as compared to 2018. Incomes in 2020 are projected to be negative if yields are at trend levels and Market Facilitation Program (MFP) payments do not occur.

Historic Net Incomes on Illinois Grain Farms
Figure 1 shows average yearly net incomes on grain farms enrolled in Illinois Farm Business Farm Management (FBFM). These net incomes are averages across all grain farms in Illinois. Size, tenure relationships, and financial structures vary across these farms. Many farms are below 1,000 tillable acres, and some farms have over 8,000 acres. Over time, the size of farms has grown. In 2018, the average number of tillable acres was around 1,500 acres.



As can be seen in Figure 1, there are three distinct periods of net income. Between 1996 and 2005, net income averaged $55,000 per farm. This period was characterized by relatively low corn and soybean prices, resulting in low incomes. Income during this period reached a low of $11,000 in 1998, a year in which government programs were instituted to provide price and income support to grain farms.

From 2006 to 2013, incomes were much higher, averaging $189,000 per farm. Corn and soybean prices were higher than the other two periods due to increased use of corn in ethanol production, growing export demand for soybeans, and yield shortfalls occurring in several years. The prime example of a yield shortfall was 2012, a year of intense drought over much of the eastern and lower corn-belt. While yields were low in 2012, corn and soybean prices reach all-time highs. High prices, along with proceeds from crop insurance products, resulted in a record income of $298,000 per farm.

Prices have been lower since 2013, with corn prices generally being below $4.00 per bushel and soybean prices being below $10.00 per bushel. From 2013 to 2018, net incomes have averaged $79,000 per farm, about $110,000 less per farm than the 2006–2012 period. Incomes during the 2013–2018 period have been $24,000 higher than the 1996–2006 period, but have been much more variable. Incomes have varied from $500 per farm in 2015 up to $147,000 in 2018.

Compared to 2013 through 2017, incomes were much higher in 2018. In 2018, soybean prices fell partially due to U.S. trade disputes with China and other countries. In 2018, central Illinois farms on high-productivity farmland averaged $8.85 per bushel of soybeans, down from the $9.81 per bushel average from 2014 to 2018 (see Table 1). Two factors countered this price decline resulting in higher 2018 incomes:
  1. Yields were exceptional. While yields have been high since 2014, 2018 yields were truly outstanding. On central Illinois farms, corn yields averaged 237 bushels per acre in 2018, 16 bushels per acre higher than the 221 bushel average from 2014 to 2017. Soybean yields averaged 74 bushels per acre, 8 bushels higher than the 67 bushel average from 2014 to 2017.
  2. Market Facilitation Program (MFP) payments. In 2019, MFP payments in central Illinois averaged $122 per acre for soybeans and $1 per acre for corn. Without these payments, 2018 incomes would have been below the 2013–2017 average.


Projected 2019 Incomes
The average net income in Illinois will be below $60,000 per farm, much lower than in 2018, with possibilities for incomes approaching 2015 levels on many farms. Most of the decline in net income is associated with lower gross revenue, as opposed to a significant change in expenses. On central Illinois high-productivity farmland, gross revenue averaged $819 per acre in 2018, given that 50% of the acres were in corn and 50% were in soybeans (see Table 1). Average gross revenue is projected at $761 per acre in 2019, $58 lower than in 2018. Factors impacting revenue from 2018 to 2019 are:
  1. Lower yields. In central Illinois, corn yields are projected at 205 bushels per acre in 2019, down by 32 bushels per acre from 2018 levels. Soybeans yields are projected at 58 bushels per acre, down by 16 bushels per acre from the 74 bushel average in 2018. Lower yields are the major reason for lower incomes.
  2. Prices are projected to be higher in 2019 as compared to 2018. Projections are made with a $3.90 corn price in 2019, compared to a $3.60 price in 2018. Soybean prices are projected at $9.00 for 2019, compared to $8.85 in 2018. Higher prices partially offset lower yields, resulting in higher incomes.
  3. MFP payments are projected at $82 per acre for both corn and soybeans in 2019. MFP payments will average about $20 per acre higher in 2019 as compared to 2018 on Illinois grain farms. Without MFP payments, average income on Illinois grain farms would be negative in 2019.
The $58 per acre decline in gross revenue from 2018 results in a net income that is $87,000 lower per farm ($58 per acre times 1,500 acres) in 2019. This leads to an estimate of net income for central Illinois farms of $60,000 ($147,000 income in 2018 minus $87,000 less income). Central Illinois likely will have some of the highest yields in the state, and therefore higher incomes than other areas. In northern Illinois, for example, yields are projected at 185 bushels per acre for corn, resulting in much lower income projections for northern Illinois. As a result, average incomes on Illinois farms likely will be below $50,000 per farm when averaged across Illinois.

Projected 2020 Incomes
Current projections would place revenue lower in 2020 as compared to 2019. In central Illinois, for example, average gross revenue is projected at $695 per acre in 2020, a decrease of $66 per acre from 2019 projected levels of $761 per acre (see Table 1). These projections are based on:
  1. A return to trend yields, which are higher than 2019 yields. Projections use a 211 bushel per acre yield for corn and 63 bushels per acre for soybeans.
  2. Stable prices of $3.90 per bushel for corn and $9.00 per bushel for soybeans.
  3. No MFP payments.
  4. No commodity title payments from Agricultural Risk Coverage or Price Loss Coverage.
These values would result in a negative average net income for 2020. Many factors could result in higher incomes, with two of the more likely factors being:
  1. A return to above-average yields. From 2014 to 2018, yields averaged 225 bushels per acre for corn and 68 bushels per acre for soybeans. These higher yields would result in average gross revenue of $745 per acre, still below the $761 projection for 2019. While higher yields are quite possible, those higher yields could be associated with price declines from projected levels. The impact of potentially lower prices are not considered in the projections, and would partially offset the impacts of higher yields.
  2. A continuation of the Market Facilitation Program. Another payment of $82 per acre will bring gross revenue near 2019 levels if yields return to trend levels.
Summary
Lower yields will contribute too much lower incomes on Illinois grain farms in 2019. A continuation of low incomes is projected into 2020. Without a continuation of the MFP program in 2020, incomes on Illinois farms will be negative if prices do not increase given that trend yields occur.
Soybean prices have fallen since the trade dispute began in 2018. Currently, soybean prices are near $9.00. Note that this $9 price results with considerably lower soybean acres in 2019, and much lower yields. In the current supply and demand environment, a return to more normal acres and above-trend yields likely would push prices below $9.00 per bushel. Farmers have not felt the full impact of lower prices because MFP payments have supported income in 2018 and 2019. If prices do not increase or yields are not exceptional, farms may have negative incomes without MFP payments in 2020.

Acknowledgements
The author would like to acknowledge that data used in this study comes from the local Farm Business Farm Management (FBFM) Associations across the State of Illinois. Without their cooperation, information as comprehensive and accurate as this would not be available for educational purposes. FBFM, which consists of 5,500 plus farmers and 60 professional field staff, is a not-for-profit organization available to all farm operators in Illinois. FBFM field staff provide on-farm counsel along with recordkeeping, farm financial management, business entity planning and income tax management. For more information, please contact the State FBFM Office located at the University of Illinois Department of Agricultural and Consumer Economics at 217–333–5511 or visit the FBFM website at www.fbfm.org.

Farmers Unlikely to Make Big Acreage Switch to Corn

The scuttlebutt in the trade, even in the numbers released by USDA at its February Agricultural Outlook Forum, is that the economics will push farmers to plant a lot more corn acres this year.

Ag Economist Gary Schnitkey has updated budgets for corn and soybeans across the state. He knows USDA increased its expectation for corn acres around the nation by about 3 million acres but says he does not expect a big shift to corn in Illinois, “What we find is that corn is projected to be more profitable than soybeans. This is the first year in a while that has happened. However, our budgets do not suggest shifting to more corn production. Particularly corn-after-corn is less profitable than soybeans. So, it is status quo for the central Illinois area with a 50/50 corn/soybean rotation being more profitable for 2019.”

This holds for northern and central Illinois. Southern Illinois still has a regionalized economic bias to plant soybeans. Soybeans make more money there says Schnitkey, “However, the big thing right now is the upcoming USDA Prospective Plantings report and whether we will see shifts from soybean to corn which some people are expecting. These budgets would say in the heart of the corn belt, or in the corn belt in general, that you won’t see shifts from soybeans to corn. So, you have to see those shifts from someplace else and there are limited opportunities there.”

USDA in its February Outlook meeting projected U.S. farmers would plant about three percent more corn acres this season than last and almost five percent fewer soybean acres. The agency will release an official estimate of acreage March 29th.

Crop Insurance Payments - an interview with Gary Schnitkey

Harvest prices used to determine crop insurance payments for corn and soybean policies in the Midwest are based on Chicago Mercantile Exchange (CME Group) futures settlement prices during the month of October. The 2016 harvest price for corn is $3.49 per bushel. This is 10% lower than the $3.86 projected price set in February. The soybean harvest price is $9.75 per bushel. That’s 10% higher than the $8.85 projected price. For the most part it means crop insurance payments to farmers will be relatively low says University of Illinois Agricultural Economist Gary Schnitkey.