FOCUS ON AG

Written by Kent Thiesse

Farm Management Analyst and Vice President, MinnStar Bank
December 18, 2017

AG REVIEW FOR 2017 --- FARM INCOME REMAINS LOW

This is the second of a two-part article highlighting what happened agriculturally in 2017. Last weeks
article provided a review of 2017 crop production and weather conditions. This week, the focus is on
farm income levels, livestock profitability, input costs, grain prices, and land value trends in 2017

Farm Income Levels --- In the latest economic forecast released in November, the USDA Economic
Research Service (ERS) is projecting U.S. net farm income to increase by $1.7 billion (3 percent) in
2017, as compared to 2016. The total net farm income for U.S. farmers in 2017 is estimated at $63.2
billion, which compares to net farm income levels of $61.5 billion in 2016, $80.7 billion in 2015, and
$92.6 billion in 2014. and the record level of $123.8 billion in 2013. The projected 2017 U.S. net farm
income level represents a 5-year decline (2013 to 2017) of 49 percent from the peak year net farm
income of $123.8 billion in 2013, and was the send lowest year since 2010.

Based on Farm Business Management (FBM) averages of 1,380 farms in Southern and Western
Minnesota, the average net farm income for 2016 was $46,472, which was 25% above the 2015
average net farm income of $37,070; however, 2016 was the second lowest net farm income level in
the past decade. Both the gross farm income and the total farm expenses declined by about 6 percent
from 2015 to 2016. The 2016 average gross income is approximately 6 percent lower than the 2011
average gross income; however, 2016 cash expenses were about 3 percent higher than 2011.

As usual, there was large variation in the FBM net farm income levels in 2016, with top 20 percent
profitability farms averaging a net farm income of +$228,908, and the low 20 percent profitability
farms averaging a negative net farm income of ($98,728). Nearly 40 percent of the farm operations
showed a negative average net farm income for 2016. Net farm income levels for 2017 may show
minor improvement in some portions of the region, due to improved profitability in livestock
production, but could decline below 2016 levels in areas that had lower crop yields in 2017.

Livestock Profitability --- Profit margins improved somewhat in 2017 for some sectors of the
livestock industry. Based on recent data, farrow-to-finish hog producers are estimated to average a
profit of approximately $20.00 per pig produced in 2017, which is certainly a significant improvement
in profitability compared to 2016 or 2015. Profit margins in hog production were quite solid during the
first half of 2017, but dropped off somewhat in the second half of the year. Fortunately, the hog prices
in the fourth quarter of 2017 did not drop as low as some analysts projected, and hog price prospects
for the first half of 2018 look quite favorable at this point. Pork demand remains very strong both in
the U.S. and globally, which has helped solidify hog prices, even though hog production has been
increasing slightly.

2017 was mixed year from a profitability stand point in the cattle feeding industry, with higher profit
levels early in the year, and some negative profit margins by the second half of the year. Cattle prices
have recovered somewhat by late in 2017, and appear to be at profitable levels again for many cattle
feeders going into 2018. Profit margins in 2017 for beef cow/calf producers were estimated slightly
below $150 per cow, which is down about 15 percent from 2016 profit levels, and is well below the
record average 2015 beef cow/calf profit levels of $438 per cow. Profit margins in dairy production
remained quite tight throughout most of 2017, with average milk prices near or below the average
breakeven price level of approximately $17.00 to $18.00 per cwt. for most producers.
Input Costs --- Average crop input costs in 2017 were mixed compared to 2016 levels, with some
producers showing a slight increase in expenses, and other growers showing a modest decrease.
Fertilizer costs continued to decline somewhat for the 2017 crop year, while seed, chemical and fuel
expenses either remained steady or increased slightly. Corn drying costs in 2017 were higher in most
areas of the Upper Midwest, compared to 2016, due to later planting dates and cooler temperatures
during the second half of the growing season than a year earlier. Land rental rates in most areas of the
Upper Midwest were steady to slightly lower in 2017; however, average land rental rates were still
higher than breakeven levels for some crop producers in 2017.

Feed costs for livestock producers remained quite manageable during 2017, and other production
expenses remained fairly steady. Agriculture interest rates, both for operating loans and longer term
loans began to increase slightly in 2017, as the Federal Reserve increased the prime interest rate three
times during 2017; however, interest rates still remained quite manageable for most farm operators.
During the tight profit margins in the past few years, many farmers have scaled back their investments
on upgrading farm machinery, as well as for other capital investments, which has increased the level of
repair expenses in many farm operations.

Grain Prices --- Local cash grain prices in Southern Minnesota started 2017 at about $3.25-$3.35 per
bushel for corn, and from $9.25-9.50 per bushel for soybeans. Local cash corn prices stayed near those
levels until early June, but have been from $2.90-$3.15 per bushel most of the second half of 2017.
Regional soybean cash prices have been a bit more volatile in 2017, ranging from about $8.50 to $9.25
per bushel most of the time since early March of 2017.

USDA is currently estimating the U.S average on-farm cash corn price for 2017-2018 in a range of
$2.85-$3.55 per bushel, or an average of $3.20 per bushel. USDA is projecting the U.S. average
soybean price for 2017-2018 in a range of $8.60-$10.00 per bushel, resulting in an average soybean
price of $9.30 per bushel. The 2017-18 USDA price estimates are the expected average farm-level
prices for the 2017 crop from September 1, 2017 to August 31, 2018, and are not estimated prices for
either the 2017 or 2018 calendar year. The 2017-18 projected USDA corn price of $3.20 per bushel
compares to an average corn price of $3.36 per bushel for 2016-17 and $3.61 per bushel for 2015-16.
The soybean price estimate of $9.30 per bushel for 2017-18 compares to $9.47 per bushel in 2016-17
and $8.95 per bushel for 2015-16.

Land Values --- Based on the latest annual Iowa Land Value Survey published by Iowa State
University, released in November, 2017, the average value of tillable farm land in Iowa was $7,326 per
acre, which is an increase of $143 per acre, or about 2 percent from a year earlier. The average value of
Iowa farm land had declined three years in a row before the slight correction in 2017. Iowa farm land
values are still approximately 16 percent lower than the peak average value of $8,716 per acre in 2013.
Average land values rose dramatically from 2004 to 2013, due to the ethanol boom, record farm
incomes, and low long-term interest rates. However, land values in the Upper Midwest have declined
in recent years from peak values a few years ago, due to continued low commodity prices and
significantly lower farm income levels in recent years.

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Note --- For additional information contact Kent Thiesse, Farm Management Analyst and
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone --- (507) 381-7960);
E-mail --- kent.thiesse@minnstarbank.com) Web Site --- http://www.minnstarbank.com/