Todd Gleason: From the land grant university in Urbana Champaign, Illinois, this is a special edition of the closing market report and presentations from the 2025 Farm Crop Budgets and Farm Management. I'm University of Illinois Extension's Todd Gleason. In a sobering session at the twenty twenty five Farm Assets Conference, University of Illinois agricultural economist Nick Paulson detailed the persistent price cost squeeze facing grain producers. Despite record breaking 2025 yields in Illinois, Paulson warned current market prices for corn and soybeans remain insufficient to cover elevated production cost, particularly on cash rented land. Here's Paulson and the presentation.

Nick Paulson: So as Todd said, I'm gonna give the the farm income outlook. I will say that, you know, the announcement this week, and and Joe indicated I'll be talking a little bit about the farmer aid package that was announced, in terms of the the 12,000,000,000 or the 11,000,000,000 slice of that that'll be going on to row crop producers. We don't have a ton of details on that, but I suppose we can say maybe we don't have to completely cancel Christmas this year. Although, you know, Gary Schnick, he was at a field day yesterday and he texted me and said one of the best questions he got was, I probably shouldn't go out and buy a new pickup though because of these because of the aid package. So I would I would also advise against that.

So I'm gonna start with probably the most positive aspects. And the story I've been telling on this has been pretty consistent the last few years. When Joe talks about the grain market outlook, he tends to focus on the big picture, yields at The US level, yields in South America, kind of the global grain market picture. And then I tend to try to of narrow in more and zero in on what's going on in Illinois. And when we talk about crop yields, again, are averages and averages are dangerous to talk about because not everybody is at or above an average by definition.

People are always gonna be below that average. And so, not everybody is having great yield experience every year consistently in Illinois. But on average, the last decade plus has been a really positive corn and soybean yield experience in the state of Illinois relative to where we think yields would naturally be increasing to on that on that thing that we call the trend line. And so, you know, the numbers at the bottom are sort of deviations between the actual yield and what our estimate of trend would be for that year. And you can see that, you know, obviously the 2012 drought stands out here with a with a big negative deviation on that.

But since then, we've consistently been above trend in terms of corn yields. A little bit of a blip in 2019 with the really wet spring, relatively disappointing yields in in 2020 as well relative to trend. But other than that, we've been pretty consistently above trend. And so those extra bushels have been helpful to Illinois farmers, particularly in some of those years when prices haven't been great like we're at now. And they've also magnified the some of the good years we saw in 2021 and 2022.

And the picture for soybean yields is very similar. So, 2019 a little bit below trend, but again, going all the way back to 2012, we've been pretty consistently above trend. Now, does that mean we should expect that run to continue next year? Does it mean we should expect like we're due for a poor yield year? The answer to both of those is no or I don't know.

I really view every yield year as a kind of a coin flip of whether we're going to be above that trend level or below that trend level. But we have been kind of beating the odds, so to speak, over the last twelve to thirteen crop years. All right. Now, again, to some of the less good news. So on prices, so what I'm showing here is the market year average prices for corn, soybeans and wheat.

I'll focus on corn and soybeans with this group. And I've got it going back to the 2019 marketing year. That's relevant. Again, this is an average price at the national level. So it's not necessarily the number any individual farmer cares about in terms of their direct grain sales and the price that they receive for the crop that's marketed across these time periods.

But it is relevant for all of us in terms of these are the prices that feed into the calculations for the guarantees. And then ultimately, the support payments that can be triggered by those ARC and PLC programs. And so, this does give us an indication of sort of where the path we've been on for price levels, over this, six or seven year period. Obviously, we saw, some very favorable, very high prices in the 2021 and particularly in the 2022 crop years. We've been, moving downwards since then.

And there's maybe a little bit of optimism, going from what we expect for 2025 into the 2026, arcing year to see a little bit of improvement there, but still below those highs that we saw our production costs adjust very quickly to unfortunately in 2021 and 2022. The one thing I'll say again related to ARC and PLC payments on this. For the 2025 marketing year, we saw a big strengthening for ARC and PLC through the changes that were made in the OB three act passed this summer. And so higher reference prices, higher effective reference prices for PLC, improvements to what is covered by the ARC program, and then those reference prices further strengthen the ARC program as well in terms of the guarantee levels that we're looking at for those ARC and PLC programs. Looking ahead to 2026, we're gonna be rolling that 2019 price off of the five year window that they look at to set those guarantees.

And so 2026 guarantees is for a program that won't make payments until 2027, which feels like a long ways away because it is. But we're going to It has some pretty strong reference prices and strong arc benchmarks just naturally because we're rolling off one of the lowest prices in the history or the lowest prices in the history there. And so that'll further strengthen the guarantees provided by those programs even into the 2026 crop year. This is a slide that we like to show, again, just to provide a little bit of perspective. We talked about the cost price squeeze that we're currently in.

We talked about how prices are low. Prices are low relative to cost. They're not low relative to historical standards, and they're not low relative to where we would still be putting longer term planning averages based on the era of prices that we're currently in. So I started my career at the U of I in 2007. And that's when Scott Erwent, who's still around, and Darrell Goode, who has since retired, made some pretty, at the time, bold claims about what the ethanol era was gonna usher in in terms of new long term average prices for for kind of the global corn and soybean markets.

They did some projections and his looking back, they were pretty much spot on. They said we would see corn prices now revolve around a longer term average in kind of that $4.40 range. And soybeans would be somewhere in the in the in the mid to upper $10 range. And you can see that's exactly where we've averaged since the 2006 crop year. Kind of mid to upper $10 range for beans, mid $4 range for corn.

And while our current market in your average prices and expectations for the 2025 crop year are a bit below that, They're not as far below it as we were in that low lower price period from 2014 to 2019. And they're definitely not sufficiently below that to where we should be surprised about where prices are at. Okay? There's there there's nothing that I think exists out there, maybe with the exception of what Scott Ermo will come in and talk to the group about a little bit later, with maybe some optimism around potential increased biofuel demand due to some of the policy changes we've seen on that front. There's really nothing in global markets that suggests we should expect prices to be closer to those 2021, 2022 crop year levels compared with, again, the mid $4 range for corn, and maybe slightly above the mid, $10 range for soybeans.

Todd Gleason: You're listening to agricultural economist Nick Paulson from the University of Illinois presentation made during the farm assets conference December 12 at the AGRI Center in Bloomington. You may find it and the other presentations online now at willag.org.

Nick Paulson: All right. Production costs. So this chart follows a pattern that becomes very familiar if you follow any of the work that we put on in FarmDoc relative to returns, farm income, production costs and things like that. So you see a general increase in production costs through time. More rapid increases in good income periods like the like the ethanol boom in the late two thousands.

And then the very rapid increases that we saw in production costs in 2021, 2022, and then peaking for the 2023 crop year. We have seen production costs come down or we're expecting them to come down about $75 per acre below that $20.23 peak on these averages that we follow for Central Illinois. The majority of that decrease is on, is from lower fertilizer prices. We're also seeing downward pressures, headwinds on cash rental rates, and we are seeing some declines in those. But majority of these cost movements that you see, again, the rapid increase into the peak in 2023 and then some of the declines since then are really driven almost exclusively by fertilizer costs because of some of the price volatility that we've seen in those markets.

And so these are average prices that the USDA tracks for the state of Illinois. This is based on, I think, what is basically a phone survey of real retailers that they do on a biweekly basis. And so again, these are averages. When I talk about these prices, I always get farmers that get upset because they tell me that they pay more for fertilizer, so these are wrong. Again, it's an average.

There's people above this number. There's people below this number. But we see the big, spike that we saw in fertilizer prices and then translating to the high cost that we saw in 2022 and into 2023. We have seen these fertilizer prices come down since the pandemic and some of the other supply chain challenges introduced by the Russia Ukraine conflict. But they're not back down to where we were heading into that ramp up period.

They're elevated still relative to this kind of 2020 and and and the the few years heading into that time frame here on the slide, we're still above those levels. All right. And this is very, very typical in agriculture. We get costs that adjust pretty quickly on the upside when we've got higher incomes because of higher prices and or higher prices and yields. And then when we need to see some downward cost adjustments, it never seems to happen as quickly or to the extent necessary to follow back down prices and their impact on the revenue side of things.

Alright. The other cost that I mentioned that we are seeing some some downward pressures on and some slight reductions at least in the averages is on the land cost side, particularly specifically in cash rents. And so the map on the right shows you the county level averages reported by the USDA for 2025. Here in Central Illinois, McLean County, we see average cash rents at or just above that $300 level with some counties in Central Illinois to the to the south of us, Logan, Menard, Sangamon, that have cash rents closer to that $350 per acre level on average. And then lower cash rents obviously in the southern third of the state.

And the thing I would say here is cash rents remain high. They remain at challenging levels to try to find positive returns to corn and soybean production. But we are seeing some reductions in cash rents come through these averages. In most counties, the majority of the counties that reported cash rents in 2025 and 2024, we saw those numbers come down more so than we saw cash rents hold stable or increase in terms of these county level averages. So some evidence here in the USDA averages that we can look at.

Some other evidence that there is some pressure working its way into lowering cash rents in Illinois is the data that we track from the Illinois Society of Professional Farm Managers and Rural Appraisers. In general, the society's rents tend to be higher. Their averages tend to be higher than we see in the averages reported by USDA. And we also tend to see larger adjustments in those society rents, both when rents are increasing and when rents are decreasing than we see play out in those USDA averages. But the points I wanted to make here, if we look at the columns on the far right, so this is broken out by productivity class.

We're seeing reductions in the average good and excellent qualities that played out in some of those society rents from 2024 to 2025. And then expectations for larger declines across all four productivity classes that the society provides data for, looking ahead to to rents that they expect to be paid in 2026 relative to 2025 levels. Okay? So again, the reductions we're seeing are are are not necessarily sufficient to solve the problems or the challenges that we're facing, but we are seeing some reductions here, in in some of these cash rent levels. Alright.

So, where where where do these costs put us in terms of breakevens? Again, a little bit of improvement looking at breakeven prices projected for 2026 relative to where we think we're at for 2025 on beans and a little bit higher breakeven in terms of corn price in 2026 relative to 2025. But either crop year you're looking at here, we're looking at breakeven prices, implied breakeven prices that are still above kind of the market opportunities that we're seeing out there even with some of the price improvements that Joe talked about. And the other point I'd make on these breakeven estimates, we do this not considering government payments, okay? So these aren't factoring in the $12,000,000,000 that was announced this week.

They're not factoring in some of the ARC and PLC support. These are market based break evens. These are where prices would need to be to cover costs in the absence of of any government support.

Todd Gleason: You're listening to the closing market report from Illinois Public Media today. We're hearing from Nick Paulson's presentation made during the December twelve farm assets conference.

Nick Paulson: Alright. So putting this together. This is a slide that, you know, I could say. I didn't get my slides done until yesterday because I'm lazy and a procrastinator, but I have a good excuse this week. This slide changed quite a bit based on what was announced.

And I wanna provide a caveat that these are still just projections. I see cell phones taking pictures of the slides. That's fine. You can associate these numbers with me. They're the numbers I put together.

But there's still a lot of uncertainty surrounding these things. Not just for the 2025 Or not just for the 2026 crop year, but even still uncertainty for the 2025 numbers because we're still on the very front end of the marketing year. And as Joyce said, there's probably more uncertainty and more potential for volatility on the price side than even we would expect in kind of a typical year. So again, what we're looking at here is net farmer return averages for typical cash rent situations in Central Illinois. And these historical numbers are all based on FBFM farms.

So these are actual Illinois farms that we're looking at. And then our projections, for the 2025 and 2026 crop years. And for the first time because of what was announced this week, for the first time in more than two years, I'm actually looking at a little green number over there for the 2025 crop year. So we had negative average returns in 2023, a big swing from what we saw from the record returns in 2022. We saw negative returns in 2024 even with the e cap payments that we credit to 2024 because we do these things on an accrual basis, even though the cash showed up in the spring of this year for those e cap payments.

And then again, prior to this week, we would have been looking at another negative red number pretty similar to 2024 for 2025. And looking at a red negative expected return in 2026. And what I've got on the slide here for '24, '25, and '26 is also just kind of an indicator to give people a sense of how important the government support has and is expected to continue to be in terms of at least mitigating some of those negative return numbers that we would be looking at. Now, economists get real squirrelly when you just say, oh, we got $37 per acre in 2024. So if we hadn't gotten that, our negative return would be what?

Almost $80 negative in the absence of those ECAP payments. Well, that's not entirely true because farmers change their behavior when they get payments from the government or payments from anywhere. But it's kind of a ballpark estimate of how much worse things could have been in the absence of that ECAP support. Same thing for 2025, I've got a $100 number in there that includes the steroid ARC and PLC payments we're going get this year because of the improvements in OB three and the fact that we're going to be getting the maximum of the two programs, whichever programs are going to trigger a bigger payment for you is what you're going to get. We're thinking that's about about 50 to 60 or more like $60 of that $100 number that I have there for 2025.

The rest is from that $11,000,000,000 or $12,000,000,000 aid package that was announced this week, which they're calling the Farmer Bridge Assistance Program. Right? FBA is the the yet yet another acronym we get to talk about for government support payments. And then 2026, you've got about a $42 number in there. And then these are very ballpark.

I mean, they're they're good estimates, but they're very much still ballpark because we could see a lot of changes in those just based on where prices go. But again, that's reflecting kind of those improved and strengthened ARC and PLC programs. And where our guarantees are going to be relative to where we think those actual marking year prices will be at in the 2026 crop year. So again, not, like I said, not completely solving the problem, but definitely reducing some of the negative returns that we would be seeing in the absence of those payments. Okay.

This is a slide I'm guessing people are going to start taking pictures of. The orange bars are and I'm this is not an ego thing. I'm calling these the pulse and estimates because I don't even want to throw my PharmDoc colleagues under the bus with these estimates. We have very little guidance for how USDA is gonna come up with the per acre payment rates for this $12,000,000,000 aid package that was announced this week. Okay.

We have about two sentences in USDA's press release that says they are going to use ERS's Economic Research Services National Cost of Production Estimates, WASDE prices and yields, and then come up with a uniform payment rate formula based on the implied economic estimated economic losses for the major row crops that are gonna be eligible for a slice of that $11,000,000,000. Okay. All of that language to me suggests that the calculation is gonna be something very similar to what they did for e cap payments a year ago. Alright. So it's very dangerous to try to anticipate what USDA and the government's gonna do here, but people wanna know.

And so this is my best guess right now based on the information we have. At least the ballpark of where we might see per acre payment rates be for the commodities that are gonna be eligible for for a slice of that $11,000,000,000. Right? So what I did was I took those twenty twenty five cost of production estimates at national level for these crops. I took WASDE yield estimates, WASDE prices, and I calculated revenue minus cost based on those numbers.

And then I took FSA acreage data, which is the other thing that they said they're going to use. And everybody needs to get their acreage updated by December 19. Make sure you get every acre in there you possibly can that you're allowed to. Don't Alright. Then Christmas week we're going to get announced what these numbers are.

Okay. So, in two weeks this slide will be irrelevant and the final numbers will be released. But this is where I think payments are going to be or the ballpark that I think they're going to be in. So, what I think will happen is we're going to see corn somewhere in that $45 to $50 per acre range. Soybeans, if they follow the methodology that they're indicating, is I will actually predict that soybeans, the crop you think that sort of justifies this whole program, is actually gonna get a smaller payment than they than than soybean acres got under the ECAP program.

Todd Gleason: The payment, says Nick Paulson, might be about $35 an acre. You've been listening to the closing market report from Illinois Public Media. I'm University of Illinois Extension's Todd Gleason. You may hear all of Nick Paulson's presentation online right now at willag.org.

Nick Paulson: And that's because of the big increase in the market year average price for soybeans that we saw relative to September in going from $10 to $10.5 in the WASDE report. All right. Wheats be around $39 So $40, about $10 per acre higher than it was in the E CAP program. And then you see, I like to we like to on PharmDoc, we like to highlight our friends in the South and the big payments that they always tend to eke out of these programs. So some pretty sizable potential increases here in terms of the per acre payments.

I'm estimating the ballpark range will be for crops like rice and cotton. The green bars I included here, some of you may be online. Paul Neefer's got a pretty popular sub stack. He released some numbers on his sub stack, some estimates that he put together. You can see how those compare to mine.

They've been picked up by a number of things. If you Google the aid package payment estimates, his come up being cited and sourced in a number of ad press articles just in the last couple of days. Alright. If those payments rates hold, given the amount of acreage we have, this would eat up about 10,600,000,000.0 of the 11,000,000,000 for these crops. And there'd be about a half 1,000,000 or half $1,000,000,000 left over for some of the other smaller acreage crops that are going be eligible for these things.

All right. Last couple of slides are a few looks at some net farm income averages. So a couple of points to make here. I guess you can't really tell the difference in the colors, but the the higher series here in the chart is average net farm income for Illinois, FBFM grain farms, statewide. So, again, a lot of variation around these averages for for individual farms.

But, you know, the the big points here are the very low income level on average that we saw for 2024. In the absence of VCAP, that would have been instead of about $15,000, about negative $35,000. And then the projection for the increase back up to around the $100,000 level for '25. And I think around 75,000 is where we'd currently be pegging net farm income potentially in 2026 if we had to be pinned down on a number. The other sort of story here that I think is lenders are getting concerned.

In general, Illinois farms tend to be in pretty strong financial positions even though we've had some pretty poor, three years of very poor farm incomes. The amount of strength that we entered the 2023 in from a financial perspective was very, very good. But there are farms kind of in that bottom 20% here that I'm showing where the situation is much different. And sort of that gap between the average and that bottom 20% tends to get magnified during periods of financial stress like this. And so, you see that gap between averages in '20 In a year like 2024 is a lot bigger than some of the gaps in some of the at least positive income years that we see here.

The other thing that we look at in terms of what goes on when we see high incomes versus low incomes. Capital purchases is the biggest use of net farm income that we see on on grain farms. And so we see the the increase in capital purchases that goes on when we've got high income periods. And then the reduction that we see when incomes are low. And we saw a pretty big decline here in 2024 relative to 2023.

There's always a lag in this effect because we've got income across crop years and marketing years are different. We're typically selling grain from the previous crop year that feeds into income for the current year. And so those capital purchases take time just for tax planning reasons to to sort of play out in terms of how they follow in that farm income. But I would predict, you know, another decline in those capital purchases. And apologize to any John Deere or Case New Holland people in the room, but they should go down again in 2025.

John Deere is a sponsor, sorry. But can't always can't sell $800,000 combines to people every single year. Alright. Another thing to look at in terms of net farm income. Again, considering averages are one thing, but thinking about the distribution of income.

This was a slide I put together for a more of an academic conference this summer. But I think interesting for a group like this as well. So the first row looks at the percentage of FBFM farms that had negative farm incomes in 2020 through 2024 crop years. And you see the big increase in 2023 and then the further increase in 2024. And then over in the 2024 column, I have that number in parentheses.

That's our estimate of the percentage of Illinois FBFM grain farms that would have had negative net farm income had those e cap payments not been made. So, almost 95% would have would have had negative net farm income. Another one is just where is our net farm income at relative to family living expenses. And you can see the big increases here where net farm income is not sufficient to even cover family living. High income years, that number is still positive, but very low.

And then the big increase to '23 and '24, and you know, close to a 100% of those farms we track in FBFM would have been below income levels, family living in the absence of those e cap payments. And then the final row there is just again how important some of these government payments have been as a share of income in these years. Big in 2020 that was pandemic related aid, still some lingering MFP payments. And then, again, a big number there over a third of net farm income in 2024 came from the various forms of government support. Alright.

So summary points, we're still in a price cost squeeze. We've seen some improvements in prices. We continue to get good yields in Illinois, but we are simply in a situation where market prices and production costs are not aligned to generate market based profitability. And so we're going to continue to see a strong role for some of the government support payments. And, you know, improved prospects are going to require higher prices, further cost adjustments, or we're kind of what a few of us stumbled upon the phrase, the policy treadmill right now where every year we're we're needing ad hoc support to bring us back up to closer to break even.

That slows some of the adjustments on the cost side that are needed to be made. And it sort of creates a a never ending cycle of continually needing to go back and ask for some of that ad hoc support. So we really need something to happen on the demand side. We really need to figure out how to get some of those production costs down lower, or we're just gonna be in another cycle next year of probably looking for more, ad hoc, or supplemental support in addition to our ARC and PLC programs, and our and our crop insurance safety net.

Todd Gleason: Nick Paulson is an agricultural economist at the Urbana Champaign campus at the University of Illinois. You've been listening to his presentation made during the farm assets conference held December 12 at the Agra Center in Bloomington. You may hear all of those presentations online right now if you'd like at willag.org or look for them in the closing market report podcast. I'm University of Illinois Extension's Todd Gleason.