Considering Marginal Cost: 2021 Continues to Challenge

It is getting to be that time of year. Usually in late August you feel a little chill at night, but not so this year. In southwestern Ontario, we’ve experienced consistent hot temperatures and humidex values over 40 degrees C. There have also been a few cracks of thunder and in my case, ample rainfall. However, its interesting to note, that weather isn’t everywhere, some of you are experiencing the heat without the rain fall, which is adding a little bit of late season crop anxiety to crop expectations. At the same time, some of parched Western Canada has got some rains. In this business, weather can be cruel.

This week several soybean fields in my neighbourhood have started turning colour, so that means, I’ll likely be harvesting soybeans in and around September 22nd. That’s good for me as I’ll be able to plant wheat early. In this same area, sugar beet harvest started today, and tomatoes have been coming off for a few weeks now. My area has been hurt from too much water and on the other end of the spectrum, other areas are being hurt from too much late season dryness. I’m thinking of the sandier soils of Quebec and Ontario. This heat dries things out in spades. It maybe takes the effervescence off Ontario and Quebec crop yields.

Let me remind everybody, last year on September 16th, we had a hard frost here, which was a wakeup call that things can change. It’s interesting as we look at this year. Sure, weather is always an outlier for our farm management, but December corn closed down a penny Thursday at $5.50 a bushel. That should be like getting a whiff of anhydrous ammonia on a cool spring day. However, we’ve become accustomed to it. It was only about 15 months ago many Ontario corn merchandizers were hoping to get December corn as high as $3.60, then we could work on that Canadian basis. As 2021 looks toward fall, crop producers are still in a pretty good place.

It hasn’t come without a few issues, Covid being one of them, which continues to spawn new challenges. We also have a shifting input cost environment. Inventory is a problem whether that be new farm machinery, parts, or even certain herbicides. I talked to my machinery guy the other day and he said getting certain parts is very difficult, for instance, GPS receivers for some tractors and combines. At the same time, he can’t get enough tractor lawnmowers. I asked if Covid was to blame, and he said yes, but in fact, Covid19 gets used as an excuse for a lot of things that go wrong. The supply chain has issues, something that we’ve talked about more than once in this column since Covid first showed its ugly head.

It is what it is. It’s our job to maneuver our way through it, but clearly, it’s about Covid and an agricultural economy, which has got a huge boost of capital over the last 18 months. You might remember the $30 billion of assistance our American farmers friends received as trade compensation from their government. As Ontario and Quebec commiserated about their lack of a safety net, all this money started percolating throughout the American agricultural economy. Add in the much higher prices over the last year, and its just that much more so. There have been quantum shifts in farm revenues, more so in the US, but on smaller scale in Eastern Canada.

While farm revenues have shifted outward, costs are following and in some cases are out of this world. For instance, how much are those GPS receivers that you can’t get? How much is that combine harvester you want, but can’t get until 2023? Forgetting that for a minute, why is the price of glyphosate going up. Do you feel like you are on an input price spaceship with your eyes closed? Clearly, I’m sure all of you have your eyes wide open. However, everybody knows, including me, as we maneuver this $5.50 December corn environment into September, the costs next year of growing it are skyrocketing. It has the effect of taking all the fun away.

However, take it from me, been down the trail many times and it can always be fun, especially if we can get by Covid. The key in this debate boils down to an old agricultural economic axiom. You need to be thinking about “marginal cost.” Marginal cost is defined as the change in total cost that results from producing an additional unit of output. In other words, you must be productive and make sure the marginal revenue garnered from producing a bushel of corn is higher than the marginal cost of producing it. It means even in a robust high-cost environment it still can be done. You just need to apply the old rules to the new environment.

Does it mean a bright future in 2022 and beyond? Well, it sure looks that way now. Keep that $5.50 December corn value in mind especially in comparison to last year’s $3.60 expectation. This is farming and it’s our agricultural environment we choose to operate in. It’s volatile at the best of times. 2021 is just another year. Our risk management keeps going and never grows old.