2014 returns for corn under drought, median & high yield cases
Note that there is a negative relationship between yield and price. Lower yields have higher prices. The highest projected price occurs in a drought year and the lowest harvest price in the high yielding year. Illinois is a major source of corn; hence, yield shortfalls in Illinois often lead to higher prices.
Also note that the range of projected prices is from $4.08 per bushel up to $6.19 per bushel. Results of this historical analysis suggest a likely price range for corn in the coming year is below prices in recent years. Also note that prices in the low $4.00 and high $3.00 range result from median and high yields.
Operator and farmland returns
For each scenario, operator and farmland returns are calculated. Operator and farmland return represents a return to both the farmer and land owner. If the operator and farmland return is $300 per acre and cash rent is $250 per acre, the farmer would receive a $50 return under this cash rent lease.
Revenue is based on a cash price that is $.30 below the harvest price, thereby accounting for basis between cash and futures prices. Revenue also includes proceeds from a Revenue Protection (RP) at an 80% coverage level with a 195 bushels per acre guarantee yield. Non-land costs of $537 per acre are subtracted from gross revenue.
The operator and farmland return under the drought scenario is $391 per acre, which includes $204 of crop insurance payments (see Table 1). This is the highest return scenario of the three. Under the medium and high yield scenarios, operator and farmland returns are $275 and $295 per acre, respectively.
Historical analysis suggests that 2014 operator and farmland returns under medium and high yielding scenarios will be below $300 per acre. This is a significant reduction in returns from recent years and is driven by lower prices. This analysis suggests cash prices of corn of $4.12 under a medium yielding scenario and $3.78 under a high yielding scenario. These prices will have longer termed impacts beyond 2014, as prices in 2015 likely would be those being projected for 2014, particularly under the high yield scenario.
Somewhat ironically, a drought has the highest return, partially due to crop insurance payments. Because 2014 prices would be higher, 2015 prices likely will be higher after a drought than under medium and high yields.
In recent years, production of corn and other related crops have been below trend levels, resulting in higher prices. Yields in 2013 return to a more normal yield level. As a result, 2014 prices and incomes are projected lower. These lower income levels should be expected to continue into the future as long as production remains at or above expectations.
Source: Gary Schnitkey, Department of Agricultural and Consumer Economics, University of Illinois
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