USDA has recently updated the budgets for major crops through 2012. Doane Advisory Services has extended those budgets through 2013 and forecast them for 2014. It is not an exact science but does provide some information about relative rates of returns among the various crops and even estimates of break-even prices. This analysis provides at least some information that will help to determine how acreage might shift next year.
The actual data reported by USDA are a little out of date, only going through 2012. Our first step is to extend the budgets through 2013. To do that we use the year-over-year changes in prices paid by farmers for the various inputs based on the April 30, 2013 Agriculture Prices report. We increase the per acre costs by that amount. For example, the year-over-year change in agricultural chemicals was a 4.6% increase from April 2012 to April 2013. We increase the per acre ag chemicals cost by that amount from what USDA reported for 2012. This is done for each of the cost variables included in the budgets. The same multiplier is used for all of the major crops.
The revenues in the USDA budgets are based on yield per planted acre – while most of us think about yields per harvested acre. This is not a big deal for corn and soybeans since most of the land planted to these crops get harvested. Corn for silage is a separate source of revenue so the yield per planted acre for corn is typically a couple of bushels under the yield per harvested acre. For wheat and cotton, the differences between the yield per harvested acre and the yield per planted acre can be pretty big if there is a lot of acres that go unharvested either because yield potential is so low or the crop is used for grazing (wheat pasture) or a cover crop. The yield per harvested acre is multiplied by the harvest-time price to calculate revenue.
The costs are broken up into two parts – operating costs and allocated overhead. The operating costs are those out-of-pocket costs associated with crop production. These costs are the key costs when comparing relative rates of return among various crop alternatives. Allocated overhead costs are essentially fixed costs. A producer needs to pay machinery costs, taxes, land costs, etc regardless of what crop gets planted – and in most cases even if no crop is planted. These costs are important in determining if an acre of land or a farm is covering all costs and making or losing money – but may not figure into the decision about which crops to plant. Economic theory says that producers should continue to produce if revenue exceeds variable costs, even if total revenue does not cover total costs.
Once the budgets are extended through 2013, we go through a similar process to get estimates for 2014. We don’t have actual changes in prices paid for various inputs, so the changes are forecasts. At the moment – it appears that fertilizer prices will be down significantly for the 2014 crop and this has a big impact on total operating costs, especially for corn. In general, modest increases are assumed in prices for other inputs. With falling crop prices we assume that land rents will level off for 2014. We assume yields return to trend levels as does the ratio of harvested acres to planted acres. For now, we base prices on new-crop futures, adjusted for a “normal” basis.
Once the changes are made to the overall U.S. budgets – we apply this information to the budgets for the USDA regions. We identify the “normal” relationship between the data for the overall U.S. and the same categories for each region. These relationships are calculated and applied for all of the costs categories and for yields and prices. In most cases these relationships hold fairly steady over time but that isn’t true for all of them. Yield differences can be pretty large from year-to-year depending on widely different growing conditions across regions.
Often times it is useful to use a corn-following-corn budget to understand the relative returns for farmers that are deciding to plant corn again next year or shift the land to another crop. Corn yields for corn-following-corn are generally lower than those for corn following another crop and fertilizer costs are higher. It seems logical to assume that chemical costs may also be a little higher for corn-following-corn.
But the USDA budget data are for all corn and not just for corn following some other crop, so the effects of the lower yields and higher costs for corn-following-corn are already included in the overall budgets to some extent. Some university studies put the corn-following-corn yield drag at between 10 percent and 15 percent, and in some years even higher. But this is compared to corn in rotation with other crops so the decline from the yields in the USDA budgets is probably smaller. For this analysis we use an additional yield drag of 7 percent compared to the overall USDA budgets and boost fertilizer costs by 12 percent. This raises operating costs by 5 percent overall but reduces net returns by 17 percent.
The analysis shows U.S. net returns over variable costs for corn at $402 per acre, compared to net returns for soybeans of $361. At least at this point the market is not sending a clear signal to farmers to plant less corn. However, the budget for corn following corn, using the assumptions outlined above shows net returns at $335 per acre. This result of higher net returns for corn based on the overall budget holds true for most regions, except for the Heartland and Eastern Upland regions where soybean net returns are higher than for corn even without the adjustments for corn-following-corn. Net returns for corn-following-corn are higher than net returns for soybeans in the Prairie Gateway and Southern Seaboard regions.
Looking at the total U.S. costs of production at the national level, the breakeven for corn is $3.98 per bushel, $4.39 using the corn-following corn assumptions. Soybean costs are estimated at $9.89 per bushel, wheat is $7.41 per bushel and cotton is $1.15 per pound. The highest per bushel costs for corn are in the Eastern Uplands region but followed closely by the Heartland where land prices are very high.
Soybean breakeven prices are highest in the Prairie Gateway region. In general, net returns over all costs remain positive for the major crops, but they are generally lower than they have been recently. While that may be true overall, there will be some higher cost producers that don’t cover all costs. Still, the data do not seem to support a significant decline in total crop acreage.
We could see some low productive land that was brought into production recently in response to the high crop prices left idle in 2014, but probably not very much. The shift in net returns that factor soybeans in the Heartland region could cause some shifting away from corn acres there but overall it looks like corn acreage will stay high. If yields snap back to trend and demand doesn’t increase substantially, the result could be another big increase in corn ending stocks. Perhaps to near 3 billion bushels.
Follow this link to see the regional and national budgets for corn, soybeans, wheat and cotton for the 2011 through 2014 crops: http://media.doane.com/binary/cropbudgets.zip