Low crop revenue most likely due to lower prices

Average years are represented by arraying yields from lowest to highest and selecting the ten years in the middle of the range. The average yield in these ten "median" years is 101% of trend yield. These median years correspond to the pairs close to the vertical line in Figure 1. During these ten years, harvest price is 92% of projected price, indicating that historically average yields in Illinois are associated with slight declines in harvest prices.

There are twelve years in which actual yields are more than 10% higher than trend yields. During these twelve years, yield average 13% higher than trend yields. Prices declined in most of these years, although there are some years in which harvest price is above projected price (see Table 1). On average, the harvest price is 85% of the projected price during these high yielding years.

Revenue under Three Yield Scenarios

Based on the descriptions provided above, three scenarios are defined under which projected revenue for 2013 is calculated:

1. Drought year in which yield is 64% of trend and harvest price is 129% of projected price.
2. Median yield year in which yield is 101% of trend yield and harvest price is 92% of projected price.
3. High yield year in which yield is 113% of trend yield and harvest price is 85% of projected price.

The trend yield used in calculations is the 2013 Illinois trend yield of 165 bushels per acre. This gives a drought year yield of 104 bushels per acre (165 x .63), a median year yield of 166 bushels (165 x 1.01) and a high year yield of 187 bushel per acre (165 x 1.13).

The projected price used in calculations is $5.90, close to the price of the December 2013 CME futures contract in the beginning of February 2013. This gives a drought year harvest price of $7.61 ($5.90 x 1.29), a median year price of $5.46 ($5.90 x .92), and a higher yield year price of $5.03 ($5.90 x .85).

Crop revenue equals yield time the harvest price minus a $.30 basis. This gives crop revenue of $760 in the drought year, $857 in the median yield year, and $885 in the high yield year (see Table 1). The lowest crop revenue is associated with the drought year. However, there would likely be a crop insurance payment associated with a drought year. Revenue from an 80% Revenue Protection (RP) policy is estimated for each scenario. Under the drought year scenario, there would be a $183 per acre RP payment, giving crop revenue plus the RP payment of $943 per acre.

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Drought years will not necessarily result in the lowest revenues. This occurs if suitable crop insurance is available for purchase. Also, the median and high yield years do not necessarily result in low revenue. However, there have been some years that do result in low revenue, as illustrated in the following section.

Low Revenue Years

Using procedures detailed above, revenue for each year from 1975 through 2012 have been calculated. Lowest revenue occurs in:

1. 1991 when actual yield is 100% of trend yield and harvest price is 77% of projected price. Revenue equals $729 per acre (includes a $25 RP payment).
2. 1977 when actual yield is 98% of trend yield and harvest prices is 76% of projected price. Revenue equals $730 per acre (includes a $45 RP payment).

Note that 1991 and 1977 have near normal yields, but large price declines.

Summary

Using history as a guide, low revenue will likely be caused by a large price declines. This year, large projected plantings of corn are projected. Large planting combined with normal or higher yields could result in large supplies of corn, resulting in large price declines.

Source: Farm Doc Daily