Low crop revenue most likely due to lower prices

Much of the Great Plains and western Corn Belt  still is in drought, leading to concerns about a drought in 2013. While a drought in 2013 is a possibility, a more likely scenario resulting in low crop revenue is declining prices combined with near normal yields. Herein, historical yield and price changes are used to illustrate potential revenue scenarios under drought yields, near normal yields, and above average yields. Then, situations in which low revenues occur from historical yield and price changes are identified.

Yield and Price Correlation

This analysis is conducted using Illinois state yields. For each year between 1975 through 2012, the Illinois state yield is stated as a percent of trend yield. Trend yield represents the expected yield in each year given "normal" weather conditions. Trend yields are found by statistically fitting historical data with a straight line from 1975 through 2012. In 2012, the trend yield for Illinois is 163 bushels. Actual 2012 yield is 105 bushels. The yield stated as a percent of trend is 64% (.64 = 105 bushel actual yield / 165 bushel trend yield).

Also calculated each year is the percent change between projected and harvest prices. The projected price is used to set crop insurance guarantees each year and equals the average of settlement prices of the December Chicago Mercantile Exchange (CME) contract during the month of February. The harvest price is used to calculated crop revenue for crop insurance purposes and equals the average of the settlement prices of the December CME contract during the month of October. The change in the projected and harvest prices provide an indication of how markets reacted to weather and other market changes during the growing season. In 2012, the projected price is $5.68 and the harvest price is $7.50, yielding harvest price as a percent of projected price of 132% (1.32 = $7.50 harvest price / $5.68 projected price).

These yield-price change pairs are shown in Figure 1. As yield increases relative to trend yield, note that price change declines. There is a negative correlation between yields and price changes of -.54. Because Illinois is a large producer of corn and Illinois production is correlated with other large producing states, high yields in Illinois generally mean higher total supplies of corn, leading to lower prices for corn.

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Illinois yields have been extremely low relative to trend in three years. Actual yield is 59% of trend yield in 1988, 64% of trend yield in 2012, and 68% of trend yield in 1983. As can be seen in Figure 1, where these three years are labeled, harvest price in each of these three years is higher than the projected price. During these three years, the harvest price averages 129% of the projected price, meaning that the harvest price is 29% higher than the projected price.

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