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Lower costs bring cautious optimism in 2017

pdf fileAgDM Newsletter
February 2017

The total cost of corn and soybean production in Iowa is expected to fall this year, according to the annual report  "Estimated Costs of Crop Production in Iowa - 2017" published by Iowa State University Extension and Outreach. The report shows the cost of corn production dipping by 12 percent and soybean production falling by nine percent this year.

Total cost per bushel for the mid- range yield category is projected at $4.08 for corn following corn and $3.51 for corn following soybeans. The total cost per bushel of soybeans is projected at $9.66 for the herbicide tolerant variety and $9.60 for non- herbicide-tolerant beans. These cost estimates are representative of average costs for farms in Iowa. Very large or small farms may have lower or higher fixed costs per acre. These annual estimates are to be used as guidelines to help you compare and figure your own costs for your farming operation.

A substantial decline in fertilizer and lime prices, machinery costs, and land rents are expected to more than offset increases in crop protection costs, especially herbicides. Despite higher projected diesel and gas prices in 2017, machinery costs are projected lower than in 2016 due to adjustments in the estimation process to reflect higher operating efficiency, as reported on a recent update of AgDM File A3-24, Estimating the Field Capacity of Farm Machines.

Labor requirements per acre were reduced approximately two percent to reflect the associated time savings in operating machinery. Cash rents are projected at $230 per acre in 2017, in line with the average rate reported in AgDM File C2-10, Cash Rental Rates for Iowa 2016 Survey, and $5 per acre below the state average reported in the 2016 USDA/NASS Cash Rent Survey. This implies a strong decline from the $266 per acre projected cash rent used to estimate costs of production in January 2016, and is an attempt to correct a cumulative error introduced in January 2014 when land prices were projected to increase for a fifth consecutive year to $287 per acre but the state average cash rent declined to $260 per acre.

The accumulated declines in total costs of corn and soybean production since 2013 amount to 19 percent and 12 percent, respectively. However, these cost reductions are dwarfed by the 44 percent and 31 percent reduction in corn and soybean prices, respectively, between 2012 and 2016.

When you use the ISU cost of production estimates for 2017, keep several things in mind. First, fertilizer and lime costs include volume and early purchase discounts. Second, farmers paying land rents higher than those projected in the report might face higher costs of production. Third, in order to be able to compare budgets through time, ISU calculations are based on a fixed rate of input use. If a farmer switches to seeds with fewer traits, or skips a field pass, then the ISU budgets will be overestimating the true cost for that farmer. Finally, crop budgets are calculated under the assumption that farmers target the same yield year after year.

Although crop futures prices are currently consistent with a slow and gradual recovery in profitability, market sentiments can change rapidly, especially in a year with the added uncertainties associated with new administration in Washington, D.C. and potential revision of trade agreements that might affect ag exports. The long term price projections prepared by USDA in February 2016 indicate corn and soybean farm prices would average $3.30 and $9.35, respectively, in marketing year 2017/18. If those prices prevail, then profit margins would be negative at trend yields. In order to gauge the impact of prices on profit margins, the following table shows the breakeven yields for the 2017 crop under different price scenarios in 2017/18:

table 1

Breaking even in 2017

Lower costs of production along with a well-prepared marketing plan will likely result in small but positive profit margins in 2017 if current price expectations are realized later in the year. Using futures market prices as of January 12, ISU Extension and Outreach economist Chad Hart projected the average prices for corn and soybeans in marketing year 2017/18 at $3.86 and $9.98 per bushel.
At those prices, a rented acre of corn following soybeans with a yield of 180 bushels would generate a positive gross margin of $64, or 35 cents per bushel; and a rented acre of soybeans following corn with a yield of 50 bushels would generate a positive gross margin of $16, or 32 cents per bushel. A rented acre of corn following corn with a yield of 165 bushels would still generate negative margins for a fifth consecutive year, in the amount of -$37 per acre, or -22 cents per bushel.

Of course, the margin of error in these projections is directly proportional to the margins of error on projected yields and prices. If actual yields or prices are higher (or lower) than expected, then the gross margin per bushel will be higher (or lower) than projected. Corn and soybean yields in Iowa in 2015 and 2016 were the highest on record. As a result, the average actual cost per bushel in those years should be smaller than projected, and revenue from crop sales should be higher than projected.

Even after adjusting for (higher) actual yields, the gross margin from the 2016 corn crop is projected to remain negative at -$46 per rented acre. The 2016 soybean crop, on the contrary, is expected to generate gross profits of $41 per rented acre.

Given the price uncertainty, it is highly recommended that farmers visit with trusted agronomists on how to cut costs without hurting revenue potential. Knowing the operation’s cost per acre is critical for creating solid marketing plans and making the necessary arrangements (such as securing operating loans, restructuring machinery or real estate loans, adding non-farm income) to cash flow the farm business in 2017.

Your cost of production?

ISU cost estimates represent typical costs and are only intended to be guidelines. The publication Estimated Costs of Crop Production in Iowa-2017 has information to help you figure your cost for your farm. Actual costs will vary considerably from farm to farm and can be entered in the column for ‘Your Estimates’, or electronic Decision Tool spreadsheets for developing crop production budgets are also available on the Ag Decision Maker website.

 

 

Alejandro Plastina, extension economist, 515-294-6160, plastina@iastate.edu