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2016 gross crop margins negative despite lower costs

pdf fileAgDM Newsletter
January 2016

The total costs of corn and soybean production in Iowa are expected to fall, respectively, by 6 percent and 2.5 percent in 2016. The total cost per bushel of corn, is projected at $4.63 for corn following corn (Figure 1, assuming yield of 165 bu./acre); and $3.99 for corn following soybeans (Figure 2, assuming yield of 180 bu./acre). The total cost per bushel of soybeans is projected at $10.67 for the herbicide tolerant variety (figure 3, assuming yield of 50 bu./acre); and $10.66, for the non-herbicide-tolerant variety.

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. Labor costs are projected flat into 2016. Rents for low, medium, and high grade land are projected 1 percent, 2.5 percent, and 5 percent lower, respectively, than the ones used to estimate the 2015 costs of crop production in Iowa. Despite higher fixed costs associated with a slightly higher interest rate, total machinery costs are projected down due to lower diesel and LP gas prices ($2.00 and $1.10 per gallon, respectively). Lower crop prices will result in lower crop insurance liabilities and therefore lower insurance premiums. Average seed prices per bag are projected at $297 for corn, $54 for herbicide-tolerant soybeans and $43 for non-herbicide-tolerant varieties.

The accumulated declines in total costs of corn and soybean production amount, respectively, to 8 percent since 2013 and a 4 percent since 2014. However, these cost reductions are dwarfed by the 47 percent and 37 percent reduction in corn and soybean prices, respectively, between 2012 and 2015. The gross margins per bushel, i.e. the difference between prices and total costs, amounted to -$1.28 for corn following corn, -$0.58 for corn following soybeans, and -$2.06 for herbicide-tolerant soybeans in 2015. The gross margins per acre amount to -$211 for corn following corn, -$104 for corn following soybeans, and -$103 for soybeans.
Based on futures prices as of mid-December 2015, the projected 2016 marketing year average prices for corn and soybeans are $3.71 and $8.36 per bushel, respectively. Using those prices, the gross margins are projected to become less negative for corn and more negative for soybeans in 2016: -$0.92 for corn following corn, -$0.28 for corn following soybeans (figure 4), and -$2.31 for herbicide-tolerant soybeans (figure 5). The gross margins per acre would amount to -$152 for corn following corn, -$50 for corn following soybeans, and -$116 for soybeans.

Several caveats apply. First, fertilizer and lime costs include volume and early purchase discounts. Second, producers paying land rents higher than the ones estimated in the report might face higher costs of production. Third, in order to be able to compare budgets through time, calculations are based on a fixed rate of input use. This might be a strong assumption for 2016, when lower crop prices will likely push some producers to look for additional cost savings by changing the mix of inputs used. For example, some producers might opt for seeds with fewer traits than in other years to save on front-loaded input costs.

Finally, crop budgets are calculated assuming average yields remain constant through time. If El NiƱo characterizes climatological conditions in 2016, then there is a high chance of having higher than average yields. In that case, costs of production per bushel might be lower than reported.

The full report is available online at: https://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf.

 

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