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Estimating costs of crop production vital for 2019 farm businesses

pdf fileAgDM Newsletter
January 2019

Estimating costs of crop production for 2019 will be extremely important. With a market outlook for 2019 similar to 2018, there are challenges ahead from a marketing perspective. Marketing strategies for farmers include forward pricing, setting a quantity-only marketing plan, or using the spot market. The price consequences of these decisions are substantial. Having a firm handle on one’s cost of production provides a key piece of information in any strong marketing plan. The latest issue of the Iowa State University Extension and Outreach "Estimated Costs of Crop Production" reports average cost estimates for Iowa farms in 2019, and provides guidelines to help farmers calculate their own costs of production.

The estimated costs of production for continuous corn are $3.93, $3.91, and $3.88 per bushel for expected yields of 164, 182, and 200 bushels per acre, respectively.

The estimated costs of production per bushel for corn following soybeans are $3.39, $3.39, and $3.38 assuming 178, 198, and 218 bushels per acre, respectively. Recent projections for the 2019 marketing year average price for corn are near $3.90 per bushel, showing the potential for a slight profit for most yield levels.

Cost of production estimates, per bushel, for herbicide tolerant soybeans are $9.21, $9.04 and $8.86 assuming 50, 56, and 62 bushels per acre, respectively. The total cost per bushel of soybeans is projected at $9.13 for non- herbicide-tolerant beans at 56 bushels per acre, according to the report. Recent projections for the 2019 marketing year average price for soybeans give a more negative outlook at $8.75 per bushel.

Starting in 2019, reference yields for corn and soybean budgets in the annual ISU Extension and Outreach report reflect 30-year trend yields that will be updated annually (the most recent prior adjustment in reference yields was done in 2010). While total costs per acre will continue to be directly comparable across all annual ISU Extension and Outreach reports, total costs per bushel under the new approach will have to be adjusted to a common reference yield before running comparisons across years.

figures 1 and 2The significant increase in reference yields between the 2018 and 2019 reports more than offsets the six to seven percent increase in total costs per acre, resulting in lower total costs per bushel. When looking at specific categories, costs increased for chemical and fertilizer inputs, while seed and fuel costs saw slight decreases.

These cost estimates are representative of average costs for farms in Iowa. The full report is available online through the Ag Decision Maker website. The publication includes additional corn and soybean budgets for low-till, strip-till, and non-herbicide tolerant soybeans. Budgets are also available for corn silage, alfalfa hay establishment with an oat companion crop and by direct seeding. Annual production costs for established alfalfa or alfalfa-grass hay as well as a budget for maintaining grass pastures are included. Actual costs can be entered in the column for "Your Estimates", or by using the electronic spreadsheet Decision Tools on the Ag Decision Maker website.

Very large or small farms may have lower or higher fixed costs per acre. "Our annual estimates are to be used as guidelines to help you compare and figure your own costs for your farming operation. For example, if you own the land and you are interested in calculating your accounting cost of production rather than your economic cost of production (which includes the opportunity cost of not renting out your land), then your land cost will likely be much smaller than the cash rent equivalent included in the report. Alternatively, if you are producing crops on leased acres and your cost structure is similar to the one used for the report but your expected yield is much higher, then your projected cost per bushel will be lower than the published one," says Plastina.

Breakdown of costs for 2019

For corn, land represents approximately 30 percent of the total costs of production (Figures 1 and 2). Values of $185, $223, and $258 per acre rent charges for the low, medium, and high quality land were assumed. The variable costs represent just over 50 percent of the costs of production. Of the variable costs, nitrogen and seed costs are almost half the costs for either continuous or rotated corn. Nitrogen increased 26 percent from 2018, at $.38 per pound and seed was assumed to cost approximately $256 per bag, a 2 percent decline.

figure 3Land represents just over 44 percent of the costs of production for soybeans (Figure 3), while the variable costs represent 42 percent. Seed and fertilizer are almost half of the variable costs. Phosphorus was charged at $.42 per pound and potassium at $.31 per pound, an increase of seven and 14 percent, respectively. Machinery costs were two percent lower compared to 2018 primarily due to lower fuel costs.

Breaking even in 2019

Current costs of production along with a well- planned marketing plan have the potential to result in small but positive profit margins in 2019 for corn but the outlook is not quite as promising for soybeans. Using recent price projections for 2019/20, a rented acre of corn following soybeans would need to produce 172 bushels of corn to breakeven, and a rented acre of genetically modified soybeans would need to produce 58 bushels of soybeans to breakeven. However, a rented acre of corn following corn would need to produce 183 bushels of corn to breakeven.

The margin of error in these projections is directly proportional to the margins of error on projected yields, costs, and prices. Given such uncertainties, it is highly recommended that producers 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 an operation in 2019.

Conclusions

When using the ISU cost of production estimates for 2019, keep several things in mind. First, fertilizer and lime costs include volume and early purchase discounts. Second, farmers paying land rents higher than the ones projected in the report might face higher costs of production. Finally, starting in 2019, reference yields for the crop budgets line up with 30- year yield trends.

While total costs per bushel may look lower in the latest cost of crop production publication due to higher reference yields, total costs per acre are estimated higher than in 2018. Although there is variability across most input categories, increased fertilizer and chemical prices and lower seed and crop insurance costs were among the most variable.

Producers need to have a strong grasp of their own production costs. Costs of production are not seeing the rapid fluctuations that were seen in recent years, but current prices still create a lot of uncertainty when it comes to profitability on individual operations. Knowing costs is key.

 

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