The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Remember Your 3 to 1 Ratio!
Oct 08, 2010
Now that the USDA has really surprised us with an US corn crop of about 156 bushels per acre, as farmers you need to remember how this will correlate to your planting intentions for this year and next. Since we can assume at current prices, corn, bean and wheat will be profitable next year, the key ratio is how much bottom line profit is created by each penny move in each of these crops.
If you are a farmer that can grow corn that will yield 180 bushels, and bean or wheat will yield 50 bushels, for every 1 cent move in the crop price, you gain $1.8 in corn and 50 cents in wheat and beans. Therefore, this ratio is about 3.6 to one. Beans and wheat will have to increase in price by at least 3.5 times higher for their crop to be worth more than corn. If you can double-crop beans with wheat, then this ratio will probably drop some and you would have to run the numbers for your farm.
These USDA numbers most likely means the market will need to bid up corn price substantially to get acres away from wheat and beans, however, in this bidding up, bean and wheat will also have to be bidded up to keep the needed acres for those crops.
Make sure you have your budget spreadsheets geared up for the changes in these prices to adequately prepare you for next year's plantings (or winter wheat for this year). All in all, next year should be profitable, just make sure you pick the crop with the most potential profit.