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Better Than Mediocre

April 26, 2014
By: Ed Clark, Top Producer Business and Issues Editor
iStock Crops and Clouds
  
 
 

A 5% boost across the board is big for your bottom line 

With expected corn and soybean returns hovering just above breakeven, reining in costs is of the essence. The most logical way to lower costs is to harvest more bushels per acre and hit the sweet spot with crop mix. 

Crop budgets show soybeans still have the profit edge this year, with positive earnings of $25 per acre compared with a loss of $46 for corn, according to Purdue University. Even just a slight shift in yields tells a different story because university crop budgets use averages.

For example, while Indiana data show a total breakeven of $4.88 per bushel for corn, a 10% increase in yield decreases that to $4.44. Let’s say you increase corn yield by 10%, but soybean yield slips by 10%. That’s not pushing the envelope either, as corn and soybean yields often move in divergent directions. Keeping all other factors constant, corn then shows a positive $29-per-acre contribution to earnings while soybeans show a negative $37. Reversing the scenario to a 10% yield advance for soybeans but corn yields down 10% gives more than a $200-per-acre profit spread: a positive $86 per acre for soybeans and negative $121 for corn.

Highly profitable farms do more than just post high yields. "There is no silver bullet factor; the top 20% tend to do a little bit better job in every category," says Dale Nordquist, University of Minnesota ag economist. 

Ironically, Minnesota farm management association data show that the top profit group not only has the highest yields, but they spend less money on inputs, even fertilizer. "It comes down to management," he notes.

A good goal is to improve 5% in all categories. This doesn’t sound like a lot, "but because it is cumulative and compounding, being 5% better per year for 10 years is huge," says Danny Klinefelter, Texas A&M ag economist

It pays to buy right. Yields are important, but other aspects of farm management are just as critical. A 10% reduction in variable costs takes corn’s breakeven from $4.88 to $4.62 per bushel, while 10% higher variable costs increase it to $5.15. 

"Buying inputs is as important as selling crops," says Michael Langemeier, ag economist, who calculated the Purdue data.

Say one producer pays 10% more than average while his neighbor pays 10% less on corn variable costs. That’s an $86-per-acre swing. 

"Getting a better deal is more than just being a good negotiator; it’s also about timing—knowing the best time of year to book inputs for the best price," Langemeier says. On fertilizer, for example, that’s often late summer. 

In addition to inputs, the ability to cut a good deal on rental rates with landlords or secure a lower-than-average interest rate from lenders affects your bottom line. 

Then there’s everyone’s favorite: marketing. While Purdue’s budget shows a negative $46 in earnings from corn this year, a 10% higher price yields a positive $29, while a 10% lower price drops earnings to a negative $121. The $150-per-acre difference is attributed to a 38.8¢ swing in per-bushel price, a range that can easily happen in a day.

The spread between soybeans and corn between now and final planting decisions was the $64 question at press time. "The soybean/corn price ratio has narrowed to 2.4 and it might narrow even further," notes Steve Johnson, farm management specialist with Iowa State University Extension. 

As a result, there is potential for a greater than normal divergence from the Prospective Plantings report to final planted acres, adds Darrel Good, University of Illinois ag economist. It will all boil down to expected yields. 

For a summary on how a 10% adjustment in price, yield and variable cost can affect breakeven prices, visit www.FarmJournal.com/2014_breakevens

 


 

 

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FEATURED IN: Farm Journal - Late Spring 2014
RELATED TOPICS: Crops, Farm Journal, Production

 
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