rolling crop fields
EVERY BIT HELPS: 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.

Lower costs bring cautious optimism in 2017

Marked decline in costs of crop production are projected for corn and soybeans.

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. The report shows the cost to produce corn dipping by 12% and soybean production falling by 9% this year. The full report is available online at the ISU Extension store.

Total cost per bushel is projected at $4.08 for corn following corn and $3.51 for corn following soybeans. 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 guides 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 as a result of adjustments in the estimation process to reflect the higher operating efficiency reported on a recent update of the estimated field capacity of farm machines (Ag Decision Maker File A3-24). Labor requirements per acre were reduced by about 2% 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 the Cash Rental Rates for Iowa 2016 Survey (Ag Decision Maker File C2-10), and $5 per acre below the state average reported in the 2016 USDA National Agricultural Statistics Service’s 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 rents 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% and 12%, respectively. But these cost reductions are dwarfed by the 44% and 31% reduction in corn and soybean prices, respectively, between 2012 and 2016.

When you use 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 report 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.

Breaking even in 2017
Lower costs of production along with a well-planned 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 Jan. 12, ISU Extension 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 for $41 per rented acre.

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 a new administration in Washington and potential revisions 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.

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 nonfarm 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. It’s available at extension.iastate.edu/agdm as file A1-20. Actual costs will vary considerably from farm to farm and can be entered in the column for “Your estimates.” Electronic spreadsheets for developing crop production budgets are also available on the Ag Decision Maker website.

Plastina is an ISU Extension economist. Contact him at [email protected].

 

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