Crop production costs decline for 2016

Crop production costs decline for 2016

Production cost in Iowa is estimated to be down by about 6% for corn and 2.5% for soybeans compared to 2015.

EDITOR'S NOTE: Alejandro Plastina is an assistant professor and extension economist at Iowa State University. Contact him at [email protected].

The total cost to produce corn and soybeans in Iowa is expected to fall this year, by 6% for corn and 2.5% for soybeans.

CONTROL COSTS: With low grain prices and low-to-negative profit margins, farmers need to update their cost estimates and evaluate whether cash rental rates for cropland should be renegotiated, says ISU Extension economist Alejandro Plastina. Consulting knowledgeable agronomists to decide the best ways to trim production costs and taking advantage of early price discounts on crop inputs is also advised.

The cost per bushel of corn, assuming a yield of 180 bushels per acre for corn following soybeans in the rotation, is projected by Iowa State University to be $3.99 per bushel. For corn following corn, assuming 165 bushels per acre yield, the cost is $4.63 per bushel. For soybeans, the total cost assuming a yield of 50 bushels per acre, is projected at $10.67 per bushel for the herbicide tolerant variety and $10.66 for the non-herbicide tolerant variety.

Looking at cost per acre, here's how the two years 2015 and 2016 compare:

Figure 1: Cost per acre of corn following corn in Iowa

Crop production costs decline for 2016

Figure 2: Cost per acre of corn following soybeans in Iowa

Crop production costs decline for 2016

Figure 3: Cost per acre of soybeans following corn in Iowa

Crop production costs decline for 2016

These cost estimates are representative of average costs for farms in Iowa. Very large or small farms may have lower or higher ?xed costs per acre. The annual estimates provided by Iowa State University are to be used as guidelines to help you compare and figure your own costs for your farming operation.

Fertilizer, machinery and land rent costs to decrease
A substantial decline in fertilizer and lime prices, machinery costs and land rents are expected to more than offset increases in costs for crop protection, especially herbicides, for 2016. Labor costs are projected flat into 2016. Land rent is projected to be slightly lower than last year. Rents for low-, medium- and high-grade land are projected 1%, 2.5% and 5% lower, respectively, than rental rates used to estimate 2015 costs of crop production in Iowa.

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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. ISU is using a diesel fuel price of $2 per gallon and an LP price of $1.10 per gallon. 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 soybean varieties.

Despite lower cost to produce, crop margins are negative
The accumulated declines in the total cost of corn and soybean production amount to 8% since 2013 and 4% since 2014. However, these cost reductions are dwarfed by the reduction in corn and soybean prices. Corn prices have dropped by about 47% and soybean prices have declined 37% between 2012 and 2015.

Gross margins per bushel, or the difference between prices and total costs, amount to negative $1.28 for corn following corn, negative 58 cents for corn following soybeans, and negative $2.06 for herbicide-tolerant soybeans in 2015. Correspondingly, the gross margins per acre amount to negative $211 for corn following corn, negative $104 for corn following beans and negative $103 for soybeans.

Price outlook is stronger for corn than soybean prices in 2016
Based on futures prices as of January 7, the projected 2016 marketing year average prices for corn and soybeans are $3.58 and $8.35 per bushel, respectively. Using those crop prices, the gross margins are projected to become less negative for corn and more negative for soybeans as we move further into 2016. The margin for 2016 crop marketing year would be negative $1.05 per bushel for corn following corn, negative 41 cents for corn following soybeans, and negative $2.32 for herbicide-tolerant soybeans.

Correspondingly, the gross margins per acre would amount to negative $173 for corn following corn, negative $75 for corn following soybeans, and negative $116 for soybeans.

Look for ways to cut production costs, without hurting yield
With negative gross margins, producers are looking for ways to reduce costs without hurting their revenue potential. Since land rents account for a substantial portion of total costs, cash rent renegotiations have surged over the past year. The cash rents that would result in total projected costs equal to total projected revenues per acre (the tenant's residual) in 2016 are $93 for corn following corn, $191 for corn following soybeans and $150 for herbicide tolerant soybeans.

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Those cash rents are 62%, 22% and 39% lower, respectively than the $246 per acre reported in ISU's latest annual survey of cash rental rates reported in Iowa. The results of the survey are in a publication "Cash Rental Rates for Iowa 2015 Survey", available on ISU's Ag Decision Maker website in File C2-10.

Keep this in mind when using ISU production cost estimates
When you use ISU's cost of production estimates for 2016 as a guide to help calculate the costs for your farming operation, consider these points.

First, fertilizer and lime costs include volume and early purchase discounts. Second, farmers who are paying land rents higher than the rents estimated in ISU's cost of production report might face a higher total cost of production. Third, in order to be able to compare budgets over a period of time, the ISU calculations are based on a fixed rate of input use.

This fixed rate of input use 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 farmers might opt for planting seeds with fewer traits than in other years, to save on front-loaded input costs.

What is your cost of production for 2016 for corn, soybeans?
Keep in mind that the ISU crop budgets prepared annually are calculated assuming average yields, which remains a constant method that has been used through time. If an El Nino weather pattern develops and characterizes the climate conditions in 2016, then there is a high chance of having higher than average yields. In that case, cost of production per bushel might be lower than indicated in the ISU report.

A publication "Estimated Costs of Crop Production in Iowa, 2016" has information to help you figure your cost for your farm. It's available at extension.iastate.edu/agdm as file A1-20. ISU's estimates represent typical costs and are only intended to be guidelines. Actual costs 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 ISU website.

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