The “New” Economics of The “New” Economics of Crop Production in 2008Crop Production in 2008

Paul D. MitchellPaul D. MitchellAssistant ProfessorAssistant Professor

Agricultural and Applied EconomicsAgricultural and Applied EconomicsUniversity of Wisconsin-MadisonUniversity of Wisconsin-Madison

These slides are a conglomeration of These slides are a conglomeration of slides from various extension slides from various extension

presentations made during Jan-Feb presentations made during Jan-Feb 20082008

Crop Prices are HighCrop Prices are High Closing prices on CBOT Tuesday 2/27Closing prices on CBOT Tuesday 2/27 Dec 08 corn $5.56/buDec 08 corn $5.56/bu Nov 08 soybean $14.27/buNov 08 soybean $14.27/bu Sep 08 wheat $11.42/buSep 08 wheat $11.42/bu Sep 08 oats $4.45/buSep 08 oats $4.45/bu

These prices drive the image that These prices drive the image that farmers are rolling in the moneyfarmers are rolling in the money

The “New” The “New” Economics of Corn Economics of Corn

and Soybeansand Soybeans

Yields are IncreasingYields are IncreasingAnnual Annual increase increase (bu/ac) in (bu/ac) in NASS county NASS county average yield average yield from 1977 to from 1977 to 2006 as 2006 as estimated by estimated by regressionregression

But Input Costs Have But Input Costs Have IncreasedIncreased

Fertilizer prices are leading the wayFertilizer prices are leading the way Seed is also up about 15%Seed is also up about 15%FertilizerFertilizer 20082008 20072007 % %

increaseincreaseUreaUrea 505505 409409 23%23%AnhydrousAnhydrous 775775 514514 51%51%32% N Solution32% N Solution 403403 269269 50%50%Ammonium Ammonium SulfateSulfate

240240 209209 15%15%

DAPDAP 578578 334334 73%73%PotashPotash 418418 254254 65%65%Prices from first week January of each year.Prices from first week January of each year.

0

50

100

150

200

250

300

350

400

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Cost

s ($

/ac)

cornsoybeans

U of IL non-land costs for corn and U of IL non-land costs for corn and soybean production in northern ILsoybean production in northern IL

Corn up $42/ac Corn up $42/ac from 2007from 2007Soybeans up Soybeans up $18/ac$18/ac

-30

-20

-10

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Annu

al In

crea

se ($

/ac)

cornsoybeans

Annual Increase: U of IL non-land Annual Increase: U of IL non-land costs for corn and soybeans in costs for corn and soybeans in

northern ILnorthern ILCosts are Costs are Rising faster Rising faster and fasterand faster

$$$$

$$

The “Real” Economics of Corn and The “Real” Economics of Corn and SoybeansSoybeans

Quick Cost of Production Quick Cost of Production EstimatesEstimates

Quick cost of production estimates for Quick cost of production estimates for corn, soybeans and wheat in Wisconsincorn, soybeans and wheat in Wisconsin

Use major cost categoriesUse major cost categories Neither scientific nor rigorous, but Neither scientific nor rigorous, but

based on simple assumptionsbased on simple assumptions Farmers should do their own cost and Farmers should do their own cost and

returns projectionsreturns projections

Fertilizer CostsFertilizer CostsPricPricee

CornCorn SoybeansSoybeans WheatWheat

$/lb$/lb AmtAmt CostCost AmtAmt CostCost AmtAmt CostCostNN 0.550.55 150150 82.582.5

0000 00 8080 44.044.0

00PP 0.500.50 1010 5.005.00 5050 25.025.0

004040 20.020.0

00KK 0.350.35 1010 3.503.50 5050 17.517.5

004040 14.014.0

00TotalTotal 91.091.0

0042.5042.50 78.0078.00

Seed CostsSeed Costs CornCorn

32,000/ac @$168/bag = $67.2032,000/ac @$168/bag = $67.20 SoybeansSoybeans

1.2 bag/ac @ $32/bag = $38.401.2 bag/ac @ $32/bag = $38.40 WheatWheat

Assume $30/acAssume $30/ac Lots of numbers out thereLots of numbers out there Depends on variety, germination rate, etc.Depends on variety, germination rate, etc.

Input Cost SummaryInput Cost SummaryItemItem CornCorn SoybeansSoybeans WheatWheat

FertilizersFertilizers 91.0091.00 42.5042.50 78.0078.00

SeedSeed 67.2067.20 38.4038.40 30.0030.00

PesticidesPesticides 30.0030.00 25.0025.00 20.0020.00

Insurance (75% Insurance (75% CRC)CRC)

25.0025.00 13.0013.00 15.0015.00

MiscellaneousMiscellaneous 10.0010.00 10.0010.00 10.0010.00

Interest (8% @8 Interest (8% @8 mo.)mo.)

11.9011.90 6.876.87 8.168.16

TOTALTOTAL 235.10235.10 135.77135.77 161.16161.16

Machinery CostsMachinery Costs Hard to estimate/measureHard to estimate/measure Very specificVery specific to each farmer to each farmer Use estimates for 2008 machinery costs Use estimates for 2008 machinery costs

from Iowa Sate Universityfrom Iowa Sate University Adjusted upwards for WI about 25% for Adjusted upwards for WI about 25% for

pre-harvest tillage, about 5% for harvestpre-harvest tillage, about 5% for harvest Smaller fields and farmsSmaller fields and farms Higher custom ratesHigher custom rates

Machinery CostsMachinery Costs

ItemItem CornCorn SoybeanSoybeanss

WheatWheat

Pre-HarvestPre-Harvest 38.5038.50 32.0032.00 28.0028.00Harvest Harvest (Combine)(Combine)

27.5027.50 27.0027.00 25.0025.00

Haul/HandleHaul/Handle 11.0011.00 3.503.50 6.006.00DryDry 40.0040.00 0.000.00 3.003.00

TOTALTOTAL 117.00117.00 62.5062.50 62.0062.00

Cost Estimate SummaryCost Estimate SummaryItemItem CornCorn SoybeansSoybeans WheatWheatInputsInputs 235235 136136 161161MachineryMachinery 117117 6363 6262

TOTALTOTAL $352/ac$352/ac $199/ac$199/ac $223/ac$223/acRange Range

(±25%)(±25%)$265-$265-$440$440

$150-$150-$250$250

$165-$165-$275$275

Does not include cost for Does not include cost for land, land, management, or investment of capitalmanagement, or investment of capital

Corn following Corn Corn following Corn vs. vs.

Corn following SoybeansCorn following Soybeans This cost estimate was corn following This cost estimate was corn following

soybeans, what about corn following corn?soybeans, what about corn following corn? Need more N fertilizer: add 20 more lbsNeed more N fertilizer: add 20 more lbs

20 x 0.55 = $11/ac in added cost20 x 0.55 = $11/ac in added cost Soil insecticide or transgenic hybrid for Soil insecticide or transgenic hybrid for

corn rootworm controlcorn rootworm control $19/ac in added cost$19/ac in added cost

Together these imply $30/ac in added Together these imply $30/ac in added costcost Add $30 to corn costs in previous tableAdd $30 to corn costs in previous table

How do you decide what to How do you decide what to plant?plant?

Can use university budgets or other Can use university budgets or other peoples’ estimates of the yields, peoples’ estimates of the yields, prices, costs, and net returns to prices, costs, and net returns to different cropsdifferent crops

Problem: These are usually averages Problem: These are usually averages or even guessesor even guesses

Reality: Costs and returns vary Reality: Costs and returns vary greatly among farmersgreatly among farmers

You want You want youryour costs and returns costs and returns

1996 Data for 1996 Data for about 250 about 250 Minnesota Minnesota Corn and Corn and Soybean Soybean Farmers Farmers

Source: K. D. Olson and H. D. Source: K. D. Olson and H. D. Lohano “Will the true Lohano “Will the true cost of production please cost of production please stand up?”stand up?”

Corn

Soybeans

Illinois Data for 2006Illinois Data for 2006

Source: Gary Schnitkey “Crop Production Cost and Rotation Source: Gary Schnitkey “Crop Production Cost and Rotation Decisions”Decisions”

Making BudgetsMaking Budgets Make budgets to estimate Make budgets to estimate youryour net net

returns for corn after soybeans, plus returns for corn after soybeans, plus corn after corn, soybeans, and wheatcorn after corn, soybeans, and wheat

Budgets can be as simple or detailed as Budgets can be as simple or detailed as you want to make them: you want to make them: youyou decide decide

Estimate Estimate youryour costs and returns, as it is costs and returns, as it is youryour money, money, youryour responsibility, responsibility, youyou live live with the consequences of with the consequences of youryour decisions decisions

My GoalMy Goal Present some resources you can usePresent some resources you can use Give you some things to think aboutGive you some things to think about

Most are internet based. If you want Most are internet based. If you want the electronic files or paper copies, the electronic files or paper copies, please contact me.please contact me.

Wisconsin Resources Wisconsin Resources AvailableAvailable

UW Center for Dairy ProfitabilityUW Center for Dairy Profitabilitywww.cdp.wisc.edu/crop%20enterprise.htmwww.cdp.wisc.edu/crop%20enterprise.htm

UW-Team Grains web pageUW-Team Grains web pagewww.uwex.edu/ces/ag/teams/grains/www.uwex.edu/ces/ag/teams/grains/

My Extension web pageMy Extension web pagewww.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm

Detailed Excel spreadsheets with base cases Detailed Excel spreadsheets with base cases and then you enter your numbersand then you enter your numbers

Estimating CostsEstimating Costs Variable Inputs: Easy = price times Variable Inputs: Easy = price times

quantity, then add them all upquantity, then add them all up Machinery/Equipment Costs: HarderMachinery/Equipment Costs: Harder Land, Labor, and ManagementLand, Labor, and Management

Usually the unpaid costs of your time, Usually the unpaid costs of your time, management skill, and energymanagement skill, and energy

Treat as residual: What’s left after you Treat as residual: What’s left after you pay for everything else?pay for everything else?

Then ask, Is it enough to justify all the Then ask, Is it enough to justify all the work?work?

Machinery CostsMachinery Costs Economic Engineering ApproachEconomic Engineering Approach

Ron Schuler on UW Team Grains webpageRon Schuler on UW Team Grains webpage Google “Machinery Cost Estimates”Google “Machinery Cost Estimates” U of IL, U of MN, IA State, PurdueU of IL, U of MN, IA State, Purdue

Simple Rules of ThumbSimple Rules of Thumb ““Fast and Simple Method to Estimate Fast and Simple Method to Estimate

Typical Machinery Costs” on my web pageTypical Machinery Costs” on my web page Your cost 25%-50% higher than custom rateYour cost 25%-50% higher than custom rate

It’s your money, you decide how much It’s your money, you decide how much detail you want!detail you want!

What’s should I plant after last What’s should I plant after last year’s corn? year’s corn?

Once you have cost estimates you are Once you have cost estimates you are comfortable with, you can answer this comfortable with, you can answer this question with yield and price question with yield and price assumptionsassumptions

Should I plant corn after corn?Should I plant corn after corn? Should I plant soybeans instead?Should I plant soybeans instead? What about wheat?What about wheat?

Net ReturnsNet ReturnsCorn after Corn after

CornCornCorn Corn after after

SoybeanSoybeanss

SoybeanSoybeanss

WheatWheat

YieldYield 155155 180180 5050 8080PricePrice 4.504.50 4.504.50 11.5011.50 7.507.50RevenueRevenue 697.50697.50 810.00810.00 575.00575.00 600.0600.0

00CostsCosts 382.00382.00 352.00352.00 199.00199.00 223.0223.0

00Returns to land and operatorReturns to land and operator

315.50315.50 458.00458.00 376.00376.00 377.0377.000

RentRent 100100 100100 100100 100100Net Net ReturnReturn

215.50215.50 358.00358.00 276.00276.00 277.0277.000

Use your own yields, prices, and Use your own yields, prices, and costscosts

Main IdeaMain Idea Develop cost estimates for your farmDevelop cost estimates for your farm Assume reasonable yields for your farmAssume reasonable yields for your farm What prices do you need to make What prices do you need to make

soybeans and wheat equal to corn after soybeans and wheat equal to corn after corn returns?corn returns?

How likely are you to get these prices or How likely are you to get these prices or better?better?

Change your assumptions to see how Change your assumptions to see how sensitive your finding aresensitive your finding are

Other Factors to ConsiderOther Factors to Consider Prices and yields can be higher or lower than Prices and yields can be higher or lower than

you assumed: few years are average yearsyou assumed: few years are average years Growing more corn means more acres to Growing more corn means more acres to

plant and more acres to harvestplant and more acres to harvest More labor and/or different equipment needed, More labor and/or different equipment needed,

which increases costswhich increases costs Yield losses if you can’t get all of your fields Yield losses if you can’t get all of your fields

planted or harvested in timeplanted or harvested in time More specialized, so more risk: weather, More specialized, so more risk: weather,

pest, or price issues that affect corn affect a pest, or price issues that affect corn affect a larger portion of your acreslarger portion of your acres

Questions?Questions?Paul D. MitchellPaul D. Mitchell

UW-Madison Ag & Applied EconomicsUW-Madison Ag & Applied EconomicsOffice: (608) 265-6514Office: (608) 265-6514Cell: (608) 320-1162Cell: (608) 320-1162

Email: pdmitchell@wisc.eduEmail: pdmitchell@wisc.eduExtension Web Page:Extension Web Page:

www.aae.wisc.edu/mitchell/extension.htmwww.aae.wisc.edu/mitchell/extension.htm