One thing that is evident in 2015: Average yields and current market offerings are making for negative profit margins with breakeven prices above the market. Producers must monitor costs closely and strive to produce an above-average crop in an efficient manner. That is easy to say, but difficult to accomplish.

While current market prices may be below breakeven prices, producers should look closely at this latest rally to price part of the crop. Higher prices could be in the offering but rallies generally need to be rewarded to some degree.

While net returns at average yields are negative, they are still somewhat indicative of what producers in Tennessee planted. Cotton acres dropped with an increase in grain sorghum or milo and soybeans. A better idea of acres and yields will come in August as Farm Service Agency releases certified acres numbers and USDA incorporates producer yield surveys into their supply and demand numbers.

In the last two months since the May 12, 2015 USDA World Agricultural Supply and Demand Estimates, grain markets have rallied. Corn prices for harvest delivery in West Tennessee have led the way, up 17% followed by soybeans and grain sorghum up 9%. Wheat also rallied over 9% going into harvest. However, while the rally is welcome will it be enough to push prices above breakeven levels?

Using Tennessee state average yields and the 2015 state average wheat yield, some basic projections can be made. Of course, individual farm operations will vary depending on their own unique cost structure and yields.

I would like to point out the cotton price of 70 cents that is being used in the profitability outlook. I would guess that there has been very little cotton priced for 2015. The price of 70 cents is made up of a cash price of 62 – 63 cents and gin rebates (seed & hauling) of 7-8 cents. The cash price of 62-63 cents is composed of a loan rate of 52 cents or 53 cents with a slight premium, and a 10-cent equity from the buyer.

This 70 cent price has been used for the last few months even while cotton prices have changed up and down. Basically, this is a result of the way the cotton marketing loan program works. As long as cotton prices stay in a roughly 63-70 cent December futures range, cotton equities most likely will stay in that 10 cent range. My observations and discussions with cotton buyers would indicate that if futures move above 70-71 cents, then the prices to the producers would start to move up penny for penny. Grain prices are those available for harvest delivery in West Tennessee.

Many ways to look at profitability numbers

These profitability numbers are useful in getting a general idea on the profit margins per acre of the crops of interest in Tennessee. Variable and fixed expenses are based on the University of Tennessee Extension row crop budgets. Variable expenses are the out of pocket cash costs that producers have such as seed, fertilizer, chemicals, fuel, repairs, etc.

Fixed costs are equipment functional depreciation as well as interest on equipment. Some producers may want to use their equipment payments on a per-acre basis for their fixed cost. Land costs are 25 percent of the gross revenue minus 25 percent of crop insurance costs. While there are many different types of share rent used in Tennessee, this percentage is used as a method of comparison.  

There are several ways to look at these profitability numbers depending on a producer’s individual situation. Producers who have owned or cash rent ground may be interested most in the returns over variable expenses. The producer then can deduct his cash rent or land payment from what is left to get an idea of profitability before fixed cost are deducted.

Producers who share rent ground may want to look closely at the returns over variable and land costs then take their own fixed costs out. Producers wanting just a general idea of profitability may look just at the net returns which have variable, land, and fixed cost deducted from gross revenue. Looking at that profitability number and the breakeven price needed to cover all expenses at the selling price can aid producers in their marketing plan.