By Matt Stockton and Devin Broadhead

One of the most basic questions farmers must answer on an annual basis is what to plant. In some cases, this is simply a choice among cultivars. In others, it is a choice among different crop types. In Nebraska, the choice may vary considerably since many different crop types are grown. But how does that decision affect profitability?

The profit equation in its simplest form can be defined as total revenue (TR) minus total costs (TC) equals profit. This profit equation captures the physical realities of production by using both revenue and cost measures. This fact makes this equation a powerful tool for making many business and production choices. This equation also makes the relationship between costs and revenue simple to apply.

In the instance of the varying corn and soybean rotations, several biological factors are generally realized and accepted. First, corn following soybean production can be expected to exceed continuous corn production yields. Irrigated fields often have less of an increase in yields compared to dryland.

Second, soybean productivity is increased following one year of corn culture, but even more so following two consecutive years of corn production.

Third, soybean production fixes nitrogen that may be available for the following season’s crop. This usually amounts to about 40 to 60 pounds of N per acre depending on the conditions and productivity of the soybeans.

Obviously, the TR generated from the production of any crop or crop rotation must exceed the TC of producing that crop for profit to be realized. In this case, TR is defined as the price per value of the product being produced multiplied by the quantity produced.

The production of 100 bushels per acre of corn sold at a $4 market price provides a total revenue per acre of $400. The same calculation for soybeans could be made depending on its yield and value at the time it is sold.

TC is more complex and can be further divided into two main components — total fixed costs (TFC) and total variable costs (TVC). The TFC is a cost that is realized regardless of productivity and is fixed for the relevant time period. In a single season, a fixed cost could be a set price for renting land ($300 per acre). TVC are those things that vary and are related to productivity, like nitrogen fertilizer.

Because corn is more productive following soybeans and some residual nitrogen is available, a higher TR would be expected and a lower TVC would show that corn grown following soybeans is more profitable than corn grown following corn.

The problem with this simple analysis is it doesn’t account for the fact that growing soybeans the previous year may have been more or less profitable than growing corn. So, a good decision requires considering the value of the rotation over its duration — in this case, a minimum of two years. The appropriate answer to the question requires an analysis over the full cycle of the rotation.

The profitability of growing continuous corn compared to alternating with soybeans in some combination is specific to individual producers. Looking at past information from Iowa, given historical average yields, costs and prices, it can be seen that in some years soybean production was more profitable and less costly than corn production and vice versa.

Market values and production costs vary enough among years so that neither crop dominates as always being most profitable. These facts point to the importance of individual farmers knowing the potential productivity of both crops on their respective farms, understanding trends in their local corn and soybean market and having a handle on the varying differences in costs.

It's a good idea to balance these primary effects when making a crop selection. Producer’s crop selection decisions become more profit-centered as they can accurately quantify the three primary effects — productivity, costs and prices.

Crop rotations have a number of biological and economic implications. When the profit equation is applied, decision-makers can make profit-centered choices for their farm. Crop rotations are best analyzed as multiyear rotation plans. Each of the three primary drivers — prices, expected fertilizer costs and expected yields — can potentially affect rotation choice and become an individual farm decision.

Obviously, you can't predict the future, but it is smart to consider forecasted prices for markets and production costs. For this reason, it is vital to do the math to clearly see the outcome and make a fair comparison among cropping alternatives.

Stockton is an associate professor of agricultural economics at the University of Nebraska-Lincoln. Broadhead is an ag economics research technologist at UNL. This report comes from Cornhusker Economics.