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Crop Returns Growing as Production Costs Rise

Crop Returns Growing as Production Costs Rise

Farmers will spend more to produce their 2011 crops but they're likely to make that up – and then some – from higher grain prices, say two Purdue University Extension specialists.

Which crops farmers choose to plant this season also will play a factor in the returns they'll earn, say Craig Dobbins and Bruce Erickson of Purdue's Department of Agricultural Economics. The numbers suggest a corn-soybean rotation is the best choice, with double-crop soybeans/wheat a good option for farmers living in areas where that cropping system is viable.

"At this point in time, contribution margins – the difference between gross revenue and production costs – are really quite large," Dobbins says. "If one is looking for a place to expend energy from now until you can get out into the field and plant, I think one ought to focus that energy on protecting the margin that you've got in crop production today."

Dobbins, Erickson and fellow Extension specialists in Purdue's departments of Agricultural Economics, Agronomy and Botany and Plant Pathology expect farmers to dig deeper into their wallets to grow corn, soybeans and wheat in 2011 than first thought last fall. An updated Purdue Crop Cost & Return Guide outlines those higher cost projections.

Since October, fertilizer and diesel fuel prices have gone up, while crop insurance premiums are likely headed higher, the economists say. On the flip side, pesticide and grain dryer fuel prices have dipped.

It adds up to a per-bushel production cost of $4.19 for rotation corn on average-yielding land, up 30¢ from 2010. The projected cost to produce rotation soybeans this year is $9.73/bu. on average-quality land, a 33¢ jump from one year ago.

Average-quality land is capable of producing 161 bu./acre of rotation corn and 49 bu./acre of rotation soybeans.

Prices to pay

"Fertilizer prices seem to be one of those areas where the cost increases are most noticeable," Erickson says. "Even though fertilizer prices are up compared to last summer, if you look at them relative to grain prices they're not terribly out of line."

Farmers can expect to pay $151/acre to fertilize their rotation corn crop on average land this year. That total represents a $17 increase since the October estimate. Fertilization costs are projected to rise another $7/acre for rotation soybeans on average land, to $69, compared with earlier estimates.

"For a crop like corn that is more energy intensive, we use a lot more fertilizer," Erickson says.

Propane prices have moderated, leading the Purdue specialists to shift their dryer fuel cost projections downward from October. They expect farmers to pay $26/acre to dry their rotation corn crop from average land, compared with the original $33 estimate.

Crop insurance premiums will be set for the year in early March. Dobbins believes they'll go up.

"The premiums one pays on crop insurance get determined, in part, by what the average price is for corn and beans in February," he says. "The exact cost isn't going to be known for a couple of weeks yet, but it's pretty obvious, I think, that the average price for this February is going to be higher than it was last February, which means crop insurance is going to cost significantly more this year than it did last year."

Since the October crop cost guide was issued, per-bushel prices are up 74¢ for corn, $1.52 for soybeans and $1.21 for wheat. That kind of upward movement in prices indicates farmers shouldn't sell crop insurance short, Dobbins says.

"We're in an environment where that's not a place to think about saving costs this year," he said. "It's an issue of finding the policy that you think will work best for you and pay the premium."

Other management implications from the updated crop cost guide include:

  • Rotation corn and soybeans or corn, soybeans and wheat provide similar returns on lower-yielding land.
  • Rotation corn and soybeans is the best option on high-yielding land.
  • Rotation corn and soybeans remain a better cost-return choice than continuous corn.

Down the road, the updated crop production estimates are likely to influence the rates farmland owners charge producers to rent their land, Dobbins says.

"Landlords can make these calculations on potential returns as easy as tenants can, and many of them see big numbers at the bottom of these calculations," he says. "So in many areas cash rents are moving up significantly, and so that's going to be an area that people are likely to see a significant rise in costs, as well."

TAGS: Soybean Corn
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