Managing farm costs key to profitability in 2021

Alejandro Plastina

Written by Alejandro PlastinaExtension Economist, plastina@iastate.edu

Corn and soybeans futures prices have recently rallied to their highest levels in years, providing hope for a market-driven profitable 2021 crop year. However, the only certainty about future prices is that they will continue to change until their expiration date, and they could plummet as fast as they rallied. Unless farm operators use futures or options to create a floor for their crop prices, current future prices might foster a false sense of security.

Winter is a great time for farm operators to concentrate on calculating their own costs of crop production, not only because they have more control over costs than crop prices, but also because knowing their break-even prices might ease the struggle to lock-in profits before harvest time. The latest issue of the ISU Extension and Outreach, Estimated Costs of Crop Production, reports average cost estimates for Iowa farms in 2021, and provides guidelines to help farmers calculate their own costs of production.

Estimated Costs of Crop Production in Iowa
Figure 1.

Total costs of corn and soybean production per acre are expected to increase, respectively, by 2.1% – 3.4% and 2.6% in 2021. However, higher expected corn yields over a 30-year trend for 2021 suggest that on a per bushel basis, costs would increase by 1.0% – 2.6% to remain below their 2019 marks (Figure 1). Fuel and insecticide costs, interest expenses on pre-harvest input financing, and crop insurance premiums are projected lower in 2021.

The estimated cost of production for continuous corn is $3.88 per bushel for a target yield of 166 bushels per acre, and it goes down to $3.82 for target yields of 184 and 202 bushels per acre. The estimated costs of production per bushel for corn following soybeans are $3.34, $3.31, and $3.32 for target yields of 181, 201, and 221 bushels per acre, respectively.

Cost of production estimates for herbicide tolerant soybeans amount to $9.16, $8.94 and $8.74 per bushel for target yields of 50, 56, and 62 bushels per acre, respectively. The total cost per bushel of soybeans is projected at $9.04 for non-herbicide-tolerant beans at 56 bushels per acre, according to the report.

The cost estimates are representative of average costs for farms in Iowa. Very large or small farms may have lower or higher fixed costs per acre. The full report is available online through the Ag Decision Maker website. The publication also includes budgets for alfalfa hay establishment with an oat companion crop and by direct seeding. Annual production costs for established alfalfa or alfalfa-grass hay as well as a budget for maintaining grass pastures are included. Actual costs can be entered in the column for “Your Estimates”, or by using the electronic spreadsheet Decision Tools on the Ag Decision Maker website.

Breakdown of costs for 2021

Costs of Crop Production in Iowa - 2021
Figure 2.

For corn, land costs account for about one-third of total costs of production (Figure 2). Values of $187, $222, and $256 per acre rent charges for the low, medium, and high quality land were assumed. Variable costs represent just over half of the costs of production, and nitrogen and seed costs account for about 43% of the variable costs. Nitrogen price is projected stable at $.34 per pound in 2021, but total nitrogen costs are projected to go up by 6 to 11% reflecting the higher application rates recommended by the ISU Corn Nitrogen Rate Calculator. Corn seed costs are expected to increase by 2% to $262 per bag.

Land costs account for 44% of total costs of soybean production, and variable costs account for an additional 42%. Seed and fertilizers amount to 44% of variable costs. Phosphorus and potassium were charged, respectively, at $.39 and $.30 per pound. Machinery costs are projected to decline by 6% primarily due to lower diesel costs: $2.02 in 2021 versus $2.53 in 2020.

Profitability Prospects for 2021

There is substantial uncertainty regarding crop prices in the coming season. The most recent USDA projections for 2021/22, published in October 2020, put the average US farm prices for corn and soybeans at $3.65 and $10.00. In this scenario, production of herbicide tolerant and non-herbicide tolerant soybean would be profitable for all target yields considered in the report. Net returns per acre to herbicide-tolerant soybean production would range from $42 to $78 per acre, depending on target yield and tillage practice.

Corn production would not be profitable in a continuous corn scenario if the price per bushel is $3.65. Net returns to corn following soybeans would range from $55 to $74 per acre under conventional tillage, and average $82 and $75, respectively, under strip tillage and no-till.

Current futures prices seem to indicate that corn and soybean prices might average $4.45 and $11.40 per bushel in 2021/22, respectively. In this optimistic scenario, corn production would generate profits north of $95 per acre in a continuous corn rotation, and above $200 per acre following soybeans. Profits from soybean production would exceed $110 per acre. However, futures prices are currently reflecting a market reaction to unexpected USDA production and stocks figures, and they could retrench fast once the market reassess the real impact of the new information. In any case, farm operators can always improve their profitability or limit losses by focusing on managing costs and using their break-even estimations to implement a tailored marketing plan.

Cost Calculations

Knowing costs is key, as it is to understand the assumptions behind the budgets used in the calculations. When using the ISU cost of production estimates for 2021, keep several things in mind. First, fertilizer and lime costs include volume and early purchase discounts. Second, farmers paying land rents higher than the ones projected in the report might face higher costs of production. Operator landowners on fully paid land will have much lower accounting costs, since the cash rent used in the report will only be an opportunity cost and not a cash cost (as it is for tenants).

Reference yields for corn and soybean budgets in the annual Iowa State University Extension and Outreach report reflect 30-year trend yields. In the latest projections used for the 2021 report, corn yields are 2 bushels higher than for 2020, while soybean yields remained unchanged.

Starting in 2021, the amount of nitrogen applied to corn production follows the recommendations from the ISU Corn Nitrogen Rate Calculator. The projected corn-to-nitrogen price ratio used in the calculator amounted to 12.35. Such methodological adjustment resulted in an average 6% increase in the amount of nitrogen applied to corn following corn, and an 11% increase in the amount applied to corn following soybeans.

Conclusions

Producers must have a strong grasp of their own production costs, and the ISU Extension report provides a step-by-step guide to help them estimate break-even costs, and serves to benchmark operations and trigger relevant questions on how to better manage enterprise costs.

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Client Corner: How can I find a rental rate for a piece of machinery?

How can I find a rental rate for a piece of machinery?

Rental rates for some machinery items are shown on the ISU Extension Custom Rate Survey. For items where just the custom rate is reported, a worksheet for estimating rental rates for those items is included at the end of the Custom Rate Survey. The calculations and an example using a Tandem Disk are included below.

Estimating a Machinery Rental Rate

Example:

Tandem Disk

1. Custom charge (includes labor, fuel, tractor)

$________/acre

$14.20

2. Percent of custom charge that is for interest, insurance, depreciation, and repairs (excluding fuel and labor) (use 60% for tillage, 65% for planting and harvesting)

x ________%

x 60%

3. Rental value, including tractor (1 x 2)

= $________/acre

= $8.52

4. Tractor rental value, if tractor is not provided:_______HP x $_______per hp-hour rental rate / _______acres/hour =

Ex: 150 HP x $.27 (per hp-hour rental rate) / 15 acres/hour = $2.70

– $________/acre

– $2.70

5. Implement rental value, without tractor (3 minus 4)

= $________/acre

= $5.82/acre

 

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Drought Questions: What is the custom rate for renting a pull-type silage chopper only?

Contributed by William Edwards, extension economist

Question: What is a fair rental price for a pull-type silage chopper? The custom rate survey includes tractor, fuel, etc., but we have a request for just using our chopper due to the circumstances this year.

Answer: While the Custom Rate Survey does not directly address this question, the worksheet at the bottom of the second page of the survey bulletin can be used to estimate a rental rate for a machine. An example is below. This assume the person using the chopper supplies labor, fuel and the tractor to pull it. You can use your own estimate of the horsepower needed to pull it. Adjust the first step if it is more than a 2-row chopper.

1. Custom charge for chopping corn silage ($44.85 (average value)/ row x 2 rows =  $89.70 per hour)
2. Take 80% (deduct 20% for fuel and labor) (80%  x  $89.70)
3. Repairs, depreciation, interest on chopper and tractor (= $71.76 per hour)
4. Subtract tractor rental value (($.25 x 200?? hp) =   $50.00 per hour (tractor rental charge from first row under Machine Rental section))
5. Implement rental value ( = $21.76 per hour (to cover . repairs, depreciation, interest on chopper, only))

For more on Custom Machinery Rates, see Ag Decision Maker Information File A3-10, 2012 Iowa Farm Custom Rate Survey, and the Decision Tool on Calculating Machinery Costs. Other drought related answers and resources from ISU Extension and Outreach are available on the Dealing with Disasters website.

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Calculate your machinery costs

The 2011 Custom Rate Survey was recently posted on the Ag Decision Maker web site. The survey is based on responses from 179 Iowa farmers, custom operators, and farm managers. For each operation, the average rate from the survey and the range are shown. Twenty-two percent of the respondents perform custom work, 14 percent hire work done, and 64 percent indicated doing both. The rate schedule is intended only as a guide. Actual custom rates may vary according to availability of machinery in a given area, timeliness, operator skill, field size and shape, crop conditions, and the performance characteristics of the machine being used.

To find out your actual cost of ownership and operation, a Decision Tool is available. The spreadsheet allows you to choose the type of machinery, and then enter purchase price, usage, field capacity, and current price of fuel to calculate the cost of ownership and operation. The spreadsheet allows you to calculate costs based on the life of the equipment, for the rest of its useful life, or for the current year only. The Custom Rate Survey is available from Ag Decision Maker here.

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