Corn ear in field

Crop profitability still slim, but better now than a year ago

As the calendar turned to 2017, producers in earnest started fine-tuning their 2017 farm financial plans.

Farm publications appear to be full of equipment auction notices, giving the impression of a bleak outlook for 2017. I think, however, the profitability outlook is better now than a year ago.

Soybean prices for 2017 harvest are 17 percent better now than mid-January 2016. Corn prices are even to up slightly, cotton even, and wheat is currently 8 percent worse, as compared to harvest prices offered in January 2016.

For the most part, variable expenses are down, led by fertilizer. So, from that standpoint, profitability — considering variable, land, and fixed costs — is improved per acre: $31 for cotton, $32 for corn, $80 for soybeans, and $55 for wheat/soybeans. Again, this is how the profitability outlook compares one year to the next.

The 2017 outlook does have the advantage of a higher average yield as yields have been trending up in Tennessee. As producers plan for 2017, they should also use appropriate yields based on their farm’s history.

As a starting point on looking at the profitability outlook for 2017, let’s look at how the big three crops in Tennessee stack up — that is cotton, soybeans, and corn.

2017 Estimated Returns

 

Cotton

Soybeans

Corn

Yield 962 lbs. 44 bu. 144 bu.
Price (as of 1/12/17) $0.71 lb.* $10.20 bu. $3.70 bu.
Revenue $686 $449 $533
Variable Expenses $430 $268 $339
Returns Over Variable Expenses $255 $201 $194
Land Costs (25% of Revenue-  25% crop insurance) $169 $110 $130
Returns Over Variable and Land Costs $86 $91 $64
Fixed Costs Depreciation & interest on machinery $130 $62 $56
Returns Over Specified Cost -$44 $29 $8
Breakeven Price at Average Yield and Specified Cost $0.76 $9.55 $3.64
*Includes gin rebates for seed and hauling

When comparing crops to make cropping decisions, first look at returns over variable expenses, particularly for own or cash rent ground.

In the scenario presented in the table, cotton looks more favorable than soybeans and corn. However, if share rent comes out as in this scenario of 25 percent share (used for comparing purposes), then cotton and soybeans are comparable as the most profitable.

If equipment changes must be made, then fixed equipment cost must be examined and returns over specified costs should be looked at closely.

Another take away from looking at this table and one that I am seeing with producers is: Cotton projects to be a profitable alternative to soybeans or corn, but mainly for the producer who is either already in cotton production or still has cotton equipment. That advantage goes away for the producer who has to purchase cotton equipment — mainly a cotton picker — or will rely on custom harvesting and maybe custom planting.

 

When selecting crops to plant, producers should consider issues that are difficult to put a dollar number on. This includes timeliness of planting, spraying capacity, and harvesting capability. Other factors to consider are capital requirements of each crop, and a producer’s borrowing ability to meet those requirements.

As we look back over the years, it is difficult to dismiss the merits of a diversified cropping plan. It can provide producers some risk protection, because we cannot always accurately project what yields and prices will be for each crop.

Comparing returns in a budget format, while helpful in making cropping decisions, does not give the producer or lender the full financial picture on the operation. In that case, a whole farm financial plan is needed to help examine the profitability considering all overhead type costs, debt payments and family living or owner draw.

Budgets are an important part of that plan and should be incorporated into the plan. There is no doubt profitability will be tight again this year, and producers will struggle with profit margins. A whole farm financial plan should give clarity as to the viability of the operation.

In summary, projected row crop returns in Tennessee look better than a year ago. Profitable crop selection may vary depending on a producer’s land situation (whether own, cash or share rented), equipment availability, and access to capital to put the crop in.

Producers should consider diversification as a means of spreading risk and because it cannot be accurately projected before planting which crop will be the most profitable at harvest. Producers should also consider the benefits of whole farm financial planning to give them a complete picture of the farms financial viability.

In Tennessee, for more on crop budgeting or whole farm financial planning, contact your local Extension office or call the MANAGEment Information Line at (800) 345-0561.

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