Yield and price received for your product are major components of the profitability equation, but expenses and cost are, too. As input prices for 2016 are being realized, cost of production has come down and may come down further depending on how producers use generic products.
A recent rally and drop in some input prices created some optimism. Care should be taken not to let the grain and soybean price rally get away without some pricing action taken.
The cotton market is up roughly 6 percent, but in reality the net price to growers has not changed. This is due to how cotton is marketed with the producer generally putting cotton into the loan program and then selling their loan option or equity to a cotton buyer.
Since the cotton merchant redeems cotton put into the loan at the Adjusted World Price, or AWP, a loan option or equity is created. This is a rather simplistic explanation on cotton marketing.
In Tennessee, the other part a cotton grower receives is made up of gin rebates for seed and what some may classify as hauling. All in all, I am currently using 72 cents for the producer’s net price and I don’t see that changing unless cotton futures move into the low to mid 70s.
Since profitability estimates at the first of the year, I have reduced cotton variable expenses $27, soybeans $15, and corn $13. This is going in the right direction and could be reduced further as the season progresses.
More and more producers are exploring the use of generic chemical products both through their traditional and non-traditional suppliers.
Breakeven prices close to market offerings
Corn planting is well underway but there may be a few producers still on the fence on whether to plant corn, cotton or soybeans. The table below gives some indication on the projected profitability at current prices offerings for the fall at average yields and updated Tennessee Extension budget cost.
From the enclosed table, a couple of items jump out.
One, projected profitability and net returns after variable, land, and fixed cost are getting close to breakeven.
Second, breakeven prices at average yields are close to the market offerings. That is a big improvement since January. Land costs used in these projections are at a straight 25% with the only expenses the landowner is paying is 25 percent of crop insurance cost. Fixed costs will vary among producers and do include a $15 per acre return to management.
Is the market and any changes in cost structure giving us any clues to changes that should be made in our crop mix? For cash rent and owned ground, I would look closest at the Returns Over Variable. For this type ground in Tennessee, average yields return the greatest profit to cotton, then corn and finally soybeans. However, the greatest separation is between cotton and corn at $70 per acre.
Not all producers are cotton farmers or set up to raise cotton, so cotton may not be a viable option. For those producers who do still have cotton equipment, cotton could be considered in the crop mix.
There is only $25 per acre separation between corn and soybeans, which really is not much – 2.6 bushels per acre of soybeans or 6.7 bushels per acre of corn.
At these numbers, a producer who could grow corn or soybeans should look closer at whether the corn crop can get planted timely or not. If not, then soybeans are a viable option.
Producers on share rent should plug in their share equivalent value for land cost but at a straight 25 percent, cotton has little separation over soybeans and corn. It is not much, so a producer not truly committed to raising cotton might have to put some thought into how much cotton they want.
It does give the landowner a higher return, so some may need to be included for that aspect. Essentially no difference between corn and soybeans.
I include the fixed costs which are the $15 return to management and depreciation and interest on machinery. Some may also equate that to equipment payments.
However, unless changes are being made to the machinery complement, I would not necessary look at the fixed cost as a deciding factor. I include it to give us an idea of breakeven prices at average yield to cover all the specified costs.
Even with a rise in grain prices and a drop in some input costs, producers should still I think look closely at diversification of their crop mix. This can spread out their production risk. Land cost structure whether cash rent, share rent, or owned farmland can also have a bearing on the most profitable crop mix.