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I'm Michael Langemeier from the Center for Commercial Agriculture.
Today I'm gonna talk about crop breakeven prices..
Why do we need to compute breakeven prices?
Well, today I'm gonna talk about a couple different reasons why we need to compute
breakeven prices.
One of those,
is we need to use breakeven prices when we're developing marketing plans.
And so if we wanna know how much corn to sell?
Or when to sell our corn?
Or when to sell our soybeans?
Often it's very useful to know the breakeven price for corn and soybeans so
we know when we're getting a good price and so it's very helpful when you're
developing marketing plans or carrying out your marketing plans.
Also which is a little less focus of the presentation today we use breakeven prices
to examine the relative profitability and competitiveness of an enterprise.
For example if we wannalook at the relative profitability or
cost of production for continuous corn and
rotation corn calculating breakeven prices for both is a very good way to do that.
What costs should be included in computation of breakeven prices?
This is very important, particularly if you're looking at a publication that's
talking about breakeven prices as you figure out what they're talking about.
Quite often I'll run into people say, well my breakeven price for corn is $3, or
my breakeven price for corn is 350.
The next sentence out of my mouth is,
what costs have you included in that breakeven price and it
varies all over the board in terms of what people use to compute breakeven prices.
Should we use cash flows, well,
using cash flows is very useful if you're looking at something like purchasing land.
You need to see if you can afford to purchase the land based on your corn and
soybean production or wheat production whatever crops you have.
What about opportunity costs?
An opportunity costs, is something like putting a value on own land,
should we include those In our breakeven prices?
I contend that we should and so most enterprise budgets use economic costs
rather than cash costs, and so we include cash costs, depreciation and
opportunity costs in our computation of breakeven prices.
An opportunity cost represents the income that could have been earned if an input
was sold or rented to someone else.
And so that's your basic definition of opportunity costs.
Because they are included in an enterprise budget, the bottom line figure
represents an economic profit or loss, or earnings, or losses.
And so there's gonna be some years where they where there's gonna be an economic
loss and some years where there's gonna be an economic profit.
For example, in 2021, we're looking at an economic profit for most people for
both corn and soybeans.
If you go back to 2019, we were actually looking at an economic loss, meaning that
we were not able to cover all of our cash, depreciation and opportunity cost.
Over a long period of time,
due to the fact that all inputs are being paid the market rate,
including these opportunity costs, economic profit is zero.
If economic profit is positive input prices will be bid up,
similar to what happened to cash rates from 2007 to 2013.
More specifically, as we entered the ethanol boom, corn price and soybean price
for that matter because certainly a very strong export demand for soybeans.
Corn and soybean prices started to increase, landlords saw this,
saw that there was good net return to land and cash rents were bid up and so
this is what typically happens when you're looking at strong economic
profits over a period of time.
Let's go back to 2021, 2021 is a year of very strong economic profits.
Does that necessarily mean that input prices are bid up because of that,
while 2021 is a very special year, we got supply chain issues, inflation and
other things going on.
But even if those things weren't going on, we would see some tendency for
input prices to be bid up because of the strong economic profits and
usually, in particular input prices are bid up in terms of cash rents.
And so see an increase in cash rents is very common,
when you see economic profit for a year or two.
[INAUDIBLE] opportunity costs that need to be included.
If we want to benchmark at farms cost to those from other farms, it is important
to include both cash, and opportunity costs in our budgets, like I indicated.
By including opportunity costs, any enterprise budget,
you can determine whether you're covering all input costs.
What are some of these opportunity costs?
Well, the big ones are land, machinery, and labor.
Proxies for all of these, land we can use cash rent, so
local cash rent can be used to put a value on our own land.
Obviously the other ground that we're renting is either crop share our cash
rent, so you're gonna use that value in the budgets but
for our own you can use cash rent as a proxy for machinery.
What I typically like to do is look at crop machinery investment per acre and
then use that figure to come up with a depreciation interest charge for
machinery.
And this accounts for the fact that you may own all of your machinery and so
there may not be any cash costs for it with respect To machinery ownership costs,
but there's still economic costs.
We still could put that money to use in some other investment that money that
we have invested in crop machinery which is very large on today's farms.
Could be put in the stock market, could be put into land,
could be put into alternative investments, as we want to calculate a depreciation,
interest or machinery ownership costs for machinery.
Labor, well, hired labor obviously you're gonna have an expense for that.
So that should be included in the budget.
When you're talking operator labor the way I like to handle that is to look at
owner withdrawals that are directly related to the crop enterprises.
If it's just a crop farm, just look at all the owner withdrawals for that farm,
owner withdrawals are typically money that's taken out for family living, for
example, and then divide that on a per acre basis to come up with a,
an opportunity labor costs related to family and operator labor.
We will use a case form in West Central Indiana to illustrate the computation of
breakeven prices for corn and soy beans.
These estimates represent projections made for 22 crop in early December.
If you've been following the input price markets here this fall and
going into the winter, there's been a lot of volatility and
a lot of increase in fertilizer prices and other inputs.
And so it's very important to keep in mind that these are December estimates,
I update estimates on the Center for Commercial Agriculture website on
a fairly regular basis and so you can look on the Center's website for
updated projections related to corn and soybeans.
This case farm has 3000 crop acres of which 750 acres are owned.
That's important because overhead costs particularly machinery ownership and
labor costs are are dependent on form size.
So, what I like to do is look at the top six categories in terms of corn, and
then look at those costs on a per bushel basis for both corn and soybeans.
And I don't necessarily need to dwell on all of these numbers but
I've got these listed in order in terms of the most important costs for
corn and then I've just use the same methodology looking at soybeans.
And so these are the six top input categories there is other things such
as dryer fuel, insurance crop, insurance interest in those kinds
of costs that are not included so that's why I have a subtotal here.
The difference between the total cost and the subtotal is these other costs.
But when you look at corn the largest costs are land, fertilizer and
machinery, land is about a $1.45 per acre using this case farm,
that could be a little lower in other parts of the state or a little higher.
So that does vary across Indiana fertilizers bought double compared to what
it was last year $1.43 per bushel and the machinery, which has both variable and
fixed components because we've got repairs, fuel,
machinery ownership costs in there is the third largest and 68 cents per bushel.
Machinery and labor vary tremendously across firms and so it's very important
that you put your own numbers in there for machinery and labor in particular.
Some of these other costs do not vary quite as much.
But it's always nice to benchmark some of these other costs with your own
fields your own farm situation.
When it comes to soybeans land accounts for a very large percentage of the of
the core total cost for soybeans and we'll see this on it.
In a figure here in a little bit,
fertilizers not quite as important because you don't have the nitrogen fertilizer.
And machinery is also very important for soybeans and so
overhead costs in general are very important for soybeans because we don't
have that very large fertilizer costs like we have for land.
The breakeven price for this case farm and in early December was 532 for
corn and $12.1 cent for rotation soybeans.
And so when we're thinking about marketing the 22 crop,
which obviously we haven't even planted yet, but
when we're thinking about looking at futures price for the fall and winter of
2022, these are the breakeven prices that we can use to examine that for this farm.
Looking at a diagram of this,
sometimes it's better to look at this in terms of a shares you're in.
So this is same information is on the previous slide only here I've included
all cost.
In there I've got that other category in there and so the other is there and so
it's communicating the same information but
cash rent represents 27% have total cost.
That's because fertilizer right now is about 27%.
Weu looked at this a year ago,
fertilizer was much smaller and cash rent was closer to 30%.
So cash rent typically is the largest expense item for
farms looking at producing rotation corn same would be true for continuous corn.
Looking at rotation soybeans,land accounts for almost 40% of the total
cost of production for rotation soybeans and so here just illustrates
the importance of making sure you have an opportunity cost on own land.
If you don't have that in there,
you're really not accurately depicting the breakeven price for soybeans because
that's a huge component of the breakeven price for soybeans is his cash rent.
If you have a rotation, corn rotation, soybeans split 50/50 and so
you rotate the corn and the soybeans don't produce continuous corn don't produce
continuous soybeans don't produce wheat, you're looking at about a third to
total cost for those two crops accounted for by cash, rent, or own land.
And so that's where we come up with a one-third, two-thirds crop share lease.
With one-third, two-thirds crop share lease, the landlord gets one
third of the crop and all the revenue essentially crop government payments,
crop insurance payments.
And the operator gets two-thirds.
That works fairly well.
If you look at the percentages on the last two figures that comes out very accurately
to their share of the costs.
Looking at this over a little longer period of time,
I'll do that for both corn and soybeans here.
To conclude corn the five year in the end the 10 year average
breakeven prices increased all way way up to about 15.
As we started that ethanol boom in 07, cost of production increased
particularly cash rent increased dramatically for a few of those years.
And so we saw an increase pricee in the breakeven price and
the breakeven price was close to $5.
If you look at the five year average in 2015, then we started to
see some declines in cash rent some tapering office and other costs.
Fertilizer was relatively high in 12 and 13, and
then came down until 22 really, for the 22 budget and so we saw some decreases and
breakeven prices, we got down there we look at the the five year average.
We got down there close to $4 corn.
Now with a higher fertilizer costs, higher herbicide costs,
higher cash rent expected for 22.The breakeven is set at that 432.
And so the reason why charts like this are important is when you're looking
at the competitiveness of corn For your farm compared to other farms,
many times it's better to look at a long term average than just one year, why?
Well, one year largely reflects weather.
And so you might be look like a genius in 2021 because you had a very good year or
vice versa if 21 wasn't very good for
you your breakeven could be substantially higher than someone's.
And so when you're looking at this competitiveness between farms,
between crops, it's better to look at a long term average than just one year.
When you're doing developing a marketing plan typically you're only looking at that
one year, and that's why I talked about the 2022 budget projections earlier.
Soybeans looking at the same thing here, we saw the same trend for soybeans.
An increase in breakeven prices from a five year average standpoint,
that's the blue bars here, all the way to 2015.
Then we saw some declines in land value.
Also, fertiliser costs were lower for soybeans from 13 to
20 than they were You know, so you know 1112 and 13.
And so that also helped.
We also had some reductions in seed costs for both corn and soybeans and so and so
that the breakeven price declined all the way through about 21.
And then it's increased expected to increase in 22 as we see
higher cash rents.
Higher phosphorus and potassium costs and higher herbicide costs.
And so right now this farm looks like a long run average of about 1050 for
soybeans.
There were some years in there where it was below $10 looking at the five year
average.
And again, if you only look at soybean breakevens compared to other firms,
you would wanna use these longer run averages rather than just one year.
Use the one year if you're developing a marketing plan.
In conclusion, computing breakeven prices enables a farm to compare the profit
potential of alternative enterprises And to formulate marketing plans.
When computing these breakeven prices it's important to include cash,
depreciation and opportunity costs.
If you wanna look at a breakeven price related to a particular piece of ground in
terms of affordability of that land,
by all means you can use cash costs which will include principal payments.
For example, when you're looking at breakeven prices principal payments
are not included in the breakeven rather we use an opportunity cost would include
opportunity interest on operating expenses, opportunity interest on
machinery and opportunity interest on land values which is embedded in cash rents.
More information pertaining to the production costs and financial
benchmarking can be filed on the website for the Center for Commercial Agriculture.
Particular updates regarding corn and
soybean prices are published on that website on at least a monthly basis.
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