Editor’s note: The following was written by Alejandro Plastina, Iowa State University Extension economist, for the university’s January 2020 Ag Decision Maker newsletter.
Thin profit margins in corn and soybean production have become the norm over the past five years, increasing the need for proper budgeting and marketing strategies among crop producers.
The latest issue of the Iowa State University Extension and Outreach “Estimated Costs of Crop Production” reports average cost estimates for Iowa farms in 2020, and provides guidelines to help farmers calculate their own costs of production.
On average, the total cost of corn and soybean production in Iowa is expected to decline by 4% from last year. When looking at specific categories, costs increased for labor, insecticide and corn seeds, but declined for other categories.
The estimated costs of production for continuous corn are $3.81, $3.78 and $3.76 per bushel for expected yields of 164 bushels per acre, 182 bu./acre and 200 bu./acre, respectively. The estimated costs of production per bushel for corn following soybeans are $3.22, $3.23 and $3.23, assuming 179 bu./acre, 199 bu./acre and 219 bu./acre, respectively.
Cost of production estimates, per bushel, for herbicide-tolerant soybeans are $8.89, $8.72 and $8.57 assuming 50, 56 and 62 bu./acre, respectively. The total cost per bushel of soybeans is projected at $8.72 for non-herbicide-tolerant beans at 56 bu./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, bit.ly/3794Gu1.
Breakdown of costs
For corn, land represents approximately 33% of the total costs of production. Values of $183, $219 and $255 per acre rent charges for the low-, medium- and high-quality land were assumed.
The variable costs represent just over half the costs of production. Of the variable costs, nitrogen and seed costs account for 43% of the costs for either continuous or rotated corn. Nitrogen cost is projected 10% lower than in 2019, at 34 cents per pound, and seed 1% higher at $257 per bag.
Machinery costs are projected to decline by 5%, primarily due to lower drying costs.
Land represents 45% of the total cost of production for soybean, while variable costs account for an additional 40%. Seed and fertilizers amount to 45% of the variable costs. Phosphorus was charged at 34 cents per pound, or 18% below 2019 costs, while potassium remained stable at 31 cents per pound.
There is substantial uncertainty regarding crop prices in the coming season. The most recent U.S. Department of Agriculture projections for 2020-21, published in October 2019, put the average U.S. farm prices for corn and soybean at $3.40 and $8.85.
In this scenario, soybean production would only be profitable for operations with medium and high yields, but the profitability margins could be very tight.
A continuous corn system would not be able to cover all costs, even with high yields, and corn production following soybean would generate $30-$40 per acre in profits.
Current futures prices seem to indicate corn and soybean prices might average $3.90 and $9.50 per bushel in 2020-21, respectively. In this optimistic scenario, soybean production would generate profits ranging from $30-$60 per acre. Similarly, continuous corn and corn following soybean would generate, respectively, $15-$27 and $121-$147 per acre in profits.
Current and future developments in trade, oil prices and weather can steer the profitability outlook in different directions. Given that those factors are outside the control of farmers, it is critical to contain the controllable costs as much as possible to break even and hopefully make a profit in 2020-21.
When using the Iowa State cost of production estimates for 2020, 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). Since 2019, reference yields for corn and soybean budgets in the annual ISU Extension report reflect 30-year trend yields.
In the latest projections used for the 2020 report, yields for corn following soybean were increased by 1 bu./acre, while yields for corn following corn and soybean following corn remained unchanged.
Starting in 2020, the average cost of lime is adjusted to account for regional differences in lime application practices (ag lime quality and quantity, and frequency of application). Such methodological adjustment resulted in a one-time increase in the cost of lime per acre from $5.71 in 2019 to an estimated $12.49 in 2020.
In future editions of the report, the annual adjustment in the yearly cost of lime should reflect only changes in average prices.
Producers need to have a strong grasp of their own production costs. Costs of production are not seeing the rapid fluctuations that were seen in recent years, but the trade war and other events create a lot of uncertainty when it comes to profitability on individual operations.