What is in this article?:
- Will Higher Corn Profitability Increase Corn Acres in Corn Belt?
- Calculation of Breakeven Soybean-to-Corn Ratios
Calculation of Breakeven Soybean-to-Corn Ratios
Corn being projected more profitable than soybeans is widespread over much of the Corn Belt. Relative profitability of the two crops is examined with breakeven soybean-to-corn ratios for each county in the Corn Belt. Calculations begin with the following formula:
breakeven corn price = (cost difference + soybean price x soybean yield) / corn yield
Here the breakeven corn price gives the price at which corn and soybeans have the same profits and the “cost difference” is the additional cost of producing corn rather than soybeans (see the Sept. 17 Illinois Farm Economics: Facts and Opinions article titled “Breakeven Corn Prices for More Corn in 2007” for more detail). This equation serves as the basis for determining breakeven soybean-corn price ratios. The above equation is rearranged to calculate ratios for each county in the greater corn-belt using expected yields for each county.
In each county, historical corn and soybean yields from the National Agricultural Statistical Service, an agency of the USDA, are used to calculate trend yields. For those counties where non-irrigated and irrigated data exists, non-irrigated yields are used. Counties that do not have sufficiently long yield series are not included in the analysis. Trend yields equal the linear trend through the 1972 through 2009 data extended to 2011. The cost difference is set at $210/acre, based on budgets for central Illinois. This indicates that corn production costs are $210/acre higher than soybean production.
The 2011 trend yields and cost difference are used to calculate breakeven soybean-to-corn ratios for each county. If soybean and corn prices result in a ratio less than the breakeven ratio, corn production is forecast to be more profitable than soybean production. If the price ratio is above the breakeven ratio, soybean production is more profitable than corn production. Take, for example a breakeven ratio of 2.8, a forecast corn price of $5.85/bu. and a forecast soybean price of $13.25/bu. The forecast prices result in a ratio of 2.26 ($13.25 soybean price / $5.85 corn price). Corn production is more profitable than soybean production because the forecast price ratio of 2.26 is below the 2.8 breakeven ratios. (See graph information.)
Over much of the Corn Belt corn is projected more profitable than soybeans. Moreover, differences in corn returns are projected to be more than historically observed. Whether farmers will react to profit incentives remains to be seen. Overall there may be caution to switching to more corn because growing and harvest conditions in the past two years have been problematic in many areas of the corn-belt.
Returns presented in this paper are averages. Individual farms can vary significantly from these averages. Hence, farm specific budgets should be consulted when evaluating acreage decisions.