Each winter, economists predict relative profitability for corn and soybeans for the coming crop year. But are they accurate?
In January, University of Illinois (U of I) agricultural economics specialists, led by Economist Gary Schnitkey, projected that Illinois corn would average up to $114/acre more in profits vs. Illinois soybeans in 2011. This is not surprising, considering corn’s generally outpaced soybeans for the past 10 years.
But Schnitkey cautions growers to be careful if basing cropping decisions on short-term profitability projections. First, he admits that the projections made several months prior to harvest aren’t all that accurate. Second, there are many other important factors – like differential equipment costs or agronomic benefits of crop rotation – to consider when making cropping decisions.
Schnitkey and his colleagues project profitability using a measure called corn-minus-soybean returns (CMSR). They calculate CMSR each year in November, March and May, in addition to January. A positive CMSR value indicates corn is more profitable than soybeans. A negative value indicates soybeans are more profitable than corn. They look at four different regions in Illinois: north, south, central-high (high-productivity farmland) and central-low (low-productivity farmland). CMSR values for each region are based on budgets for price, yield and input costs.
Chicago Mercantile Exchange futures-contract prices are used to budget corn and soybean prices, based on November and December contracts, respectively. “We use those prices to project what prices will be like at (the following) harvest,” Schnitkey explains. The researchers subtract 30¢/bu. for basis, which is the typical difference between the cash and futures prices.
Five-year yield averages are used for each crop, adding a small number of bushels to the average to allow for technological advancements. “We typically see, on average, that yields increase about 2 bu./year for corn and ½ bu./year for soybeans,” says Schnitkey.
Illinois Farm Business Farm Management (FBFM) summaries are used to estimate non-land input costs such as fertilizer, pesticides, seed, drying, storage and crop insurance. “We start with averages for costs in previous years and update those to the current time period by looking at how prices on different inputs have changed,” he explains.
To monitor their projections, Schnitkey and his colleagues compare CMSR predictions made early in the year with actual results at harvesttime. Unfortunately, the early projections of relative profitability don’t always mirror reality, admits Schnitkey. “We are finding the projections that we make about those differences early in the year aren’t all that accurate,” says Schnitkey. “A lot can change between January and harvest.”
In January 2009, Schnitkey projected that CMSR would be $80/acre (corn $80/acre over soybeans) in central Illinois with high-productivity farmland. However, the actual figure that year was -$95 for that region.
What’s the reason for the $175 miscalculation? As you’ll recall, 2009 was a relentlessly wet fall and a lot of corn was harvested at moisture levels of 23% or higher. The super high drying costs, coupled with high fertilizer costs and high soybean prices, were a surprise. “Costs are much more difficult to predict, and the one year we messed up badly was 2009,” Schnitkey admits.
Another poor projection occurred in May 2008 when CMSR projection was $328 for central Illinois on high-productivity farmland, considerably higher than the actual 2008 CMSR of $118. The reason for the $210 miscalculation was a period of substantial run-up in commodity prices which was factored into the May projections, says Schnitkey.
Barring shifts in demand or relative yield, corn will likely remain more profitable vs. soybeans in Illinois in the coming years, says Schnitkey. Even so, he advises growers to look beyond short-term profit potential when making cropping decisions.
Growers must allow for additional costs, such as added machinery costs, if moving to more corn to be profitable, he says. There are also many potential benefits derived from crop rotation and selecting optimum cropping choices for specific fields.
This all seems to reinforce something farmers already know: Growing crops is bound with uncertainty.