Yields, prices determine which rotation will be more profitable
Recent and planned construction of ethanol plants suggests the need for substantially more corn to meet the needs of ethanol plants, livestock producers, other manufactures and foreign buyers.
For corn production to increase, farmers must plant more at the expense of other crops, usually soybeans. But, the profitability of corn must exceed that of soybean to entice farmers to plant more corn. This enticement generally comes in the form of higher corn prices relative to soybean prices.
Given a $6.00-per-bushel soybean price, breakeven corn prices range from slightly above $3.00 down to $2.50 for a range of yields typical of most Midwest farms. Given current 2007 price forecasts, many farmers may find planting more corn to be more profitable than planting soybeans.
Calculating breakeven corn price
The additional corn decision often comes down to a comparison of corn-after-corn returns to soybean returns. Corn-after-corn returns relative to soybean returns can be evaluated by constructing budgets for corn-after-corn and soybeans. While a large number of factors impact the relative profits of the two crops, the key factors can be summarized in five key variables:
- Per-acre cost difference between corn and soybeans, or cost difference. This cost difference equals per acre corn production costs minus per acre soybean production costs. As the cost difference becomes larger, corn production becomes more costly than soybean production.
- Corn yield
- Soybean yield
- Corn price
- Soybean price
Using these variables, a mathematical relationship that gives a breakeven corn price as a function of the other four variables is: breakeven corn price = (cost difference + soybean price x soybean yield) / corn yield.
As can be seen by the formula, higher cost differences, soybean prices and soybean yields increase the breakeven price. Conversely, higher corn yields lower the breakeven price.
Breakeven Corn Prices
Current price forecasts suggest that soybean prices will be near $6.00 per bushel for the 2007 crop year. At a $6.00 soybean price and a 50-bushel yield, breakeven prices range from $3.07 for a corn yield of 135 bushels per acre, down to $2.52 for a 165-bushels-per-acre yield. Similar results exist for all soybean yields above 45 bushels per acre.
The range in breakeven corn prices are from slightly above $3.00 down to $2.50 for the $6.00-per-bushel soybean price. About half the farms can expect corn production to be more profitable than soybeans given the current 2007 price forecast. These expected yields cover much of the production in the Midwest and are particularly relevant to northern and central Illinois.
Breakeven corn prices also will vary as the cost changes. Each $5.00 increase in the cost difference causes the breakeven prices to increase by $.02 to $.03 per bushel.
Breakeven corn prices are based on an expected corn yield that should in most cases reflect corn-after-corn production. Agronomic research indicates that corn-after-corn yields are 10% below corn-after-soybean production. Consideration should be given to yields used in calculating breakeven corn prices. Lower expected corn yields will increase breakeven corn prices.