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Range in Revenues and Returns Possible for Corn in 2014

07/16/2014 @ 3:38pm

The U.S. Department of Agriculture released a revised World Agricultural Supply and Demand Estimates (WASDE) report on July 11, 2014.  In this report, the 2014 market year average (MYA) price for corn is projected to fall between $3.65 per bushel and $4.35 per bushel. Revenues and farmer returns are estimated for prices in this range given an average and high yield.  Crop insurance and commodity title payments are included in estimates. Given this price range, there is about a $100-per-acre range in which per-acre returns can fall.  Farmer returns likely are negative for cash-rented farmland, given that costs are near average.  Farmer returns for share-rented farmland likely will be low.

Price and yield scenarios

Returns from an acre of corn production are calculated for three price scenarios:

  • The low price in the WASDE range for the 2014 marketing year:  $3.65 per bushel.

  • The mid-price in the range: $4.00 per bushel.

  • The high price in the range: $4.35 per bushel.

For each market year average (MYA) price, a harvest price is needed so that crop insurance payments can be calculated.  Based on the average difference from 1972 through 2013, the harvest price is set 10 cents per bushel lower than the MYA price. There is variability in the relationship between the harvest price and the MYA price over time, with extremes occurring in 1974 (harvest price was 78 cents above the MYA price) and 2007 (the MYA price was 62 cents above the harvest price).  As a result of this variability, there can be variations in the relationship between crop revenue and crop insurance payments from those shown in this article.

Two yield scenarios are presented. The first is 197 bushels per acre, representing the average yield for central Illinois farmland with high productivity. Returns also are estimated for a high yield of 220 bushels per acre. These yields are selected based on expectations for above-average yields for 2014. Similar to all years, yield experiences in 2014 will range across farms, with some farms having yields above 220 bushels per acre and some farms having below-average yields. Generally, lower-yield scenarios will result in lower returns and higher-yield scenarios will result in higher returns, given the same price and costs.

Revenue

Revenues from crop revenue, insurance payments, and agricultural risk coverage (ARC) are included in return calculations (see Table 1). Crop revenue equals the MYA price times the yield. For a $3.65 MYA price and a 197-bushel yield, crop revenue is $719 per acre (see Table 1).  Across the price and yield scenarios, the lowest crop revenue is $719 per acre at the $3.65 MYA price and 197-bushel-per-acre yield. The highest revenue is $957 per acre with a $4.35 MYA price and a 220-bushel-per-acre yield.

Crop insurance payments are estimated for a revenue protection policy at the 85% coverage level. The guarantee yield is 195 bushels per acre, and the projected price is the 2014 price of $4.62 per bushel. For a 197-bushel yield, crop insurance payments are $67 per acre at the $3.55 harvest price (see Table 1). No other crop insurance payments occur in the scenarios shown in Table 1.

Agricultural risk coverage (ARC) is a county revenue program for receiving commodity title payments contained in the 2014 Farm Bill.  ARC payments are calculated using a McLean County situation given a 177-bushel-per-acre county yield when the farm has a 197-bushel yield, and a 200-bushel county yield when the farm has a 220-bushel yield. For the average yield scenario, ARC payments are estimated at $77 per acre at a $3.65 MYA price, $62 per acre at a $4.00 MYA price, and $10 per acre at a $4.35 MYA price (see Table 1).  At the high-yield scenario, ARC would make payments at a $3.65 MYA price: $45 per acre. If ARC payments occur, they will be made after October 1, 2015, the year after harvest.

Rather than ARC, farmers could choose to receive commodity title payments from price loss coverage (PLC), a target-price program that makes payments when the MYA price is below $3.70 per bushel. For prices in Table 1, PLC would make payments only at the $3.65 MYA price. For a typical farm in central Illinois, PLC payments are estimated at $6 per acre at the $3.65 price. Given the WASDE price range, ARC likely will make larger payments than PLC when commodity title payments occur. Like ARC, PLC payments will be made after October 1, 2015.

For the scenarios shown in Table 1, the range in revenue is from $848 per acre to $957 per acre.

Costs

Nonland cost and cash rents are the same across all price and yield scenarios.  Nonland costs are at $588, as estimated in 2014 Illinois crop budgets. Cash rent is set at $293 per acre, the average cash rent for high-productivity farmland in central Illinois.

Farmer Returns under Cash Rent

For average yields, farmer returns are negative at all prices:  -$18 per acre for the $3.65 price, -$31 per acre at a $4.00 MYA price, and -$14 per acre at a $4.35 MYA price (see Table 1).  Given the WASDE range, negative returns seem likely given average yields and average costs.

For high yields, returns are -$33 per acre at a $3.65 MYA price, -$1 per acre at a $4.00 MYA price, and $76 per acre at a $4.35 price.  Positive returns are possible at high yields and at prices near the high of the WASDE range. Given growing conditions to date, yields of 220 bushels are possible on many farms in central Illinois. As more farms have higher yields, however, the chance of prices in the upper end of the WASDE range decreases since higher yields result in more supply, which typically has a dampening effect on prices.

Farmer returns under share rent

Table 1 also shows estimates of returns from a share-rental arrangement. In Table 1, this arrangement has a 50% land owner share and a 50% farmer share for revenues and direct costs (fertilizer, seed, chemicals, drying, storage, crop insurance). There also is a $25 cash payment paid by the farmer to the landowner.

Under average yields, farmer returns under share rent are positive, but low. Farmer returns are $17 per acre for a $3.65 MYA price, $11 per acre for a $4.00 MYA price, and $19 per acre for a $4.35 MYA price (see Table 1). Under high yields, farmer returns are $10 per acre for a $3.65 MYA price, $26 per acre for a $4.00 MYA price, and $64 per acre at a $4.35 MYA price.

Except at the high price/high yield scenario, farmer returns under share rent are above returns under cash rent. Sharing revenue causes rental payments to adjust downward in the face of lower prices and lower yields. As a result, landowner returns under share-rental arrangements will be lower than under cash-rental arrangements for all but the high-price/high-yield scenario shown in Table 1.

Summary

There is a considerable range of revenues and returns that can occur for the 2014 cropping year. A range of roughly $100 is possible at this time point. However, the range is relatively low, particularly when compared to returns in recent years. For cash-rental situations, farmer returns likely will be negative, except if yields are well above average and prices are near the high of the WASDE range. Share-rent returns are low at the yields and prices illustrated in this article.


Editor's note: Gary Schnitkey is an ag economist with University of Illinois Extension.

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