It's no surprise considering recent events, but putting pencil to paper, corn now looks like the best deal going when compared to traditional Southeastern crops like cotton, peanuts and soybeans, says Nathan Smith University of Georgia Extension economist.
Smith compared the cost of producing corn with other crops such as cotton, peanuts and soybeans during the recent Georgia Corn Short Course held in Tifton.
“Basically, we need 10 million more acres of corn to meet current demand projections, and the big question is where will that corn come from? That question not only is being asked in Georgia but throughout the United States,” says Smith.
“The only problem I see in demand is that we'll have to make adjustments in exports,” he adds. “In the short-term, they're actually ahead of expectations. In the long-run, as an economist, I believe high prices are the solution to high prices. Eventually, we'll produce more corn worldwide. On the world front, we are down in supplies, and it's easy to see why we're friendly towards corn this year.”
The last time corn prices were at $4 was in 1995 and 1996, when the average season price was $3.50, says Smith. “We were going into the 1996 farm bill, so it was a similar scenario as the one we're facing today. The stocks-to-use ratio was 5 percent in 1995, and we have 6 percent projected from this crop. If we increase the crop by 10 million acres and get tremendous yields, we're still talking about a 5 to 6-percent stocks-to-use ratio, so that is a very favorable outlook for corn prices in the next year or two,” he says.
Ethanol definitely is the driving force behind current prices, says Smith. The Renewable Fuels Association estimates that about 535 million bushels of corn will be needed for ethanol production next year. Many of the plants already are being built, he says, so that demand probably will be realized.
“Looking at crop budgets, if we increase our corn crop by 10 million acres, how will that impact fertilizer prices? When we upgraded our budgets, nitrogen was down in price compared to this time last year, partly because energy prices are down. We have seen some increases in the cost of potash and phosphate in terms of fertilizer prices, so there could be an impact on fertilizer prices later in the spring, especially if we come out and plant 10 million more acres and especially if it comes from soybean acreage,” he says.
This time last year, growers were in a cost/price squeeze with corn. Fortunately, current prices will help to make up for that, says Smith.
Summarizing budget costs for dryland corn with an average yield of 85 bushels per acre, Georgia growers are looking at variable costs of $190 to $200 per acre and a break-even price of $2.22 to $2.37 per bushel, he says. “How many times have we done a budget lately and had market prices that actually would cover our total costs?” asks Smith.
The USDA price range averages about $3.20 per bushel, so about 80 bushels would be the break-even point to cover dryland corn, he says.
“We'll definitely increase corn acres in Georgia this year. Will that come in the form of dryland or irrigated? I think a good portion of it will come in irrigated, because to take advantage and these prices and the risk of forward contracting, you want to be able to produce those bushels,” says Smith.
The budget for irrigated corn assumes a yield of 185 bushels per acre on 36-inch rows with six-row equipment. Variable costs are about $440 per acre with a break-even price of about $2.40 per bushel. Fixed costs are about $175 or $165 per acre on strip-tillage.
“One of the wild cards when looking at this market is that we're seeing a lot of trading by investment funds into the futures market. A lot of those are retirement funds. They have gone back a couple of years ago and done studies, and they've found that commodities do as well as or sometimes outperform the S&P Index.
“These funds have invested a lot of money into the commodity markets, and that includes corn and soybeans. If things turn out well, and we plant the 10 million extra acres and get better-than-average yields, whenever those funds pull out of the market, that'll probably cause an over-reaction, and the price will go down further than it should. Again, that will be down the road as far as what happens during the growing season and once we know what the planted acres will be.”
Smith has compared the costs and returns on corn, cotton and peanuts, on both irrigated and dryland acreage. “Right now, we're assuming a corn price of $3.50 per bushel. That's probably very conservative based on current corn prices. Then again, if we do plant those 10 million acres and we do get trend yields, it might be more realistic.”
On non-irrigated production, assuming a corn price of $3.50 per bushel and an expected yield of 85 bushels per acre, income would be about $300 per acre. With variable costs of $200, the net return would be $98. On cotton, with an average price of 60 cents per pound and an expected yield of 700 pounds per acre, income would be $420 per acre. With variable costs of $380, net income would be $40. For peanuts, with an expected average price of $385 per ton and an expected yield of 2,700 pounds per acre, income would be $520 per acre. With variable costs of $429, net return would be $91. With non-irrigated soybeans, an expected average price of $6.75 and an expected yield of 30 bushels per acre would produce an income of $203 per acre. With variable costs of $178, the net income would be $25 per acre.
Looking at the same crops but with irrigation, net return on corn, with an expected yield of 185 bushels per acre, variable costs of $445 per acre, and income of $648, would be $203. On cotton, with an expected yield of 1,100 pounds per acre, variable costs of $482 per acre, and an income of $660, the net return would be $198. Peanuts, with a yield of 3,700 pounds per acre, variable costs of $529, and an income of $712, would produce a net income of $183. Irrigated soybeans, with a yield of 50 bushels, variable costs of $225, and an income of $338, would produce a net income of $113.
“We increased wheat plantings in Georgia this year,” says Smith. “I guess we'll know later in the year how many growers will go ahead and fertilize and grow out the rest of the wheat for grain, or if they'll go out and plant into the wheat. Some growers have been talking about double-cropping cotton with wheat and double-cropping soybeans, so we put together a scenario for that in our comparison.”
On dryland, a wheat/cotton system at $4 wheat, 60-cent cotton, and an expected yield of 55 bushels on wheat and 565 on cotton would produce an income of $559. With variable costs at $497, the net return would be $62. In a wheat/soybean system, with $4 wheat, $6.75 soybeans and yields of 55 and 24 bushels, respectively, the income would be $382. With variable costs of $328, the net return would be $54. On irrigated, the wheat/cotton system would offer a net return of $141 per acre while the wheat/soybean system would be about $95 per acre.
“The $4 wheat price depends on whether or not you've already priced your wheat, and if you've got a place to take it. Come harvest time, the soft red winter wheat market won't be like the rest of the wheat market. There's more wheat, and exports are down in that area, so you may not have a home for your crop.”