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Crop revenues and costs resulting from drought

Don Nitchie, Extension educator,

How quickly crop conditions have changed from the wet weather of May.

Extreme heat and lack of rainfall throughout June has resulted in USDA Crop reports having been dramatically revised to reflect deteriorating crop progress throughout the U.S. Corn Belt. At the moment, conditions appear not quite as severe in SW Minnesota as in other regions but, that could change soon. I hope it is for the better as the result of rainfall.

Dry conditions threatening to generally impact final yields across the U.S. Corn Belt have historically had significant impacts on "old crop" and "new crop" prices. We have certainly seen that in the last few weeks. If market demand for corn or soybeans remain the same and stocks are tight, a relatively small change in expected supply leads to a larger change in prices.

A larger change in expected supply leads to an even greater change in prices. We are certainly experiencing this now. This is not the case when we have more localized dry conditions which tend to mostly impact local supplies and therefore local basis relative to a mostly unchanged national price.

At your farm level, sometimes this greater price reaction of a general U.S. drought can compensate to a degree for your potential lost yield because of price compensations for reduced yields. This depends greatly on how widespread the U.S. crop impact is and what your yield impact is at your farm. However, it is important to remember that yields also impact your cost of production per final bushel of yield. At this time of year your costs per acre are virtually fixed for the year but, not your cost per bushel of production. Grain is priced per bushel not per acre, obviously, so sellers of grain will remain concerned with selling at desirable prices relative to their final cost per bushel. So, it is more important than ever, to continue to revise your final expected yields and update your costs per bushel of final yield. Yours will be different than the average and other producers.

To illustrate here are some examples of possibilities an average SWM farm could experience. Total costs include labor and management charge.

Table 1.2012 Cash Rented Corn SW Minnesota.
YieldPriceTotal rev/acreTotal cost/acreTotal cost/buNet return/bu

The above examples are only hypothetical at this point and some people will definitely have the opinion that things could turn out much worse or better than the extremes used in the example. However it is clear, that market price changes may compensate to a degree for yield reductions. How much depends on how our SW Minnesota weather and crop conditions progress from here until harvest, relative to the Corn Belt as a whole. It is also clear that you should continue to adjust your yield expectations and re-calculate your costs per bushel of that expected yield. It may change dramatically throughout the growing season. Not doing this may not help you realistically evaluate rapidly changing national and local corn and soybean prices.

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