August 17, 2015
But What About Revenue Expectations?
By David Widmar
Last week the USDA released the much anticipated corn and soybean yield estimates. Many were caught by surprise as the USDA estimated yields higher than the overall trade expectations. Corn and soybean futures tumbled in response. While attention has focused on the higher than anticipated yields and lower-trending price, little has been done to considered how the changes have impacted potential revenue.
This week’s post takes a look at the latest USDA yield estimates and how changes in yield and price estimates have impacted corn and soybean revenue expectations across the country.
The biggest surprise may have come in the corn crop. Overall, yields were forecasted only slight less than 2014. Comparing state yield estimates to the long-run average (the mean of detrended yields from 1970-2014), only five state have estimated yields below average, figure 1. In other words, after adjusting for increases in trend yields over time, USDA expects that most states will harvest an above average corn crop.
In the Corn Belt, the USDA expects that only Indiana will produce a below average crop. The most disappointing yields in the report came from California and Washington, where yields more than 10 bushel below average are expected. Colorado and North Carolina were also estimated to have below average yields.
The remaining states were all forecast above average and are shown in shades of green and blue. Some of these states are expected to produce crops well above average. For instance, South Dakota, Kentucky, Tennessee, and Mississippi, to name a few, are expecting yields at least 20 bushel per acre higher than average.
Figure 1. Difference between the USDA’s August 2015 Estimated Corn Yields (bushels per acre) and Average Yields (Mean of Detrended Yields from 1970-2014). Data Source: USDA NASS.
As mentioned, yields are only one aspect of equation for farmers. To consider how price and yield changes have interacted, mean yields and price expectation from this spring where compared to the current conditions.
For corn, the assumed spring price was $4.15 per bushel. This was the trading range for the December 2015 contract and the crop insurance price set by the USDA’s RMA. For the current price expectations, $3.75 per bushel was used. The prices were assumed constant across the county, although basis levels vary from state to state.
In figure 2 the changes in expected revenue are shown. For a majority of states revenue expectations have declined significantly; especially in the Corn Belt and Plains regions. Conditions in Indiana are $85 per acre worse than spring expectation. Even in Iowa, where estimated corn yields are 8 bushels above average, revenue expectations have diminished by nearly $40 per acre. The situation is such that most producers will likely experience lower than anticipated revenues in 2015. Improvements in corn revenue expectations were only found in South Dakota and in the Southeast, where yields were well above average.
Figure 2. Estimated Changes in Corn Revenue Expectation ($/acre). Average Yields and August 2015 Yield Estimates used with Spring 2015 Price Assumption of $4.15 per bushel and August 2015 Price Assumption of $3.75.
The adverse yield conditions appear even less widespread for soybeans, figure 3. Only three states were estimated to have 2015 yields below average, North Dakota, Indiana, and Missouri. Again similar to corn, yields significantly above average were found in South Dakota and in the Southeast.
Figure 3. Difference between the USDA’s August 2015 Estimated Soybean Yields (bushels per acre) and Average Yields (Mean of Detrended Yields from 1970-2014). Data Source: USDA NASS.
For the changes in soybean revenue expectations, a spring price expectation of $9.73 per bushel was used, consistent with the crop insurance price. An August price assumption of $9.15 per bushel was used.
North Dakota, Missouri, Indiana and Ohio have been hit hardest by declining revenue expectations; more than a $40 per acre decline in revenue expectation in both Indiana and Missouri (Figure 4). Arkansas, on the other hand, is positioning for soybean revenues to improve nearly $100 per acre over earlier expectations.
Figure 4. Estimated Changes in Soybean Revenue Expectations ($/acre). Average Yields and August 2015 Yield Estimates used with Spring 2015 Price Assumption of $9.73 per bushel and August 2015 Price Assumption of $9.15.
Wrapping it up
Often it’s difficult to consider how conditions can vary across the country. While the latest USDA report estimates high yields and commodity markets are trending lower, the related revenue impacts and implications are not uniform across the country.
Going into 2015, the economic conditions were bleak. Purdue University’s crop budget forecasted negative returns for corn and soybeans production. If current yield and price conditions are realized, those expected negative returns will likely be exacerbated across the Corn Belt and Plains. In other areas of the county – South Dakota and in the Southeast – economic conditions have improved.
Just as conditions vary by state, significant variation should be expected at the county, farm, and field levels. This will be especially true in areas where excessive rain has been troublesome.
A few things to consider; this analysis did not consider acres that may be lost due do drowned out or preventing plantings. Also, potential crop insurance payments were not considered but may help mitigate some of the losses. However, it appears that in many areas the revenue declines will not likely be large enough to trigger widespread insurance payments. Because the initial revenue guarantees were not high enough to cover anything close to the total cost of production, many farmers will be facing an increasing economic loss in 2015.
Finally, this analysis assumed uniform crop prices across the county. In reality, local cash prices vary greatly and would adjust with regional availability and usage of grains. In regions with poor yields, grain basis will likely improve and offset some of the pain. Conversely areas with strong yields are likely to experience weaker cash prices. This negative relationship between yields and grain prices is known as the natural hedge; its effectiveness will be the topic of a future post.
The final size of the U.S. corn and soybean crop will be top of mind producers this fall, especially in those regions where bleak economic conditions have been deteriorated. For now, it seems that only those with yields well above average are finding their current situation better than what they planned in the spring.
Photo by Johnny Klemme