Figure 1. Contribution Margin at Final Crop Insurance Prices and Yields, Average Quality Indiana.
Assuming costs didn’t change from budget and state average yields, the contribution margin for 2021 was the highest on record for both crops. While it is quite possible that costs inflated above the early Purdue budget estimates, we can still conclude that 2021 will be among the most lucrative ever recorded for these crops. In the case of corn, the contribution margin is just short of $600 per acre. For soybeans, it was $434 per acre. To put the corn number in perspective, it was nearly double last year’s (by no means the worst in the last 14 years) contribution margin.
As a reminder, the contribution margin is revenue less variable costs of production. Stated differently, the contribution margin gives us an idea of how much producers have to cover fixed production expenses (rent, equipment, labor, family living) and, if sufficient, generate a profit.
When considering the total profit situation, the returns for a 50/50 crop rotation were again very good, although it is unlikely to be record-setting. This is because of the higher cost associated with farmland rents and other fixed costs over time. For example, in 2008 – when rotation profits were the highest – the fixed cost structure was $274 per acre. In 2021, fixed costs were $403 per acre. Still, 2021 will go down as the third highest in this data series.
Wrapping It Up
It is pretty clear that 2021 will be memorable for good prices, generally decent yields, and a very favorable cost structure. This combination of events produced one of the most profitable years that many farmers have seen. It is also likely that these strong profits will be under pressure in 2022.
We have already begun to see significant upward pressure on costs. These are being led by fertilizer and land costs, both of which have seen spectacular increases already. We think it safe to conclude that the budget outlook for 2022 is not quite as favorable as what just occurred in the farm sector. It’s still good, just not as good as 2021.