By Brent Gloy and David Widmar
It’s March, so we’ve been thinking about the crop insurance prices and the acreage battle. At $5.91 and $13.76, spring 2023 crop insurance prices are some of the highest observed, but the situation has elements in play.
Table 1 shows the spring crop insurance prices since 2007. For both crops, the 2023 prices are the second-highest observation. For corn, the 2023 price lags behind the 2011 record ($6.01). Last year, soybean prices set a record of $14.33. Near-record prices in 2023 set the stage for high revenue projections and crop insurance coverage levels.
Figure 1 plots the soybean/corn price ratio of spring crop insurance prices. At 2.33, the 2023 price ratio is the lowest since 2016. Furthermore, the ratio is below the long-run average of 2.35, indicating corn prices are relatively higher. Considering only the price ratio, the acreage battle would appear to favor corn, especially compared to recent history.
While popular, the price ratio tells us nothing about the overall profitability and doesn’t account for production expenses. These are both important considerations, especially given fertilizer expenses. To further unpack the situation, we used crop insurance prices and Purdue crop budget data to consider these factors.
Table 2 shows the annual revenue and contribution margin for corn and soybeans since 2007. As a reminder, contribution margins are the returns after variable expenses are paid, or how much is available to cover the fixed expenses, debt payments, family living, and generate a profit. For corn, projected revenue is at $1,087 per acre, the highest observation in 17 years. At $771 per acre for soybeans, the projected revenue is only $18 per acre behind last year’s record.
Despite high revenue, high variable expenses have cut into contribution margins. For 2023, corn contribution margins are $381 per acre, $37 behind soybeans. There are several ways of presenting these data. First, the records for both crops were set several years ago; 2011 for corn ($571) and 2008 for soybeans ($473). Second, compared to last year, contribution margins are lower by $32 for corn and $41 for soybean. Finally, and the most positive spin, is that contribution margins in 2023 are above the long-run averages. Specifically, the average contribution margin for corn is $346, which is nearly the same as the soybeans, $345.
Figure 2 plots the difference in contribution margins, which shows soybeans have more historic appeal than what the price ratio alone suggests. At a $37 per acre advantage in contribution margin, soybeans have only had better crop budget conditions twice (2014 and 2023). On average, corn barely wins the contribution battle at +$1 per acre. At the extreme, corn beat soybean contribution margins by more than $100 per acre in 2007 and 2011.
Wrapping It Up
When it comes to slicing the 2023 crop insurance price data, there are several angles. First, prices are historically high, which is good news given the high production costs. Second, relative prices are generally favorable for corn. The overall profitability situation – measured by the contribution margin – is above the long-run average but lower than last year. Finally, soybeans have a strong budget advantage given the high-cost structure.
Those still curious can dig deeper into recent AEI Premium articles that review how much the crop insurance safety net provides in 2023 and what relative prices and contribution margins tell us about acreage estimates.