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Comparative Economics of Growing and Marketing Wheat

Comparative Economics of Growing and Marketing Wheat

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Comparative Economics of Growing and Marketing Wheat

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  1. Comparative Economics of Growing and Marketing Wheat

  2. Suppose wheat wasn’t part of your cropping system • How would you decide whether or not to incorporate wheat into your cropping system?

  3. Let’s start with the “relatives” • What would you expect wheat yield to be “relative” to corn yield? Soybean yield? • What would you expect wheat price to be “relative” to corn price? Soybean price?

  4. Relatives continued... • What would you expect wheat allocable cost to be “relative” to corn allocable cost? Soybean allocable cost ? • What are the comparative risk profiles?

  5. Follow the relatives questions with ... • Adjust base budgets for interactions and synergistic effects ... • Primary effects • Secondary effects

  6. Examples of Primary Effects: • Does incorporation of wheat into a corn: soybean cropping system: • Increase corn yield? Soybean yield? • Reduce machinery and labor requirements and costs? • Reduce Farm revenue risk exposure?

  7. Primary effect examples …. • Break-up of weed and pest cycles with associated cropping system cost reductions • Contribute to reduced purchased fertilizer costs

  8. Examples of secondary effects: • Passive soil management • Preventing groundwater contamination • Increased soil “quality”

  9. Let’s get quantitative... • Corn yield = 2 x wheat yield • 10 year average: • 70 bu wheat and 140 bu corn go together?

  10. More …. • 10 year average • 55 bu wheat and 110 bu corn go together?

  11. What about the corn to soybean and soy to wheat yield relationship? • 10 year average • Corn to soy at 3:1 • Soy to wheat at 0.67:1

  12. How about prices ... • ‘96: Corn to wheat @ 1.63:1 • ‘95: Corn to wheat @ 1.28:1 • ‘94: Corn to wheat @ 1.46:1 • ‘93: Corn to wheat @ 1.23:1 • ‘92: Corn to wheat @ 1.58:1 • ‘91: Corn to wheat @ 1.21:1 • ‘90: Corn to wheat @ 1.08:1 • 10 year avg: 1.35:1

  13. OK … wheat prices are not enough greater than corn to offset lower yield … How much do we have to make up from wheat’s other contributions ? • Yield relationship @ 2:1 vs price relationship at 1:35:1 • 140 bu corn @ $2.25 = $315 • 70 bu wheat @ $3.04 = $214 • 1 ton of straw @ $40 = $40 • Revenue difference of $60

  14. Differences and contributions ... • Does the incorporation of wheat into the cropping system increase yields of corn and soybeans? • Well, it depends … • Just adding wheat probably doesn’t increase corn and soybean yields • Wheat with clover as a cover crop increases corn yields in a corn:soy rotation by about 7%. At 140 bu corn, that’s 10 bu or $22.50.

  15. More … differences and contributions: • But, clover seed isn’t free • Seed cost and fertilizer cost reduction is about a “wash” • Thus, $22.50 is a net gain • In some instances, incorporation of wheat may reduce pest control costs ...

  16. More ... • Reduced allocable costs … lower totals for seed, fertilizer, weed and pest control, fuel, drying, …. • $70 to $80 / acre • Cumulatively, $22.50 (x 0.5) + $75.00 = $97.50 vs $60 shortfall (with straw)

  17. Financial Risk

  18. Revenue Risk Exposure Differences: • Ranking: Corn > Wheat > Soybeans • But ... • “Portfolio” don’t put all your eggs in one basket effect • Corn and soybean yields are moderately correlated / associated but corn and wheat and soy and wheat have a low correlation

  19. Revenue risk exposure … • “Portfolio” with wheat included has less revenue risk exposure • If we value the the gain at what it would cost to achieve comparable risk reduction in a corn:soy plan using crop insurance and/or put options on futures, value is $4 to $7 / acre.

  20. Machinery and labor cost reductions: • Wheat provides better distribution of labor/machinery requirements over the course of a year\ • If you were designing a machinery system from scratch, the gain in reduced depreciation, interest on investment and labor would be $4.50 to $6.00/acre

  21. Summing up ... • Wheat price advantage is not enough to offset yield disadvantage • But … the sum of • Rotation effect w/ clover … • Lower wheat production costs • Lower “Portfolio” Revenue Risk • Lower machinery labor req. • Can more than offset the shortfall

  22. END