Where Will 2006 Lead Us in Crop Agriculture?

Although harvest is not yet complete, there are farmers and managers who are beginning to make plans for 2006. With the current grain market and higher input costs, it is clear that 2006 will be even more challenging than the 2005 crop year.

This article has a twofold purpose. One purpose is to look at sowing wheat as a viable cropping alternative for 2006. The second purpose is to stimulate crop producers to begin looking at the various cost categories where cost cutting measures may be required. Planning for 2006 is imperative now!

Are wheat and double-crop soybeans viable in 2006? The answer certainly depends upon costs and returns as compared to other cropping activities. Table 1 provide data from the Kentucky Farm Business Analysis Program on the 2004 enterprise analysis summary for crops. When viewing the data results, please remember individual producer data are likely different. Table 1 data are only averages. For those of you with individual 2004 enterprise analysis data results, Table 1 may be useful for comparison purposes.

Obviously, 2005 farm records are not complete. But from my first look at results for this year, it appears at this point that the 2005 wheat and double-crop soybean yields are higher than 2004 levels. Given this, we will not use 2004 results to analyze the feasibility of wheat and double-crop soybeans for 2006.

Due to the lower wheat yields, the 2004 double-cropping activity did not fare as well as the 2006 projections shown in Table 2. However, 2004 price and yield results do point out one thing. We are never certain of the results, no matter how carefully we plan. There is always risk and it must be considered. Be realistic in price and yield expectations.

I have completed Table 2 to provide a basis upon which to plan for 2006 cropping activities. There are many assumptions made in its development. Yields are based on 5-year averages. Prices are based on the futures market close on September 23, 2005, adjusted for normal harvest basis. Some cost assumptions are as follows: Nitrogen will increase 10% from 2005 levels. Dry fertilizer and starter fertilizer will be at least 5% higher. Seed corn and grain sorghum seed will increase 0 to 3%, dependent upon the variety. Wheat seed and seed beans will increase 1%. Pesticide costs will increase about 1%. I am guessing that fuel costs will increase about 38% over 2004 levels. The balance of the remaining costs is shown to be from 3% to 8% higher.

Short-term decision models typically examine returns over variable costs. Table 2 presents these returns in parentheses. Clearly, wheat and double-crop soybeans project the highest returns ($184.32). The activity generating the next highest returns over variable costs is full season soybeans ($118.05), followed by white corn ($98.02; assuming a price premium of 40 cents per bushel) and yellow corn ($85.20). A sensitivity model reducing gross returns for each activity by 10 percent does not change the rankings by returns over variable costs.

The analysis, thus far, is true for owned and cash rented land. What happens if the rental arrangement is changed under which the landlord receives 1/3 of the returns and bears no variable input costs? The new rankings with returns over variable costs are as follows: 1) full season soybeans ($34.20), 2) wheat and double crop soybeans ($32.38), 3) white corn ($-16.82), and 4) yellow corn ($-25.20). With a 10% reduction in total returns under the assumed crop share arrangement, the rankings change to 1) full season soybeans ($17.43), 2) wheat and double crop soybeans ($1.99), 3) white corn ($-39.79), and yellow corn ($-47.28).

We must examine another scenario in the face of Asian rust entering the U.S. during 2004. Though minor damage was found in the U.S. during 2005, consideration must be given to potential damage and/or increased costs. Let's assume that the soybean yields are attainable, but it will cost $30 per acre to protect the yields. For owned or cash rented land, the crop activity rankings change to 1) wheat and double crop soybeans ($154.32), 2) white corn ($98.02), 3) yellow corn ($85.20), and 4) full season soybeans ($88.05). For the crop share arrangement of 2/3-1/3, the rankings change to 1) full season soybeans ($4.20), wheat and double crop soybeans ($2.38), 3) white corn ($-16.82), and 4) yellow corn ($-25.20).

We would be remiss if we did not discuss the impact of loan deficiency payments (LDPs). Table 3 shows the 5-year averages of LDPs. Table 2 did not include LDPs as the assumed per unit price was greater than the loan rates. However, from a historical standpoint, it does not necessarily mean that LDPs will not become available. For producers who wish to include LDPs in the current projections, please review Table 3.

A second point that we should make from the information in Table 3 is that compared with history, the projected returns to the wheat and double crop soybean activity are $42.42 per acre larger than the 5-year history. The reason this is important is that if producers decide to sow wheat this fall, forward price contracts or some other method of establishing a price must be acted upon. The projected price used was $3.46 per bushel in Table 2. The 5-year average selling price is $2.90 per bushel. The highest average price received for harvest time sales is $3.32 per bushel during the last five years. In addition, producers must be careful with white corn. We recommend that it be grown under contract as in more years than not, the price premium disappears by the time the crop is harvested. (We assumed a 40-cent premium per bushel.)

Given an understanding that wheat and double crop soybeans are a very viable consideration, especially with the 2006 price consideration of wheat, we must briefly discuss cost considerations. The projections shown in Table 2 do not suggest very large profits without serious cost cutting measures. Even with some crops more closely approaching five-year average total returns, most producers have their work ahead. Let’s briefly touch on some of them.

• Soil Type. Adjust inputs consistent with soil capability. Also, producers must consider wheat and double crop soybeans on well-drained soils.
• Fertility. Many producers can find a way to cut this cost. Does "starter fertilizer" pay dividends? By soil testing, discussing results with your county agricultural extension agent and even the University of Kentucky state agronomy specialists, producers may find that fertilizing by soil type can save money. In addition, pH is an important factor. A high fertilizer rate on soils with low pH is not a winner!
• Pesticides. Timeliness is likely more important than the pesticide program itself. This is another input that needs serious review. There is much cosmetic spraying. Discuss this with your county agricultural agent and UK state agronomist.
• Seed. Use variety trial information for seed selection. Save by establishing prices early for discounts. Adjust plant populations by soil types.
• Repairs and Supplies. It is not the time for "tinkering" or gadgets. Only purchase the necessary. Is it justified? Think before doing! Get another party's opinion when in doubt.
• Fuel and Oil. Is tillage work really necessary? Yes, it can pay dividends where needed. Still, do only as needed. Check for soil compaction. This is probably the only area where concern is needed.
• Capital purchases. Yes, some producers are financially secure that new purchases are affordable. Many already have more debt payments than they will be capable of making. Do not use income taxes as an excuse for doing something that will be regretted or unaffordable!
• Insurance. Protection is important. What level is needed is the better question. For property, liability, crops, and health, reviewing policies with your agent is important. You may get an objective review from a Farm Business Analysis specialist in your region. How much can you afford to lose? Insurance coverage is not there to make money.

Let me conclude by saying, producers must objectively look forward to 2006. A "team approach" is probably prudent for most. An objective team review of 2006 can help make 2006 a profitable year. Emotions may become a producer's biggest enemy with each decision that must be made. Producers must make a battle plan and the sooner it is made, the better for most! Challenge yourself.

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