Doster, D Howard

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Purdue University Purdue e-Pubs Historical Documents of the Purdue Cooperative Extension Service Department of Agricultural Communication September 2015 Replant Wheat to Corn or Soybeans? Break-Even Analyses Based on Expected Contribution Margins D Howard Doster Follow this and additional works at: https://docs.lib.purdue.edu/agext Doster, D Howard, "Replant Wheat to Corn or Soybeans? Break-Even Analyses Based on Expected Contribution Margins" (2015). Historical Documents of the Purdue Cooperative Extension Service. Paper 1051. https://docs.lib.purdue.edu/agext/1051 For current publications, please contact the Education Store: https://mdc.itap.purdue.edu/ This document is provided for historical reference purposes only and should not be considered to be a practical reference or to contain information reflective of current understanding. For additional information, please contact the Department of Agricultural Communication at Purdue University, College of Agriculture: http://www.ag.purdue.edu/agcomm This document has been made available through Purdue e-Pubs, a service of the Purdue University Libraries. Please contact epubs@purdue.edu for additional information. 1EC-707Purdue University Cooperative Extension Service • West Lafayette, IndianaIntroductionCurrently, farmers receive government paymentsindependent of the crop mix they plant. In the past,Indiana farmers have planted from 600,000 acresto over 1,000,000 acres in wheat. Expected wheatyields are 55% of rotation corn yields on well-drained and sloping soils, 50% on somewhatpoorly drained uplands, and 45% on poorlydrained dark soils. Planted in the fall, wheatprovides favorable erosion control on highlyerodible soils, even if it is used only as a covercrop and then killed in the spring.The question of when to replant wheat to corn orbeans is important. Why? Wheat yields and qualityare highly variable. While some of this variabilityis because of weather-related factors which occurin late May or June, wheat yields are often af-fected by events occurring before that time.Therefore, farmers can decide to switch fromwheat to corn or soybeans as they finish plantingtheir other acres to corn or soybeans.Just how low can wheat yield be before a personwould be better off replanting the field to corn orsoybeans? This publication explains how thenumbers look based on costs from the PurdueCrop Guide (ID 166), B-95 Input Form GuideBook (CEC-11), and yields from Influence ofProduction Practices on Yield Estimates for Corn,Soybeans, and Wheat (ID 152), when harvestprices are $3.50 for wheat, $2.50 for corn and$6.00 for soybeans. This publication then dis-cusses how a farmer can use contribution marginanalysis to determine how to increase land, labor,and machinery resources.The ProblemThe objective is to find the wheat yield thatwould be expected to produce the same per acrecontribution margin as if the acre were replantedto corn or beans. Contribution margin is revenueminus variable costs. The contribution margin isthe return to land, labor, and machinery resources.Therefore, to calculate the break-even wheat yield,make the per acre contribution margins from eachcrop equal.The replant decision can be postponed untilspring planting of corn and soybeans is aboutcompleted. At that date, the only variable costsremaining for wheat are the harvest fuel andrepairs, say, $4 per acre. For corn or soybeans notyet planted, variable costs also include fertilizer,seed, chemicals, tillage and harvest fuel andrepairs, dryer fuel, and interest. Corn and soybeanfuel and repair costs are based on plow tillage. Ifthe wheat is killed by herbicide and the corn andsoybeans are no-tilled, increase chemical cost anddecrease fuel and repairs. Since the wheat will beharvested four months earlier than corn, beans, ordouble crop beans, add $.10 interest to the wheatprice to get the fall equivalent price.1 The author thanks colleagues Alan Miller and Robert Taylor for their helpful suggestions.ECONOMICSAgriculturalReplant Wheat to Corn or Soybeans?Break-Even Analyses Based on Expected Contribution MarginsD. Howard Doster1Purdue Extension EconomistFarm Management2Wheat to Corn?Assume a Crosby-type soil with an expected cornyield of 130 bushels if planted and harvested onideal dates. If the wheat acreage is planted last afterplanned corn or soybean acreage on May 27 andharvested November 4, the expected corn yield is75% of 130 = 97.5 bushels because of the lateplanting date. Example 1 shows that the per acrecontribution margin for corn is $140.00.1Corn fertilizer is $43 less $24 of the $30 wheatfertilizer which is assumed available for corn.Example 2 shows how the break-even wheat yield,the unknown or “Y” in the algebraic formula, isfound when the corn contribution margin is $140.Thus, if your expected wheat yield is less than 40bushels/acre, you would have a larger expectedcontribution margin by replanting wheat to corn.2Soybean fertilizer is “0.” Presumably, more phosphateand potash were applied for wheat than will be re-moved by soybeans.Example 1Expected revenue, variable costs, and contribution marginfor corn are:Revenue: 97.5 bu @ $2.50 $244Less variable costsFertilizer and Lime1 $19Seed and Chemicals   43Repairs and Fuel   26Dryer Fuel    9Interest    7$104Per acre contribution margin for corn:         $244 - $104 = $140Wheat to Soybeans?What if you were to switch from wheat to soy-beans? Suppose best plant/harvest date yields forrotation soybeans are 32% of rotation corn. Then32% of 130 = 42 bushels. However, if planted May27 and harvested November 4, the expected beanyield is 92.5% of 42 bushels or 39 bushels. Example3 shows that the per acre contribution margin forsoybeans is $166.00.Example 3Expected revenue, variable costs, and contribution marginfor soybeans are:Revenue: 39 bu @ $6.00 $234Less variable costsFertilizer and Lime2 $ 0Seed and Chemicals  40Fuel and Repairs  23Interest    5$68Per acre contribution margin for soybeans:           $234.00 - $68.00 = $166Example 4 shows how the wheat yield needed tobreak even is found from the soybean contributionmargin.In these examples, the break-even yield for wheatis similar at 40 bushels when compared to corn and47 bushels when compared to soybeans. Especiallywhen planted around June 1, soybean yields arelikely less variable than corn yields. Therefore, plantsoybeans unless corn is needed in thecurrent year or unless more acres ofbeans in the current year will adverselyaffect the crop rotation acreage for thenext year.Double Crop?Suppose you plan to plant double cropsoybeans after the wheat and expect ayield of 25 bushels @ $6.00/bu harvestprice. How do you compute the break-even wheat yield compared to corn orsingle crop beans? First, you must findExample 2Per acre revenue minus variable costs = break-even wheat contribution margin[(wheat price + interest to corn harvest) x (Y wheat yield)]- (harvest fuel and repairs) = (corn contribution margin)         [($3.50 + $.10 ) x (Y)] - $4 = $140  3.60 Y - $4 = $140           3.6 Y = $144                 Y = 40 bushel3the contribution margin from double crop soybeansas shown in Example 5.Then you must subtract the double crop contribu-tion margin (CM) of $72.00 from the corn or beancontribution margin as shown in Example 6.Likely, you’ll have different expected yields,costs, and/or prices. Try several combinations ofexpectations using the same math processes asabove and you’ll get appropriate answers for yoursituation. When deciding which crops to raise, andperhaps anything else except taxes,  “past costsdon’t count.” It’s expected future revenue and coststhat you consider in a decision.The point in time when you make the decision willdictate which costs to consider. Before you plantwheat, you’ll also want to use all the wheat variablecosts in your calculations, not just the harvestingfuel and repairs.Optimization Using ContributionMargin AnalysisCompare crop contribution margins as you selectyour crop mix. Recognize that you want to selectacreage of crops so as to get the highest possibletotal contribution margins for your farming opera-tion.You want to select crops where you realize thehighest contribution margin per unit of scarceresource. Strawberry per acre contribution marginExample 4Per acre revenue minus variable costs = break-even wheat contribution margin    [(wheat price + interest to soybean harvest) x (Y wheat yield)]   - (harvest fuel and repairs) = (soybeans contribution margin)    [($3.50 = $0.10)                                           x (Y)]              - $4  = $166                                                                                                    3.60Y-$4  = $166                                                                                                           3.6Y  = $170     Y = 47 bushelExample 5Revenue: 25 bu @ $6.00              $150Less variable costsFertilizer and Lime               $11Seed and Chemicals 53Fuel and Repairs   8Wheat dryer fuel   2Interest   478.00Per acre contribution margin for double crop soybeans: $150.00 - $78.00 = $72Example 6CM corn =  $140CM double crop =    72     $  68CM bean =  $166CM double crop =    72     $94The result is the contribution margin the wheatwill have to contribute to the double crop activity inorder for the contribution margins from corn orbeans and wheat-double crop beans to be equal.Example 7 (p. 4) shows how the break-even wheatyields are found.Thus, if you expect more than a 20 or 27 bushelwheat crop, you’ll have a larger contribution marginby producing wheat-double crop beans. Withexpected wheat yields of less than 20 bushels,replant to corn or beans.4may be much higher than corn. However, you andyour crew can’t produce many acres of strawberries.You can realize much higher returns (total contribu-tion margin) to your labor, land, and machineryresources by producing corn, soybeans, and perhapswheat and beans or sorghum double crop.For the total farm operation, acres may not be themost limiting resource. Therefore, a simple compari-son of contribution margin per unit of a particularresource may produce misleading results. Thebusiness goal is to find the set of activities thatmaximizes the contribution margin to all scarceresources on the farm. This is the difference betweenwhat is essentially partial budgeting versus wholefarm budgeting.With your new “freedom to farm” opportunities,selecting the best crop rotation is again an importantquestion. Your best crop rotation is partly dependentupon your machinery set.Your corn planter is a very scarce resource onMay 1 and on every other day until you get yourcrop planted. You can find out just how scarce(really how valuable) it is in terms of its per hour jobcontribution margin. By calculating such values fordifferent size planters, you have useful informationfor selecting the best size machine for your needs.With a pencil, it’s time consuming to calculate allthe possible contribution margins for your scarceresources each day of the season. In 1968, severalpersons at Purdue used a linear program mathprocess to create a computer program to handle thisin a few minutes. Improved versions of this programcontinue to be used in an annual Purdue Top FarmerCrop Workshop on campus or as requested. Farmersuse the computer to “test before they invest” inchanges in their crop mix, tillage system, machinerysize, and/or farm size.Since the first session, 7,000 mostly Cornbeltfarmers have created 25,000 computer budgets.They’ve tested bigger machinery to improve timeli-ness, then tested adding land because they were tootimely, then tested bigger machinery, then againadded land, etc. Some bought one farm too manyinstead of just renting more land, but most werequite successful. That process is continuing.Example 7Per acre revenue minus variable costs = break-even wheat contribution margin[(wheat price + interest to corn/bean harevst) x (Y wheat yield)]- (harvest fuel and repairs) = (corn or soybeans contribution margin)[($3.50 + $0.10)                                              x(Y)]              -$4   = $68 corn CM                                                                                                 3.60Y-$4  = $68                                                                                                         3.6Y  = $72                                                                                                              Y  = 20 bushel                                                                                                3.60Y-$4   = $94 soybean CM                                                                                                         3.6Y  = $98                                                                                                               Y = 27 bushels Cooperative Extension work in Agriculture and Home Economics, state of Indiana, Purdue University, and U.S. Department of Agriculturecooperating; H. A. Wadsworth, Director, West Lafayette, IN. Issued in furtherance of the acts of May 8 and June 30, 1914. The CooperativeExtension Service of Purdue University is an affirmative action/equal opportunity institution.Printed onRecycled PaperNEW 1/98

Replant Wheat to Corn or Soybeans? Break-Even Analyses Based on Expected Contribution Margins

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Replant Wheat to Corn or Soybeans? Break-Even Analyses Based on Expected Contribution Margins

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