Comparative Economics of Growing and Marketing Wheat

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Comparative Economics of Growing and Marketing
Wheat
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• Suppose wheat wasnt part of your cropping system
• How would you decide whether or not to
  incorporate wheat into your cropping system?

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Lets 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?

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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?

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Follow the relatives questions with ...

• Adjust base budgets for interactions and
  synergistic effects ...
• Primary effects
• Secondary effects

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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?

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Primary effect examples .

• Break-up of weed and pest cycles with associated
  cropping system cost reductions
• Contribute to reduced purchased fertilizer costs

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Examples of secondary effects

• Passive soil management
• Preventing groundwater contamination
• Increased soil quality

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Lets get quantitative...

• Corn yield 2 x wheat yield
• 10 year average
• 70 bu wheat and 140 bu corn go together?

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More .

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

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What about the corn to soybean and soy to wheat
yield relationship?

• 10 year average
• Corn to soy at 31
• Soy to wheat at 0.671

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How about prices ...

• 96 Corn to wheat _at_ 1.631
• 95 Corn to wheat _at_ 1.281
• 94 Corn to wheat _at_ 1.461
• 93 Corn to wheat _at_ 1.231
• 92 Corn to wheat _at_ 1.581
• 91 Corn to wheat _at_ 1.211
• 90 Corn to wheat _at_ 1.081
• 10 year avg 1.351

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OK wheat prices are not enough greater than
corn to offset lower yield How much do we have
to make up from wheats other contributions ?

• Yield relationship _at_ 21 vs price relationship at
  1351
• 140 bu corn _at_ 2.25 315
• 70 bu wheat _at_ 3.04 214
• 1 ton of straw _at_ 40 40
• Revenue difference of 60

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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 doesnt increase
  corn and soybean yields
• Wheat with clover as a cover crop increases
  corn yields in a cornsoy rotation by about
  7. At 140 bu corn, thats 10 bu or 22.50.

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More differences and contributions

• But, clover seed isnt 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 ...

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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)

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Financial Risk
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Revenue Risk Exposure

• Differences
• Ranking Corn Wheat Soybeans
• But ...
• Portfolio dont 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

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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 cornsoy
  plan using crop insurance and/or put options on
  futures, value is 4 to 7 / acre.

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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

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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

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END