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Crop management decisions balance agronomics, economics

Knowing your numbers is the foundation of good decision-making on your farm

What’s it cost to grow a bushel of wheat, canola, soybeans or corn on your operation?

If you can’t answer that question, it’s going to be hard to make informed decisions about how to manage your fields.

That’s because production, marketing and management starts with planning, and calculating the cost of production (COP) is the first step, according to Roy Arnott, farm business specialist with Manitoba Agriculture.

Roy Arnott

Roy Arnott
photo: File

“Knowing the COP on a per-bushel, not just a per-acre basis, is key to maintaining and managing for profitability,” said Arnott at the Manitoba Agronomists Conference in Winnipeg last month, where he presented data from the new provincial guidelines for estimating 2017 crop production costs.

Calculate costs

The 2017 COP is available online as a customizable Excel spreadsheet which allows producers to plug in numbers that more accurately represent their own farm.

For most Manitoba crops, 2017 operating costs are $150 to $250 per acre, and when fixed costs (but not labour) are taken into account the total cost per acre ranges from $300 to $450. The profitability analysis shows that canola, at a long-term average yield of 40 bu./ac. and an anticipated fall price of $10.75/bu., would deliver a return of $25.79 per acre net profit, when all operating and fixed costs are taken into account. Wheat, at an average historic yield of 55 bu./ac. and a price of $6.25/bu., would give a negative net return. Soybean at 36 bu./ac. and $11.50/bu. could net producers $65.64 per acre.

“Prices look a bit stronger than they did a year ago in terms of projections and margins for the most part are positive, so that’s good to see for our industry,” said Arnott.

Projected break-even prices, with operating and fixed costs factored in, are $9.36/bu. for canola, $5.72/bu. for wheat, $8.84/bu. for soybean and $3.69/bu. for corn. Break-even yields based on these prices are 34.8 bu./ac. for canola, 50.3 bu./ac. for wheat and 27.7 bu./ac. for soybeans.

“If we have profitable break-evens, and we can achieve them in the market, things look good for the upcoming year,” said Arnott.

Risk level

A new feature in the 2017 COP is a break-even yield risk ratio, which calculates target or average yields as a percentage of break-even yields to help determine the amount of risk with any particular crop.

“Anything over 100 per cent is good, but the lower the number the more challenges a producer faces,” said Arnott. “The tighter the number is to 100 per cent, the more risk there is. As an example, canola at 40 bu./ac. yield exceeds the break-even by 6.4 per cent, whereas wheat at 55 bu./ac. is right on the break-even, and soybean at 36 bu./ac. exceeds the break-even by 19 per cent. This is the NASCAR analogy – it tells you how close to the wall you are. How much money can you put into a crop? If you know your break-even yield is sitting at 100 per cent of your target yield don’t spend money – even if the crop needs it. If there’s no hope to make a profit you have to back away.”

A quick tip for producers wanting to cut down on input costs is to buy their fertilizer in the fall, because long-term data shows that on average it is 15 per cent cheaper in fall than in spring.

The COP also includes a sensitivity analysis or stress test which allows producers to play around with different yield and price scenarios to see what impact they would have on the bottom line. Arnott gave the example of a 10 per cent drop in prices, combined with a five per cent drop in yield. In most crops the net profit would be negative, the exception being soybean, which would hold in at a net profit of around $5.61/ac.

“This highlights a key fact in farm management,” said Arnott. “You have to produce a good crop or you have nothing to work with, and all the economic analysis you run doesn’t matter.”

Insurance strategy

Another new feature for 2017 is the AgriInsurance analysis. Arnott believes that producers need to look at crop insurance more strategically.

“Insurance coverage at 80 per cent will cover all of the operating costs, but depending on the crop being grown it’s going to leave $75 to $125 of total costs (including fixed costs) not covered,” Arnott said. “This is an indication of risk. And this is something I think more farms should be calculating as they go forward.”

The key point, added Arnott, is that different producers need different insurance coverage, depending on their situation.

“The young producer just starting is going to need a lot of insurance. He’s got to go 80 per cent,” Arnott said. “More established producers may need less insurance as they often have fewer liabilities. We have to remember that we insure liabilities, we don’t insure revenues.”

And agronomics

Crop management decisions are a fine balancing act between economic and agronomic considerations. There are a number of tools available to producers which can help them make informed agronomic decisions, such as crop rotation yield tables, based on MASC harvest production reports.

According to Anastasia Kubinec, oilseeds crop specialist with Manitoba Agriculture, the best economic returns over a long-term rotation of six years is not coming from the classic wheat/canola rotation.

“Wheat on canola is giving us a yield boost of one per cent on canola and two per cent on wheat,” Kubinec said. In contrast, what Kubinec calls the ‘new classic’ rotation for Manitoba — canola, wheat, soybean, canola, wheat, soybean — is showing a four per cent boost in canola yield following soybean.

There are many other factors that come into play with regard to crop rotation, including disease and weed issues, nitrogen use or even water availability, that have to be assessed over time, added Kubinec.

“This tool does demonstrate that we could be getting more benefits with our crop rotations because the yield potential for a single crop does change based on what crop it is following,” Kubinec said. “Using the information from MASC and the COP calculators, producers can determine whether they want to switch their crop rotation and what crop on crop is going to make the most money.”

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