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Comparative Economics of Growing and Marketing Wheat

Comparative Economics of Growing and Marketing Wheat. Suppose wheat wasn’t part of your cropping system How would you decide whether or not to incorporate wheat into your cropping system?. Let’s start with the “relatives”.

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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

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