Microeconomics of investing in $3 corn and $8 soybeans: a good idea?

Chris: Welcome everybody to another episode of the Ag View Pitch. And today you have Chris Barron again here to have a little conversation with you. About a question that we've been getting quite a bit from producers that we work with on the subject of this specific question. And it is worded this way, um, how much can I invest in $3 corn and $8 soybeans? And that's kind of a tough question. As we look at where our cost of production's at for most of our clients, it's approaching $4 in corn if you use your 5-year yield average and it approaches $9 to $9.30 or so, somewhere in that area, depending on what part of the country you're looking at and that kind of thing in terms of cost production on grains.

And so that becomes kind of a tough question, but I want to spend about 10-15 minutes here walking everybody through kind of the logic of, you know, how much more do we invest in a crop that maybe isn't worth as much and how do we make some of these decisions. And so I'm going to start out by just pointing out that we have a tool called a margin enhancement calculator. That's a very simple tool, but yet at the same time it kind of helps in operations, especially if you have a couple of decision makers in the operation that maybe don't always agree as you get later in the growing season of, you know, should we be spending money on fungicide, additional nitrogen, insecticide, if all of a sudden we get dry and we start to have some issues and those kind of things. And so, um, just want to work through some of these key considerations.

And so I want to start out by just going through what the 4 key considerations are first. Number 1 is use your own numbers. I talked about that last week in the presentation or the podcast that I did on land rental negotiation and how we can end up a lot of times making incorrect decisions if we're using, um, theoretical numbers or numbers that come from a third party as opposed to your own numbers. And so that's why we like to get these tools out in your own hands, running your numbers, not somebody else's numbers, not averages and that kind of stuff. So we really want to get specific to your situation. So number one, use your own numbers. Number two, What's the potential productivity look like?

You know, and when we talk to a grower in Ohio and 5 minutes later talk to somebody in Nebraska and 15 minutes later somebody in Texas and then somebody in North Dakota, we hear a lot of variance in terms of productivity potential in a given area, weather, just a lot of things factor into this. So we really need to look at our specific productivity potential as number 2. Number 3 is evaluate your individual insurance coverage. So that again is another thing that from one area to the next looks quite a bit different. Depends on what your APH levels are, what level of coverage you actually have purchased or have the capacity to purchase, because in some areas the insurance coverage level can be at a higher level, and we'll talk about that here in a little bit.

And then the fourth thing and the final thing is, again, ties back into running your own numbers, but this is analyzing your margin enhancement numbers. And we'll get into what does that mean, understanding, you know, how, again, the number one question that we're talking about in this podcast is how much money can we spend in $3 corn and $8 soybeans? So let's go back to number one, use your own numbers. Pretty simple. Uh, like I said, when we look at some of the decisions that get made when, uh, somebody selling us product talks us into something, or when we had an experience last year that a certain product worked well, every year is different. You all know that. Um, and so we want to be really careful to guard where the information comes from that, that drives these decisions. And again, using your numbers is going to ultimately be the best part of the process.

Number 2, potential productivity. So what's it look like in your area? And again, we all get smarter as the growing season goes on. So, you know, once we're done planting, if everything goes good, we have pretty good prospects. We can start to count on, okay, probably a 5-year yield average is a great place to start, you know, so So what is your yield average? And so let me give you an example of that specifically. Uh, just was looking at one of our clients' numbers here. Um, their 5-year yield average is right around 220 bushel an acre. Their cost of production this year is going to be at $343 at 220. Um, however, if they have a 10-bushel reduction in their 5-year yield average, instead of their cost of production being $343, all of a sudden it's $359. If they drop 20 bushels, all of a sudden it goes from 343 to 377.

If they go all the way down to 190, which they've had a yield like that in the last 5 years, they're all of a sudden now at 397. So again, know your numbers and look at your yield potential and ask yourself, where is that number? What is the 5-year yield average? Does it look like we're going to be able to achieve that? So that way, when you start to populate your margin enhancement analysis tool, you get as close as you can to a real number in that regard. So that kind of covers the productivity part of that. Um, evaluation, uh, of your insurance coverage is another really key area. And so what we see a lot of times is is, you know, a lot of our clients do go to the 85% coverage level if they have a pretty strong APH, because their coverage level in terms of dollars per acre is quite high, especially in corn.

And so right now, specifically when we look at a grower who has grown corn, bought 85% coverage, if that individual yields their APH, so for example, if they have an APH of 200 bushel corn, they grow 200 bushel corn, If this fall price comes down to an average of $3.29 or lower, right around $3.30 or lower, they will probably or most likely be in an indemnity payment situation. Um, this calculation is done, it's an average daily close in corn specifically during the month of October. And so again, if we see a number right around that $3.30, they're going to be collecting probably on the corn. For soybeans, it's, it's during the month of October as well, but it's off the NOV soybean number. And that's, that's a little bit lower number, even at 85%, probably a little less likely that we'll see some indemnity payments.

But the way the market's looking this year, you know, it's probably likely that we could see a lot of operations with a fair amount of indemnity payments going out this year on the insurance side. So again, understand that because that does factor in the decision. Because if all of a sudden, you know, your APH, as I gave an example of the client, the numbers that I showed in their productivity potential, let's say their 5-year average is 220, that's their APH level. It's probably a situation where if all of a sudden they're sitting there looking at 190 bushel corn, doesn't look like it's going to quite make their 5-year average, it gets real difficult to spend any money on that crop, and that's very understandable.

However, conversely, if the crop does look really good, and that's kind of what we're seeing in some areas where this crop got planted timely, things are looking really good, and all of a sudden, you know, maybe they're thinking they can grow 330 bushel corn, their cost of production in that level is, is $3.28, Well, yeah, if they can enhance the yield, we all have to keep in mind that the, the fastest way to lower our cost of production is improving yield. And so that leads me then to point number 4, which is run your margin enhancement numbers. And again, this tool is available. We'd be happy to send it to you. What it involves is 4 pieces. Number 1, plugging in your yield, and I have an example here just on my computer that I'll plug in as we talk through this. I'll put in a 220-bushel yield. The next thing we do then is we put in an estimated price.

I'm just putting in right now $3.30 cash-on-farm price. I know there's operations in there and be listening to this might be lucky to get $2.90, and there's also operations that might be getting close to $4, kind of depends on where you're at in the country and what your basis levels are. So understand that again, that's why you need to run your own numbers, not averages. Then next we would plug in the investment per acre. So what's it going to cost for the product, you know, whether it's additional nitrogen, fungicide, insecticide, herbicides, you know, going back for a rescue weed treatment, any, anything like that that you're considering spending money on, what is that cost going to be? Including the pass, you know, so it might be the product and the pass.

So basically I plugged in $30 and as an example here, just assuming that we're going to put some additional nitrogen on to include the pass and the nitrogen. And then the next thing is yield enhancement, and that's a real important one. You know what, if you're going to spend money on a product mid-season, you want to know that it's going to generate additional yield, right? So what, what's the extra yield that you're going to get out of this product, you know. And so in this case, I'm just saying, well, if we put this additional 50 pounds of nitrogen on, we're expecting an additional 10 bushels. Now, it's just an example. Again, you're going to want to put your own numbers in here on whatever specific analysis you're doing, plug in the amount of acres, and then basically what this spits out then is, is what's your per acre improvement.

So like in this case, it's $3, but you know, that makes it worth the investment then in that case. Um, you know, you also, it spits out how many bushels do you need to cover the cost? And in this case it's 9 bushel. So, you know, an extra bushel is, um, is gaining you, uh, that $3. Um, one of the things that I want to point out though, that's real important is as we get later into the season, and we're sitting here looking at 3-something corn or less, 8-something soybeans or less. It's a very emotional thing and we get sick of spending money halfway through the year, but that doesn't mean that we should give up on the crop. I know there's some of you that probably are going to need to start putting the brakes on in terms of spending money on this crop. Conversely, there's people here that probably should keep their foot on, on the gas pedal here.

And enhance the yield because again, it might be a situation where increasing yield is going to really reduce that cost of production, uh, in terms of a cost per bushel and give us an opportunity to be able to market this grain at these lower prices and still have a margin, uh, possibility here, or at least at the very least reduce the amount of loss that could occur in a, in a low marketing year like this. The final thing I do want to point out though in this margin enhancement tool is it shows a column here called investment per bushel, and a lot of times, like you said, when you're writing a check out, you really don't want to, to write out a big check in the, in the middle of the season. I implore you to look at what's this going to cost me per bushel, because a lot of times we'll buy a put option, spend 14, 15 cents a bushel or, or something, along those lines to enhance or protect.

Well, this is the same thing with a product mid-season where when we look at this and the example I gave you, 220 bushel corn, 330, spending $30 an acre, that's 14 cents a bushel at 220 bushel corn. If you, if you enhance that by, by just 10 bushel, basically what that does is it drops down. It's 13 cents per bushel investment. So instead of looking at it and saying, geez, I got to write out a check for $25,000, depending on the acres you're going to run it over, what is that investment cost on a per bushel basis? How many bushels do you need to cover that cost? And try to have those numbers help guide that decision so that it's not an emotional decision. Instead, it's more of an economic decision based on on the margin enhancement potential that you might get. So really, that's all I have for this podcast. I did want to though get this out.

Like I said in the last one that I did by myself, I'm used to talking with Duane and Shay and everything, and so hopefully this is a useful podcast. I know that I want to let everybody know, please email me if this is a tool that would help with some of the decision making that you're going to have during the remainder of the growing season. And I know a lot of you may already have it. If you do, you're listening to this, you want me to think through or analyze some of this stuff with you, please give me a call so we can stay in contact as some of these decisions are made. And they're, they're difficult when the commodity prices are low like they have been. So again, thanks everybody for listening. We'll be back with some other topics real soon. And, and thanks for listening to the Ag View Pitch, and we'll catch you next time.

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