Newsletter | Past Issues

March, 2005

In This Issue:

Put Those Excess Funds into a Retirement Program
Farm Machinery Cost Estimates for 2005

Landlords: Protecting Your Right To Payment

2005 Crop Loan Rates Announced by the USDA

2003 Ohio Farm Income Report Now Available

Agricultural and Horticultural Employer Checklists Available in Ohio & Indiana

Why Farm Property Values Fluctuate

Corn-Soybean Rotation: Its impact on acreage decisions

Put Excess Funds into a Retirement Program
Donald J Breece, OSU Extension Farm Management Specialist
                
For many farmers, 2004 was a better than average year for farm income and consequently raised the income tax liability for most.  Why not use various retirement plan accounts that offer tax savings and will generate desired income for future retirement years.  Evidence will show that many farm families have not planned adequately for retirement.  Often, a farmer will reply to the question of retirement as "I don't ever plan to retire."  But, is that a realistic answer?  Spouses sometimes have a much different answer, and a farmers physical health may not allow them to "farm forever."  If the farm is to transfer to another generation, it may not be possible to continue in business and sell enough assets to fund retirement. 

Life expectancy is increasing and the annual cash requirements for living has rapidly increased in recent years.  Financial planners indicate that we should plan on at least 80% of our current family living needs during retirement.  Today, farm families spend an average of $40-47,000 for living costs to include health care, insurance and taxes.  At a 4% annual inflation rate, these costs will double in 18 years, triple in less than 30 years.  Do you have enough assets to fund retirement?  A Virginia study indicated that an average farmer retiring with $500,000 in assets will outlive his equity by about 14 years, when living costs and health care is considered.  Furthermore, how much equity will be in depreciated buildings and equipment at retirement age?  Will there still be debt to be paid?   How much was paid into social security or through self employment taxes?   Through aggressive income tax planning, many farmers have not paid much into the social security system.  When a person's lifetime of earnings is indexed for inflation, and the top 35 years are considered for the social security retirement, the eventual monthly check may be quite small,  And, what about income requirements for a surviving spouse? 

It is recommended to get professional advice to put a complete plan together.  There are many choices and various tax consequences to work through.  New income tax laws allow individuals to use a Retirement Savings Contributions Credit of up to 50% of a qualified contribution into a retirement plan, up to $1,000 credit per individual.  Adjusted gross income must be less than $50,000 for joint returns and $25,000 for single.  Even if a person does not qualify for the tax credit, participation in a Roth IRA would allow $3000 in 2004 (and $4000 in 2005) to be invested per person, and the earnings from this investment to accumulate completely tax free.  There is also a catch-up provision for folks over 50 years of age of an additional $500 per year.  If a farmer wants to contribute more money to a retirement plan, or help fund an employee retirement plan, the SEP IRA or the SIMPLE IRA would be the next set of accounts to consider since these allow for much larger contributions.

Are you ready for retirement?  Do you have a complete plan of diversified investments that will take care of you and a surviving spouse in the manner that you both deserve?  Will your farm survive as a business for the next generation?   Use the "good year" of 2004 to set the stage for your retirement plan.  Don't put this off, in today's farming environment we can not depend upon farm income, social security, or the final value of the farm assets to fund a long, happy retirement. The sooner you begin with your plan, the better.    

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Farm Machinery Cost Estimates for 2005

Barry Ward, Leader Production Business Management, OSU Extension, Department of Agricultural, Environmental and Development Economics

University Extension Economists periodically calculate machinery costs for tractors, combines, and field equipment. The Universities of Minnesota and Nebraska have recently updated these estimates for 2005 and the publication is titled “Farm Machinery Cost Estimates for 2005 is located online at: http://www.apec.umn.edu/faculty/wlazarus/mf2005.pdf

Extension Economists William Lazarus ( University of Minnesota Extension ) and Roger Selley ( University of Nebraska Extension ) have collaborated to update these Cost Estimates. These estimates are useful for setting custom rates for machinery operations, establishing rental rates for farm machinery, and analyzing machinery costs on farms. These costs are estimated using formulas developed by the American Society of Agricultural Engineers.

Machine costs are separated into time-related and use-related categories. Use-related costs are incurred only when a machine is used. They include fuel, lubrication, use related repairs and labor. Time related costs, also often referred to as overhead costs, accrue to the owner whether or not the machine is used. Overhead includes time related economic costs: interest, insurance, personal property taxes, and housing. Depreciation will be related to use to the extent that increased annual usage shortens years of life and/or reduces salvage value. While not entirely use-related, depreciation is included along with operating expenses and labor costs in the columns labeled “use-related cost/acre”.

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Landlords: Protecting Your Right To Payment

(by David C. Barrett, Jr., attorney at law, BARRETT, EASTERDAY, CUNNINGHAM & ESELGROTH LLP, 7269 Sawmill Road, Suite 100, Dublin, Ohio 43016; phone: 614-210-1840; email: dbarrett@farmlawyers.com )

“ Let the landlord beware ” is the rule in Ohio when it comes to getting paid by farm tenants. While some states protect agricultural landlords through legislation that creates a statutory lien in favor of landlords for unpaid rent, Ohio is not one of those states. Thus, an Ohio agricultural landlord generally is an unsecured creditor vis-à-vis other creditors of a farm tenant.

Are there ways for a landlord to protect his/her right to receive farm rental payments? The answer is yes, but it takes some work beyond the handshake or trust me habits of the past. In addition to having a written lease with the tenant, here are some general rules:

•  Don't be the tenant's banker . Get paid up front. It may even be worth providing a discount for up front payment because higher cash rent that you don't receive is much worse in the end.

•  Financial Statements . If you aren't getting paid up front, then you are extending credit to the farm tenant. Did you ask for a written financial statement? Would the bank extend credit to anyone without a financial statement? A written financial statement signed by the farm tenant lets you know what your chances are of getting paid. If the farm tenant refuses to give you a written financial statement, see Rule #1.

•  Securing Payment . If a landlord is willing to extend credit and wants to have a secured claim in the event the tenant has financial problems, then the landlord needs to follow the formalities to create, perfect and enforce a security interest under Ohio law and, in the case of crops or other farm products, federal law.

•  Crop Share Lease . An alternative to cash rent, of course, is a crop share lease (which has its own set of risks and rewards). In the typical crop share lease, the tenant owns only his/her portion of the crop. In such a situation, the tenant's creditors should not have any legitimate claim to the landlord's share of the crops. However, it is very important that a written lease be used in crop share situations to avoid disputes with the farm tenant's creditors over ownership of the crops. If the lease is properly executed and notarized, it also can be filed of record with the local county recorder to bolster the landlord's position vis-à-vis the tenant's other creditors.

The Value in Being a Secured Creditor

A secured creditor has rights in specified collateral of a debtor should the debtor default on his/her obligations to the creditor. This holds true even if the farm tenant files bankruptcy. The typical landlord who decides to extend credit to a farm tenant might want to take a security interest in the farm tenant's growing and harvested crops.

In order to have a legally enforceable security interest, the following (at a minimum) will have to be done:

A) A written lease outlining the parties' rights and responsibilities needs to be signed   by the parties;

B)   An agreement in the written lease or in a separate document granting the landlord   a security interest in the farm tenant's growing and harvested crops and any other   collateral that the landlord and the tenant agree upon (Other collateral could   include crop insurance proceeds and federal farm program payments. Note that   crop insurers and USDA have special forms that must be executed by the farm   tenant in order to properly assign such payments.);

C)   A UCC-1 financing statement needs to be properly completed and filed with the   Ohio Secretary of State (this action is known as “perfecting” the creditor's   security interest);

D)   It should be determined whether other creditors have previously filed financing   statements on the same collateral (this can be determined by a search of the Ohio   Secretary of State's records and the local county recorder's records; while   financing statements are now filed with the Ohio Secretary of State, some older   filings at local county recorders' offices may still be in effect). If another creditor   claims a security interest in the same collateral, it is prudent for the landlord to   request a subordination of the competing creditor's claims to the extent that rent is   due the landlord; and

E)   The landlord wanting to protect his/her secured claim needs to have the farm   tenant provide a list of potential buyers of farm products that conforms with the   requirements of Section 1324 of the federal Food Security Act of 1985, 7 U.S.C.   § 1631. The written agreement with the tenant-debtor should contain language   requiring the debtor-tenant to provide this information upon request. Ohio is a   “direct notice” state under this federal law and secured creditors have to give   notice to the debtor's farm product buyers with instructions on how to pay the   debtor. Typically, secured creditors ask farm product buyers to write joint checks   to ensure that the debtor pays the creditor when crops are sold.

If all of the above seems complicated, see Rule #1 ( Don't Be The Tenant's Banker ).

IMPORTANT : This summary is being provided for educational purposes only and should not be used as a substitute for professional advice, as there are various detailed requirements that need to be carefully followed and there often are exceptions to the general rules.

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2005 Crop Loan Rates for Corn & Soybeans announced by the USDA

David Marrison, OSU Extension Educator, Ashtabula County

Ohio crop farmers should be aware that the United States Department of Agriculture released the 2005 national and county loan rates for corn, grain sorghum and soybeans on January 31, 2005 .   The 2002 Farm Bill established the 2005-crop national average loan rates at the following levels: Corn   $1.95 per bushel Grain Sorghum $1.95 per bushel Soybeans   $5.00 per bushel   The 2005 county loan rates reflect the USDA's continual effort to make incremental adjustments to the relative levels of the county loan rates for each commodity. The restructured rates are intended to better reflect the market factors affecting each crop and to minimize distortions that work to the detriment of producers and industry. The USDA has paid special attention to reducing notable loan rate differences among neighboring counties that are not the result of current market forces.   Producers interested in learning the 2005 Crop County Loan Rates for their county can do so by calling their local Farm Service Agency office or by accessing the Farm Service Agency Web site at http://www.fsa.usda.gov/dafp/psd/LoanRate.htm or directly linking to the county loan rates posted at:

http://www.fsa.usda.gov/dafp/psd/2005CorSorSoyLR.pdf

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2003 Ohio Farm Income Report Now Available

Barry Ward, Leader Production Business Management, OSU Extension, Department of Agricultural, Environmental and Development Economics

The newly updated Ohio Farm Income Report for 2003 has been completed and is available online through the OSU Department of Agricultural, Environmental and Development Economics (AEDE) website at http://aede.osu.edu/ (Navigate through Info Resources, Publications, AED Economics Report Series or go directly to the Report at:

http://aede.osu.edu/resources/docs/pdf/RJ1TRSUQ-2HZ8-M86M-V3MQTO2XW3O25W8H.pdf

This report summarizes farm cash receipts for Ohio for various commodities for 2002 and 2003. Data is also summarized for commodities by county for 2002 and 2003 and ranks commodity receipts for each individual county to show relative importance of a commodity to a county's overall farm receipts. Report authors include Dr Alan Randall, Department Chair, and Shu-Ling Chen, Student Assistant, AEDE and James Ramey and Wayne Matthews of the National Ag Statistics Service (NASS). Their summary of Ohio Farm Receipts for 2003 follows in edited form.

Cash receipts during 2003, from Ohio 's livestock, livestock products, and crops totaled $4.66 billion , 6.6 more than the $4.37 billion in 2002. Cash receipts from all crops in 2003 were up 4 percent from 2002. Cash receipts from livestock in 2003 were 11.1 percent in 2002 cash receipts from livestock. The 2003 value of cash receipts for crops, at $2.85 billion, was 4 percent higher than 2002 and the highest since the 1998 value of $3.06 billion. However, the 2003 crop value for cash receipts was, 15.4 percent below the record high value of $3.37 billion set in 1997. The percentage of total farm marketings attributable to crops in 2003 was 61.2 percent, 1.5 points below the revised 2002 data.

The 2003 cash receipts for livestock and livestock products totaled $1.81 billion, up 11.1 percent from the 2002 value but 7.7 percent below the record set in 1996. The percentage of total farm marketings earned by livestock and livestock products was 38.8 percent, 1.5 points more than the revised 2002 cash receipts value.

Government payments for 2003 totaled $398.8 million, 42.9 percent above the 2002 value of $279.0 million. Government payments represent 7.9 percent of the grand total for cash receipts. (All cash receipts plus government payments).

Agriculture in Ohio made a net value added contribution of $2.58 billion to the National economy in 2003, up 73.6 percent from 2002. The final agricultural sector output, at $6.01 billion, was up 22.7 percent from 2002. Purchased inputs totaled $2.80 billion, up 6.5 percent from last year. Capital consumption at $811.4 million was down slightly from 2002, while payments to stakeholders at $1.11 billion were up 15.8 percent.

The top five commodities in terms of cash receipts earned were soybeans with $983.6 million and 21.1 percent of total receipts; corn with $722.1 million and 15.5 percent of total receipts; wholesale milk with $584.3 million and 12.5 percent of total receipts; greenhouse and nursery with $551.7 million and 11.8 percent of total receipts; and poultry and eggs with $536.2 million and 11.5 percent of total cash receipts. The commodities ranked sixth through tenth were cattle and calves, hogs, wheat, vegetables, and hay, respectively. The top ten commodities accounted for 95.6 percent of all Ohio cash receipts.

The following ten counties ranked first through tenth, respectively, based on total cash receipts: Mercer, Darke, Wayne , Licking, Putnam, Wood, Holmes, Hardin, Lorain , and Fulton . Wayne county ranked first in milk, and cattle and calves, and oats & hay. Mercer county ranked first in cash receipts for hogs, poultry and other livestock. Darke county was in first place for corn and soybeans. Wood county was first for wheat, and Lorain county ranked number one for other crops.

This year's report includes publication of revised data by county for 2002 in addition to the 2003 preliminary data. The publication of the revised 2002 data by county permits a better comparison of the two years after the revisions have been made to reflect more complete data.

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Agricultural &Horticultural Employer Checklists Available in Ohio & Indiana
John Wargowsky
Executive Director - Mid American Ag and Hort Services, Inc.

Ohio   and  Indiana   agricultural  and  horticultural  employers  have a new resource  to  assist them in performing tasks required by state and Federal labor laws and regulations. The Ohio State University Extension Ag and Hort  Labor  Education  Program  developed the Ohio checklist in partnership with Mid  American  Ag  and  Hort  Services  (MAAHS).  The Indiana checklist was developed  by  MAAHS  in  partnership  with the United States Department of Agriculture's Risk Management Agency.

Employers  often  comment  they  need  a  comprehensive  list  of  employer requirements  that  details  the  thresholds for applicability and provides sources  of  additional  information. The eight-page checklist includes the following six sections to meet such employer needs.

* Section I - Before Hiring, Employers Must
* Section II - After Hiring, Employers Must
* Section III - During Employment, Employers Must Provide to Employees
* Section IV - Annually, Employers Must Complete
* Section V - References
* Section VI - Labor Law/Regulation Compliance Thresholds & Contacts

The  printed  checklists are being distributed primarily by Mid American Ag and  Hort  Services  through  events  and Ohio and Indiana agricultural and horticultural  organizations.  Limited supplies are available for others to distribute  to  employers  through targeted events and mailings. An on-line
version is also available and includes live hyperlinks that will be updated regularly  and  assist  employers  in  locating  the  necessary  forms  and information.

Contact Mid American Ag and Hort Services at 614-246-8286 or labor@ofbf.org for more information on the Ohio or Indiana Agricultural and Horticultural Employer Checklist. The on-line checklists are available at www.midamservices.org by clicking on 'Quick Ref' and then 'Checklists'.   Agricultural and horticultural organizations and businesses are encouraged
to create links directly to these on-line checklists.

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Why Farm Property Values Fluctuate

Warren F. Lee, Professor Emeritus, OSU Department of Agricultural, Environmental and Development Economics

click here for a PDF Version of this article

Since 1974, most farmland in Ohio has been assessed for property tax purposes on its Current Agricultural Use Value (CAUV) instead of the fair market value used for most other types of real estate. CAUV results in a significant reduction in farmland assessed values. CAUV's as a percent of fair market values range from about 20% in metropolitan areas to around 40% in rural farming counties. Real estate parcels are reappraised every six years and assessed values are updated every three years. The objective of this article is to explain why CAUV's may change between reappraisals and updates.

CAUV's are estimated by dividing the estimated net income per acre by a capitalization rate (Cap Rate). The Cap Rate reflects the opportunity cost of money for someone who is considering an investment in farmland. Consider an example where the gross revenue = 150 bu. x $2.00 = $300 per acre, non-land production cost = $200 per acre and the Cap Rate = 10%. The CAUV for this parcel would be ($300- $200) / 0.10 = $1,000 per acre. (Another way to understand Cap Rates is to show this calculation in reverse or from an investor's perspective. An acre of land worth $1000/A that nets $100/Yr. would have a Cap Rate of 10%; $100/$1000 = .10 or 10%)

Causes of Fluctuation

Crop Rotations and Yields

The “highest and best use” of the parcel is a cropping program determined by soil type, slope and drainage characteristics. The actual use of the parcel, which may be similar or quite different from the highest and best use, has no bearing on CAUV. Crop yields are based on the soil productivity indexes for over 3,300 soil types in Ohio . Crop rotations are based on slope and drainage. For example, as slope increases, the rotation shifts from row crops to more hay. Farmland parcels with greater than 25% slope are classified as permanent pasture or woodland and are assigned a minimum value of $100 per acre. Crop yields and rotations do not change from year to year and are not a source of variation in CAUV's.

CAUV's do not include the values of buildings and other improvements. These improvements are appraised separately so the total assessed value may increase if improvements have been added.

Commodity Prices

Gross income = yields x prices, so even though yields are constant, changes in commodity prices do cause changes in CAUV's. Commodity prices used to determine CAUV's are based on five year moving averages of prices received by farmers. Prices received over a total of seven years are considered with the highest and lowest values deleted. Government payments received by farmers are not included in the CAUV calculations.

Despite the “smoothing” effects of the moving averages, some changes in CAUV's can be attributed to changes in commodity prices over time. CAUV calculations for Tax Years 2002 through 2005 were based on moving averages of commodity prices that ranged from $2.05 to $2.12 per bushel for corn, $5.11 to $5.42 for soybeans, $2.49 to $2.79 for wheat, $70.20 to $73.98 per ton for mixed hay and $56.11 to $58.06 for grass hay.

Non-land Production Costs

Non-land production costs are based on OSU Extension Enterprise Budgets. These costs have generally been increasing slowly over time and rising production costs have a dampening effect on CAUV's. Production costs for base yields are adjusted on per bushel increases for higher yields to account for added fertilizer, harvesting, drying and other marginal costs. To illustrate the trends, non-land production costs for corn with a base yield of 100 bu. per acre increased from $212 in 2002 to $230 in 2005. Over the same period, the added costs for corn yields above the 100 bu. per acre base yield ranged from 89 to 92 cents per bu. Production costs are also “smoothed” over time by using a five-year moving average.

Capitalization Rates

The Cap Rates used in the CAUV calculations are based on farm mortgage interest rates, the opportunity cost of equity capital and a risk premium to reflect slope, drainage and other soil-specific characteristics. Changes in Cap Rates have been a significant source of variation in CAUV's in the past. Between tax years 1990 and 1993, the base Cap Rate dropped from 12.3% to 9.25% due to a sharp drop in mortgage interest rates. As a result, CAUV's on parcels that were reappraised or adjusted in 1993 were significantly higher than they were three years earlier.

Cap Rates used in the CAUV calculations are now based on five-year moving averages of interest rates. In recent years, the base Cap Rate has trended slowly downward from 10% in 2000 to 8.5% in 2005. With no changes in commodity prices or production costs, declining Cap Rates cause CAUV's to rise, and vice versa.

How Much Might CAUV's Change?

Consider the effects of 5% changes in the variables that affect the CAUV using our earlier example. A 5% increase in commodity prices to $2.10 with a yield of 150 bu. per acre and no change in production costs or the Cap Rate, would cause the CAUV to increase from $1,000 to $1,150 [(150 x 2.10) - $200 / 0.10]. So, a 5% increase in the commodity price resulted in a 15% increase in the CAUV in this example.

A 5% increase in production costs to $210 per acre would cause the CAUV to decline by 10% - from $1,000 to $900 per acre. A 5% decrease in the Cap Rate from 10% to 9.5% would result in a CAUV of $1,053 (a 5.3% increase).

It is important to recognize that increases in CAUV's do not result in proportionate increases in property taxes. Property value increases apply only to the 10 mills of inside millage. Tax reduction factors are applied to avoid windfall gains to taxing districts supported by voted outside millage.

Summary

Most Ohio farmland used in agricultural production is appraised for property tax purposes on the current agricultural use value. CAUV yields are based on soil type, slope and drainage. Five year moving averages of commodity prices, production costs and interest rates are the other variables used in the capitalization formula. Property taxes paid on CAUV's are significantly lower than taxes based on fair market values.

To qualify for CAUV, the parcel must be not less than 10 acres and it must be used exclusively for agricultural purposes. If land under CAUV is converted to non-agricultural use, some of the CAUV tax savings are subject to three years of recoupment. Applications to and questions about the program are handled by local County Auditors ' offices.

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Corn-Soybean Rotation: Its impact on acreage decisions

Carl Zulauf and Allison Specht , Professor and Graduate Student, respectively

Department of Agricultural, Environmental, and Development Economics, Ohio State University

click here for a PDF Version of this article

Introduction

The benefits from rotating crops are a key consideration in planting decisions. Rotations control crop-specific pests and diseases by altering the host environment. Thus, they increase yields and reduce expenditures on pesticides. Incorporating legumes, such as soybeans and alfalfa, into a rotation also reduces the amount of nitrogen fertilizer that needs to be applied on the subsequent crop. This benefit is particularly valuable for corn which requires large amounts of nitrogen to obtain high yields. These benefits limit the willingness of farmers to alter their crop rotations until prices change enough to compensate for the loss of the rotation benefits.

Objective of this study is to provide an initial assessment of the limit that the benefits of rotation place on cropping decisions. The study focuses on the corn-soybean rotation, which is widely believed to be the most common in the U.S. Benefits of the corn-soybean rotation are quantified based on a review of the agronomic and extension literature, a Delphi questionnaire distributed to a state extension agronomist in the ten largest corn producing states, and a review of the crop budgets developed by the extension service in these 10 states. A simple analysis is then conducted to estimate the limit that the benefits of the corn-soybean rotation place on the response of farmers to changes in corn and soybean prices.

Delphi Questionnaire

The Delphi process involves the use of a standardized instrument to elicit the opinions of experts on a subject. A Delphi process is considered useful when the information is used to examine the benefits and costs of a potential decision and when a list of experts can be identified (Turoff, 1971). Furthermore, the benefits and costs of crop rotation change over time as new varieties are released, as crop production techniques change, and as pests adapt. Thus, a Delphi process can help identify the current picture of the benefits and costs of the corn-soybean rotation.

The list of experts was identified as state agronomy specialists in the top ten corn producing states in the U.S: Iowa , Illinois , Nebraska , Minnesota , Indiana , South Dakota , Ohio , Missouri , Kansas , and Wisconsin . Responses were received from nine states, but only six provided useable numerical responses. Table 1 contains the Olympic averages calculated from the numerical responses to the two questions used in this analysis. An Olympic average removes the high and low values from the calculation, thus reducing the influence of the extreme or outlier responses. This consideration merits attention because of the small number of questionnaires distributed. The responses to the entire survey are reported in the appendix table at the end of this report.

The respondents indicated that planting corn after corn instead of planting corn after soybeans had three major impacts on corn production attributes. Corn yield declined by 10%, the use of nitrogen fertilizer increased by 21%, and the use of pesticides for insect control increased by 13%. Four major impacts on soybean production characteristics were identified when planting soybeans after soybeans instead of planting soybeans after corn. Soybean yields declined by 8%, the use of pesticides for insect control increased by 10%, the use of disease management strategies increased by 10%, and the amount of soil erosion declined by 12%.

Unsurprisingly, these expert estimates are consistent with the literature.

The yield impacts from the Delphi questionnaire are similar to those reported, for example, by Gregoire (2004) and Lauer, Porter, and Oplinger (1997). Because soybeans add 15-60 pounds of nitrogen to the soil (Buchholz, et. al , 1999), optimal corn yields require less nitrogen fertilizer when corn is grown in rotation with soybeans rather than continuously (Vitosh and Jacobs, 1996). Last, the Illinois Agronomy Handbook , for example, also lists these benefits to the corn-soybean rotation over monoculture: (1) more weed control options, (2) fewer insect and pest problems, and (3) potential benefits of residue on soybean output and tillage practices.

Table 1. Impact of Changing Corn-Soybean Rotation on Selected Production Attributes, Ten Largest U.S. Corn Producing States, 2004.

Source: survey of state agronomy specialists in the 10 largest U.S. corn production states, Fall 2004.

Extension service personnel for Iowa , Illinois , Indiana , Nebraska , and Wisconsin publish separate budgets for planting corn after corn and for planting corn after soybeans. A simple average of the numbers reported by these five states reveals that, compared to the corn-soybean rotation, (1) yields are 8% (11 bushels/acre) lower for corn-corn, (2) variable costs are 10% ($20/acre) higher for corn-corn, (3) total fertilizer costs are 7% ($4/acre) higher for corn-corn, and (4) total pesticide expenses are 38% ($11/acre) higher for corn-corn. Only Iowa 's budget divides fertilizer expense into (1) nitrogen and (2) phosphorus and potash. Nitrogen is listed at $40/acre for corn-corn and $30/acre for corn-soybeans. Phosphorus and potash is listed at $14/acre for corn-corn and $15/acre for corn-soybeans. Although it is difficult to definitely compare results from the Delphi questionnaire with the state budgets because the categories differ, the two sets of data appear to be broadly consistent. The biggest difference occurs for pesticides, with the Delphi questionnaire revealing a smaller increase than the state budgets.

Only Indiana prepares separate budgets for planting soybeans after soybeans and for planting soybeans after corn. Compared to planting soybeans after corn, (1) yields are 10% (4.7 bushels/acre) lower while (2) variable costs are only 2% ($2/acre) lower when planting soybeans after soybeans. Historically, expenditures for insect control and disease management when producing soybeans have been considered minimal. However, concern over nematodes and plant diseases in soybeans have been increasing during recent years, especially in northern production regions. Bergland (1999) notes that root rot, white mold, and brown stems rot are common pathogens that build up if soybeans are planted continuously. Porter, et al . (2001) found that the highest levels of soybean cyst nematode eggs were found in rotations where soybeans had been planted for two years or longer. Given the recent emergence of these concerns and their greater prominence in northern production regions, it is not surprising that the Delphi results, compared to the Indiana state budgets, imply a higher cost when planting beans after soybeans than when planting soybeans after corn.

Analysis: Rotation Benefits and Acreage Response

To examine the impact that the benefits from the corn-soybean rotation have on acreage decisions, several assumptions are made. First, yield and variable cost for corn planted after soybeans and for soybeans planted after corn are assumed to equal the simple average yield and variable costs reported in the budgets for the top ten corn producing states. Second, the yields for corn planted after corn and for soybeans planted after soybeans are assumed to decline from the rotation yields by the average percent obtained from the Delphi questionnaire (see Table 1). Third, the variable cost for corn after corn is assumed to be 10% higher than for corn after soybeans while the variable cost for soybeans after soybeans is assumed to be the same as for soybeans after corn. This assumption is based on the state budgets for those states that published separate budgets for corn and soybeans planted in rotation and planted continuously. The state budgets are considered more complete and internally consistent than the information generated by the Delphi questionnaire, which solicited information for only selected categories. Last, to initialize the analysis, the price of corn for the corn-soybean rotation is assumed to be $2.00/bushel, implying a return over variable cost of $93/acre.

Given these assumptions, the price of corn that generates a $93 return over variable costs for corn grown after corn is $2.37/bushel. The price of soybeans that generates a $93 return over variable costs for soybeans grown after corn is $4.62/bushel but for soybeans grown after soybeans is $5.02/bushel. These prices imply a soybean-corn price ratio of 2.31 for corn and soybeans planted in rotation (i.e., $4.62/$2.00). In contrast, the price ratio is 1.95 (i.e., $4.62/$2.37) using the corn and soybean prices that equalize the returns over variable cost for soybeans planted after corn and for corn planted after corn. This calculation implies that, for a farmer in this hypothetical situation, the soybean-corn price ratio has to be less than 1.95 before it is rational to consider altering the corn-soybean rotation by planting corn after corn. Analogously, the soybean-corn price ratio has to exceed 2.51 (i.e., $5.02/$2.00) before a farmer in this hypothetical situation would be interested in altering the corn-soybean rotation by planting soybeans after soybeans. Stated somewhat differently, the soybean-corn price ratio must increase by more than 9% (i.e., 2.51/2.31) for this farmer to rationally alter the corn-soybean rotation by planting soybeans after soybeans and the ratio has to fall by at least 16% (i.e., 1.95/2.31) for corn to be planted after corn instead of planting soybeans after corn.

Table 2. Corn and Soybean Prices and Price Ratios that Offset Benefits of Corn-Soybean Rotation, Ten Largest U.S. Corn Producing States, 2004.

NOTES: (1) See text for discussion of procedures used to generate table. (2) Competing decision and calculation of soybean-corn price ratio were: corn after beans vs. beans after corn ($4.62/$2.00); corn after corn vs. beans after corn ($4.62/$2.37); beans after corn vs. corn after beans ($4.62/$2.00); beans after beans vs. corn after beans ($5.02/$2.00). (3) Source: original calculations.

Implications of Analysis

Because of the higher yields and lower costs associated with rotating corn and soybeans, a range exists for the soybean-corn price ratio over which changes in the ratio will not provide incentives for farmers to shift out of their corn-soybean rotation to plant corn after corn or soybeans after soybeans. Based on information obtained from the literature as well as state budgets and a Delphi questionnaire of a state agronomist in the ten largest U.S. corn producing states, this analysis suggests that this range lies between soybean-corn price ratios of 1.95 and 2.51. Note that an asymmetry exists in how much the soybean-corn price ratio has to change in order to induce a farmer to break the corn-soybean rotation. The reason for the asymmetry is that the benefit of planting corn after soybeans is greater than the benefit of planting soybeans after corn.

As with all farm level decisions, a farmer should use his/her own yield and cost data. To illustrate the importance of the yield data, consider a situation where the corn-to-soybean yield ratio is 3.6 instead of 3.05 as in the illustration above. Thus, the yield of corn after soybeans is 155.5 bushels/acre instead of 132.1 bushels/acre. This change implies that the no change range on the soybean-corn price ratio for this producer is 2.43 to 3.11 instead of 1.95 to 2.51.

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Editors: Chris Bruynis & David Marrison

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