March 20, 2019

The Economic Advisability of Lowering 2019 N Rates on Corn



by Gary Schnitkey, Agricultural Economist - University of Illinois
read farmdocDaily article

Spring field operations will soon begin, and nitrogen applications on corn will commence. More nitrogen will be applied this spring than is typical because wet weather limited fall applications. University-recommended nitrogen application rates in Illinois are between 140 and 180 pounds of actual nitrogen per acre for corn-following-soybeans. For farmers applying above those rates, application reductions seem prudent this year. If a farmer is uncomfortable lowering to the University-recommended rates, experimenting by leaving strips in fields seems prudent.

Why Consider Lowering Nitrogen Application Rates in 2019?

Two economic factors suggest urgency in lowering nitrogen rates this year. First, net incomes on Illinois farms could be extremely low in 2019. Projections indicate average income on grain farms enrolled in Illinois Farm Business Farm Management (FBFM) could be -$55,000 per farm if prices maintain their current levels and yields are not exceptional (see farmdoc daily January 15, 2019). This average income would be the lowest since FBFM began collecting consistent income data starting in the 1970s. Although higher yields or higher prices could result in higher incomes, it seems more reasonable to expect very low incomes in 2019. Given these low incomes, reducing costs is crucial, particularly if those costs do not increase revenue.

Second, nitrogen fertilizer prices in 2019 have been increasing and will be above levels of the last three years (see Figure 1). On March 14th, the Agricultural Marketing Service (AMS) — an agency of the U.S. Department of Agriculture — reported an average anhydrous ammonia price in Illinois of $615 per ton, which is $97 per ton above the 2018 March average price of $518 per ton. The 2019 price also is above prices in March in 2016 and 2017 (see Figure 1). A higher nitrogen price suggests lowering applications, particularly given that the 2019 expected corn price is roughly at the same level as in 2017 and 2018.



Maximum Returns to Nitrogen (MRTNs) in Illinois

“Maximum Return to Nitrogen” (MRTN) rates are available from the Corn Nitrogen Rate Calculator, a website maintained by universities in Corn Belt states. MRTNs give the nitrogen rate that, over time, will produce the highest economic return for nitrogen use. Many nitrogen rate trials provide the basis for determining MRTNs (see the “About” section of Calculator for more detail).
Table 1 shows MRTNs from the Corn Nitrogen Rate Calculator for northern, central, and southern Illinois. These rates are shown for “corn-following-soybeans” and “corn-following-corn.” MRTNs also are given where the source of nitrogen is anhydrous ammonia and 28% nitrogen solution. Note that the rates in Table 1 include all sources of nitrogen, and credits should be given for nitrogen in DAP (see Using the N Rate Calculator).



Take Central Illinois as an example in interpreting the table. For corn-following-soybeans, MRTN rates are 174 pounds of nitrogen per acre for anhydrous ammonia and 163 pounds of nitrogen per acre for 28% nitrogen solution. Those rates are pounds of nitrogen applied per acre and not the amount of ammonia or solution applied. For anhydrous ammonia, the 174 pounds of nitrogen results in an application of 212 pounds of anhydrous ammonia (212 = 174 / .82 analysis of ammonia). For nitrogen solution, the application is 582 pounds per acre of 28% nitrogen solution (582 = 163 / .28).
Prices used in the calculations of MRTN rates in Table 1 are \(3.70 per bushel for corn, $610 per ton for anhydrous ammonia, and $280 per ton for 28% nitrogen solution. Lower MRTNs result for 28% because nitrogen costs more in 28% than in anhydrous ammonia. The costs per pound of nitrogen in anhydrous ammonia is $.37 per pound ($610 price / (2000 pounds x .82 analysis)) compared to .50 per pound cost for 28% (\).50 = $280 / (2000 pounds x .28)).

PCM and Rates

Precision Conservation Management (PCM) is a farmer service program led by the Illinois Corn Growers Association in partnership with over 30 partners. The mission of PCM is to increase conservation practice adoption using farm business management principles. With 200 farmers enrolled in its 16-county service area, PCM represents about 200,000 acres of farmland in Illinois.
Farmers enrolled in PCM provide detailed production records geo-linked to fields, with data provided including nitrogen applied and yields. Data from 2015 through 2017 have been analyzed and suggest that many farmers apply above MRTN rates, with some exceeding 200 pounds of nitrogen per acre. In 2015 through 2017, higher than MRTNs did not lead to higher yields.
Costs of Over-applying

Applications of nitrogen above MRTNs have additional costs. Given the nitrogen prices above, every 10-pound application of actual nitrogen applied above the MRTN has a cost of $3.70 per acre for anhydrous ammonia and $5.00 per acre for 28%. For anhydrous ammonia, 1.0 additional bushel of corn is needed to compensate for the higher nitrogen costs. For 28%, 1.35 bushels of corn are needed to cover the costs of 10-pounds of additional nitrogen.

Costs increase as pounds of over-applications increase. Take a application that is 50 pounds above the MRTN. For 28%, this application will have an additional cost of $25 per acre. A farm with 1,000 corn acres would have $25,000 higher costs, and $25,000 less net income.

The MRTN takes into consideration many trials, and higher yields will occasionally occur at rates above MRTNs. Over time, however, profits should be maximized at rates near the MRTN (see N rate Calculator Updated). The $25 per acre costs would have to have an addition of 6.8 bushels to cover the cost if the yield above the MRTN was obtained each year. This break-even yield goes up if the yield does not increase each year. For example, the 6.8 bushels increase to 13.6 bushels per acre if the additional application only increases yield in 50% of the years. The break-even yield further increases to 27.0 bushels per acre if the yields respond only in one in four years.

Experimentation

The MRTNs in Table 1 may be considerably below the nitrogen rates used on many farms. Over time, applying above the recommended rate will result in lower profits. Given this fact, lowering applications to the MRTN rate seem prudent. If cutting applications to the MRTN seem extreme, experimentation may be warranted. Placing strips in fields at MRTNs may provide evidence that those rates do result in the most profit.


March 20, 2019

Spring Acreage in Focus

by Todd Hubbs, Agricultural Economist - University of Illinois

Uncertainty on trade issues and the subsequent price movements associated with speculation on the topic added a degree of difficulty to acreage decisions this year. The March 29 Prospective Plantings report will provide the initial indication of potential acreage allotments for spring crops and sets the tone for production potential as we move into planting season. Considerations of planted acreage this spring begins with analyzing the amount of acreage available for planting. During the 2016 – 2018 period, total acreage for principal crops tracked by the USDA came in at 319, 318.3, and 319.6 million acres respectively. When one considers the Conservation Reserve Program (CRP) and prevent plant acres as well, acreage totaled 346.3, 344.3, and 345.0 million acres. Over the same period, corn, soybean, and wheat acreage combined came in at 227.6, 226.4, and 226.1 million acres respectively. Current USDA projections for the three crops indicates 224 million acres planted. The lower acreage estimate implies either a drop in principal crop acreage or an increase in acreage for other crops in 2019.

A potential reduction in planted acres will not materialize through an increase in CRP acres this year. Through January, CRP acreage enrollment is reported at 22.4 million acres, down from the 23.5 million acres last year. The government shutdown and uncertainty in CRP acreage enrollment deadlines led to enrollments coming in below the 24 million acres set forth as the statutory limit. Lower CRP acreage enrollment in 2019 may be negligible when considering acreage planted in major spring crops. While the impact of lower CRP acreage looks to be minimal, spring weather conditions appear set to have a significant influence on the acreage of spring-planted crops.

The weather forecast for parts of the Midwest indicates an above average probability of wet conditions this spring across large parts of the Corn Belt which may slow planting and impact acreage allotments. The prospect of a wet spring looks to exacerbate issues in many areas. In particular, the western Corn Belt may see problems with more moisture on top of a significant snowpack. Prevented planted acres totaled only 1.9 million acres in 2018, down from the previous three years. In those three years, prevented plantings were reported at 6.7, 3.4, and 2.6 million acres, respectively. The National Weather Service forecasts a well above normal potential for flooding in the upper Mississippi River Basin and its tributaries. Flooding and wet conditions in these areas may lead to an increase in prevented plantings and would presumably reduce the total acreage planted. A return to average prevented plantings would diminish possible acreage availability.

Competition for corn and soybean acres this spring focuses on spring wheat and cotton acreage in some major production regions. The winter wheat seedings report released by the USDA in February came in four percent lower than last year. At 31.3 million acres, winter wheat planted sits 1.24 million acres lower than a year ago. The cold and wet conditions in the southern Plains that delayed fieldwork and planting last fall continued through the winter and led to slow growth in late planted wheat. Some abandonment of late-planted wheat in the region remains a possibility. USDA’s projection in February placed wheat acreage at 47 million acres. Based on winter wheat seedings, the implication is spring wheat and durum acreage look to be at 15.7 million acres. Spring wheat, corn, soybeans, and other crops will compete for acreage in the northern Plain states. At 13.2 million acres, planted spring wheat in 2018 rose from the 11 million acres planted in 2017. Expectations of spring wheat acreage coming in at or above last year’s 13.2 million acres are in place. Durum wheat acres look to fall from the 2.5 million acres planted last year. Flooding and snow cover in many areas may impact spring wheat acreage and holds the potential for a shift into soybean acres if planting is delayed significantly.

Cotton looks to compete with soybean acreage in the Mid-South region. Currently, cotton acreage is projected by the USDA to increase by 1.1 percent to 14.25 million acres in 2019. The potential for higher cotton acreage exists as indicated by the National Cotton Council survey released in February pegging acreage at 14.45 million acres. The survey showed that most of the growth is in the Mid-South with the potential for reduced acreage in the Southeast. As a result, soybeans are expected to lose a portion of the acreage allotment in the mid-South with the prospect of increased corn acreage in the Southeast.

Corn acreage in a range between 91.4 – 92.0 million acres provides the baseline for many projections this year. The possibility of lower corn acreage remains a dominant consideration due to fieldwork issues, high fertilizer costs, and poor weather conditions. Soybean acreage expectations indicate much lower acreage levels than last year’s 89.2 million acres with projections in a range between 84.3 – 85.6 million acres. A substantial deviation in planted acreage from current expectations appears necessary to generate a substantial price reaction in corn or soybeans.

Discussion and graphs associated with this article available here.


March 12, 2019

Audio from the All Day Ag Outlook

Use this player to listen to the audio from WILLAg’s All Day Ag Outlook held at the Beef House in Covington, Indiana Tuesday, March 5, 2019.

Global Weather
* Eric Snodgrass, Agrible - Champaign, Illinois

Cash Grain Panel
* Matt Bennett, AgMarket.net
* Aaron Curtis, MID-CO Commodities - Bloomington, Illinois
* Brian Stark, The Andersons - Champaign, Illinois
* Chuck Shelby, Risk Management Commodities - Lafayette, Indiana

The Value of Farm Land
* Murray Wise, Murray Wise Associates LLC - Champaign, Illinois

Soybean Panel
* Ellen Dearden, AgReview - Morton, Illinois
* Bill Gentry, Risk Management Commodities - Lafayette, Indiana
* Pete Manhart, Bates Commodities - Normal, Illinois
* Bill Mayer, Strategic Farm Marketing - Champaign, Illinois
* Jacquie Voeks, Stewart Peterson - Hollister, Missouri

Corn Panel
* Curt Kimmel, Bates Commodities - Normal, Illinois
* Wayne Nelson, L&M Commodities - New Market, Indiana
* Mike Zuzolo, Global Commodity Analytics & Consulting - Atchison, Kansas
* Todd Hubbs, University of Illinois - Urbana, Illinois


March 07, 2019

SCO: An Insurance Option Available to More Farmers


Supplemental Coverage Option (SCO) was introduced in the 2014 Farm Bill but was limited to acres where Price Loss Coverage (PLC) was the commodity title program choice. More farmers likely will be choosing PLC for the 2019 and 2020 marketing years, leading to more acres being eligible for SCO. SCO may be attractive to those farmers who find the costs of Revenue Protection (RP) at an 85% coverage level too high. Farmers interested in SCO should discuss eligibility options with crop insurance agents.

by Gary Schnitkey

SCO Background
SCO is available to farmers who choose PLC for receiving commodity title payments. SCO is not available when Agricultural Risk Coverage (ARC) is chosen (farmdoc daily, June 16, 2015). ARC was selected on over 90% of the base acres in corn and soybeans under the 2014 Farm Bill. As a result, SCO was not an option for most Midwest farmers. Similar to the 2014 Farm Bill, the 2018 Farm Bill again gives a choice between PLC and ARC. More farmers likely will choose PLC for 2019 and 2020, increasing the acres eligible for SCO.
SCO provides protection in a band from 86% down to the coverage level of an underlying COMBO product. If, for example, a farmer selects a 75% Revenue Protection (RP) product, SCO could be purchased from 86% to the 75% RP coverage level (see farmdoc daily, December 17, 2014; April 24, 2014).

The SCO band of coverage is based on county revenue given that the underlying Combo product is RP. That is, county revenue must fall below 86% of expected revenue before SCO makes a payment. As a result, the RP-SCO combination provides mixed coverage: Farm-level coverage is provided from the RP coverage level downward while county-level coverage is provided between 86% to the coverage level of the RP product.

The primary disadvantage of the RP-SCO combination is that the county-level coverage may not match losses on a farm. Sometimes a farm may have a loss while SCO will not trigger a payment. Conversely, it is possible for the farm not have a loss while the county-based SCO product triggers a payment.

Premiums under RP-SCO Combinations
The primary advantage of using SCO is lower farmer-paid premium. The costs of a RP-SCO combination usually will be lower than an 85% RP product when RP is purchased at less than 85% in the RP-SCO combination. Compared to RP 85%, the RP-SCO premium usually is lower for two reasons. First, county yields typically are less variable than farm yields, resulting in fewer payments for a county product than for a farm-level product at the same coverage level. Lower payments then result in a lower premium. Second, the premium assistance under SCO often is higher than for RP. SCO has a subsidy rate of 65%. For a product with an expected payment of \(1, the SCO farmer-paid premium will be about $.35 (\).35 = $1 expected payment x (1 – .65 subsidy rate)). The 65% subsidy rate is higher than all subsidy levels for basic and optional units when the coverage level is above 50% (see Table 1). The 65% SCO subsidy level also is higher than the subsidy level at an 85% coverage level given enterprise units.



Table 2 shows examples of RP-SCO combinations for Sangamon and Saline Counties in Illinois. Sangamon County is a relatively low risk county while Saline County has higher risk. Premiums are shown for corn (Panels A and B) and soybeans (Panels C and D). Relationships of premiums are the same for both counties and crops.



Take corn in Sangamon County as an example. An RP 85% product has a farmer-paid premium of $21.35 per acre (see Panel A of Table 2). SCO for an RP with an 85% coverage level has a $.79 premium. For an 85% RP coverage level, the RP-SCO combination has a $22.14 per acre premium. An RP-SCO combination with an 80% RP coverage leave has a $14.02 per acre premium, with $11.03 premium from RP 80% and $2.99 from SCO from 86% to 80%. RP-SCO combinations have lower farmer-paid premium as the RP coverage level is decreased. A $22.14 combined premium result for an 85% coverage level, $14.02 premium results for an 80% coverage level, a $9.43 premium results for a 75% coverage level, and so on.

Who Should Consider SCO Farmers purchasing RP at 85% coverage levels likely will not find SCO an attractive alternative. The SCO band from 86% to 85% coverage will provide little additional coverage. Any reduction of RP coverage level with an SCO band results in a crop insurance payment structure that is less correlated with losses on the insurance unit.

Farmers purchasing lower coverage levels could find SCO useful, particularly if the lower coverage level is selected so as to result in a lower farmer-paid premium. The farmer-paid premium for RP approximately doubles from the 75% coverage level to 80% coverage level. For example, soybean RP premium in Sangamon County goes from $2.93 per acre at a 75% coverage level to $5.78 at an 80% coverage level. Premiums again double from the 80% coverage level to the 85% coverage level. For soybeans in Sangamon County, RP premiums increase from $5.78 at an 80% coverage level to $11.68 at an 85% coverage level. A farmer currently at a 75% coverage level could include SCO for $2.53 additional premium, with the $5.46 premium for the RP-SCO combination being less than for a stand-alone RP 80% premium ($5.78) and RP 85% premium ($11.68). The addition of SCO to a RP 75% coverage level would improve coverage, providing county-level coverage above the 75% coverage level of the RP.


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