Central S. Dakota: 2016 potential crop profitability
Soybeans are projected to provide the best return on investment for central South Dakota farmers during 2016 according to an analysis of profitability of crops grown in central South Dakota performed by SDSU Extension.
“Using SDSU Extension budgets, we conducted this study to compare the potential profitability of crops in central South Dakota incorporating yield and price risks,” explained Lisa Elliott, Assistant Professor & SDSU Extension Commodity Marketing Specialist. “The results consider risks as well as returns.”
SDSU budgets are used to estimate expected costs and returns for crops in the upcoming production year. Elliott added that because this analysis is based upon SDSU Extension budgets, price projections and yield projections, any change of these assumptions will alter the probability of returns.
“Producers should evaluate how close the yield and budget cost assumptions align with their own operations in order to evaluate the applicability of this analysis to their operation,” she explained. “This analysis does not incorporate any potential rotational benefits, which could also change the results.”
To figure out which crops would provide growers with the greatest return on investment, Elliott developed a model which incorporates risk associated with yields, crop prices and fertilizer prices. The risk variables developed for the model included the following:
The mean crop yield and yield distributions were based upon a trend yield model using historical (1999-2014) USDA-NASS Hughes County, South Dakota crop yield data (when available).
Price risk was incorporated using price distributions from historical SDSU (1999-2014) central cash price data.
Price distribution means were derived for Central South Dakota in 2016/2017 by adjusting 2016/2017 crop price projections from the USDA Agricultural Projections report using an average difference between historical central cash prices and USDA-NASS national prices (1999-2014).
Fertilizer price risk was incorporated by using historical regional fertilizer prices to develop a standard deviation around the fertilizer prices listed in the budget.
Elliott’s team then developed two graphics to provide growers with an easy-to-read method to view the results of the study.
Table 1 shows the projected 2016/2017 mean yields and prices for Central South Dakota used in the analysis.
Figure 1 is a stoplight chart which shows the probabilities of returns of the different crops.
Green indicates the probability that greater than $150 per acre return over direct and fixed costs, while yellow indicates probabilities of returns between $0 and $150 per acre.
Red shows the probabilities of negative returns, or where returns do not cover fixed and direct costs. “For example, the results show that there is a 15 percent chance that returns to direct and fixed costs for soybean production in 2016 will be greater than $150 per acre, while there is a 52 percent chance of returns being between $0 and $150 per acre, and a 33 percent chance that returns will be less than $0 per acre,” Elliott said.
Figure 2 shows the projected mean returns over direct and fixed costs per acre for Central South Dakota from the analysis.
“All crops, except sorghum, show positive mean returns over direct and fixed costs for Central South Dakota,” Elliott said. “Soybeans, by far, show the highest projected mean returns over direct and fixed costs for Central South Dakota.”
Keep this in mind
When reviewing the information compiled by SDSU Extension, Elliott explained that it is likely farm yields will vary more than historical county level data, so variation in yields at the farm level may be underestimated.
“Also, insurance mechanisms and farm programs have not been incorporated into the analysis, so revenue risk may be overstated for operations that utilize these risk-reducing mechanisms and eliminate any probability of returns below a revenue threshold,” she said.
She added that if there are changes to ending stocks, for any of these crops during the production year, growers could see changes in the probabilities of price levels supported, which would alter the results. But this analysis provides a base perspective on potential returns given the supply and demand situation that exists today, and historical changes in prices and yields.
To read additional articles which examine the potential crop profitability for South East, North Central, South Central, North East, and East Central South Dakota, visit iGrow.org.
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