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QUINCY AREC RESEARCH REPORT NF-82-2
PRODUCTION AND MARKETING
OF IRRIGATED CORN
^*--"r;:" .-"x"" / ''
BY M.A. EASON ND F.M. RHOADS
SFlorida Agricultural Experiment Stations
Institute of Food and Agricultural Sciences
University of Florida, Gainesville
Quincy AREC Research Report NF 82-2
PRODUCTION AND MARKETING
OF IRRIGATED CORN
BY
M.A. Eason
and F.M. Rhoads1
Institute of Food and Agricultural Sciences
Agricultural Research and Education Center
Quincy, Florida
M. A. Eason, Extension Farm Management Economist, F. M. Rhoads, Professor of Soil
Science, AREC, University of Florida, Route 3, Box 638, Quincy, Florida 32351
PRODUCTION AND MARKETING OF IRRIGATED CORN
M. A. Eason and F. M. Rhoads1
Budgets
The production of a crop requires many different inputs such as land, labor,
capital, and management. A budget is needed to determine the most productive
and profitable combination of these resources. A budget is simply a financial
plan. An example of a corn budget is presented in table (1).
Fixed costs are usually considered to be those incurred in crop production
regardless of the management level. In other words they will be the same re-
gardless of yield. However, some variable costs become fixed once the decision
is made to include a particular practice. For example, if herbicides are used
the effective rate will be applied and yield will be influenced as a result of good
weed control. The rate is fixed and does not change as higher yield goals are
set. Irrigation is similar because water stress in corn plants must be minimized
for greatest returns. Fertilization practices are different because the amount
applied is related to yield goal. The producer must have some knowledge of
the fertilizer response curve for the selected hybrid and population under his
particular soil conditions in order to make wise decisions concerning fertilizer
practices.
The production and marketing process begins with preparing a budget be-
fore the production period begins. In preparing the budget the farmer should
estimate all costs, yields, and returns. A producer must know his costs before
he can effectively calculate an asking price. Once costs are known the producer
can determine what profit margin he will accept when marketing his product using
cash contract or futures market.
lM. A. Eason, Extension Farm Management Economist, F. M. Rhoads, Professor of
Soil Science, AREC, University of Florida, Route 3, Box 638, Quincy, Florida
32351.
- 2-
Economic Analysis
Break-even analysis and marginal analysis are two techniques that are used
to evaluate the empirical corn data. The break-even price is the price the farmer
must get for his corn in order to cover all costs at given yield levels and costs.
The break-even price is also the average production cost (APC). The formula
used for calculating break-even price or APC is
Break-even price = total costs
yield
A producer who calculates his break-even price ahead of time will know what the
lowest acceptable price will be. Table (2) shows the break-even price for
various inputs of fertilizer and seed. Figures (1,2 & 3) show these graphically.
Figure 1 is a good example showing that the lowest break-even price
occurred at the highest yield. The fertilizer inputs for the lowest break-even
price were 300 Ib of ammonium nitrate/A and 1050 Ib of (5-10-15) /A. Application
of more fertilizer resulted in increased cost with no further yield increase and
reduced net return. In this particular case maximum net return occurred at the
point of maximum yield and lowest APC without regard to selling price (assuming
it was greater than the APC).
A different hybrid was used to obtain the data shown in Figure 2. Soil
conditions were different because residual levels of nutrients were lower as shown
by the zero yield for zero fertilizer. A maximum yield was not reached and the
APC continued to decline. Under these conditions the producer should apply as
much fertilizer as he can afford.
Marginal analysis is the second technique used in evaluating the corn data.
Marginal analysis is a valuable tool for determining the most profitable combina-
tion of inputs and corn yield. The concern is with the last added or marginal
unit of input and yield, thus profits are maximized when marginal returns are
equal to marginal costs. Marginal analysis in this situation deals only with
variable costs such as seed and fertilizer, all other costs are fixed. Adding
- 3-
more fertilizer and seed will increase yield up to a point, and then yield will
begin to decrease as shown in the data. This concept is known as the law of
diminishing returns which states that, as increasing amounts of a variable input
are applied to a fixed quantity of the other inputs, the amount added to the
total product by each additional unit of the variable input will eventually de-
crease.
An interesting example of marginal analysis is shown in Figure 3. The
lowest break-even price occurred at a yield of 200 bu/A while the maximum yield
was 230 bu/A. Fertilizer inputs for these yields were 300 Ib ammonium nitrate/
A plus 1050 Ib (5-10-15)/A and 450 Ib ammonium nitrate/A plus 1575 Ib (5-10-15)/
A respectively. The cost of the increase in fertilizer required to produce the
extra 30 bu/A was $104.40 or $3.48/bu. Therefore, it was more profitable to
produce 200 bu/A with a selling price below $3.48/bu, whereas, 230 bu/A was
more profitable with a higher selling price.
A producer who is interested in making a profit will apply the equi-marginal
principle which states that a producer should keep using additional units of a
productive input as long as the added input earns or saves more money than it
costs. This principle states that the price of the corn times the change in corn
yield over the change in fertilizer must be equal to the price of fertilizer. The
equation is as follows:
Py =A Px
AX
where,
X = fertilizer
Y = corn yield
P = price
AX = change in fertilizer
AY = change in corn yield
- 4-
The process in which profits are maximized at varying fertilizer levels
for population of 24,000 seed per acre is shown in table (3). The value of
the marginal product (VMP) indicates the amount by which the total revenue
changes when an additional unit of input is added. The value of the marginal
product is .found by dividing the change in corn yield by the change in fertilizer
applied and then multiplying by the price of corn per bushel. The maximum
combination is found by subtracting the cost of the fertilizer and seed at dif-
ferent levels from the total revenue at those levels. With constantly changing
interest rates and inflation, input and product prices seldom stay constant for
any length of time. The producer needs to see how changing prices affect the
most profitable level of input use. In doing so, he simply plugs in the new or
expected values and reworks the analysis.
Marketing Alternatives
Contrary to what some believe, there is a difference between selling and
marketing. Selling is simply selling whatever quality or grade of product a
farmer can most easily produce, at whatever time it is ready for delivery, at
whatever location is convenient, and, as a result, for whatever price you can
get. Unlike selling, marketing is defined as producing and selling the product
quality or grade that has the greatest profit potential, at the most profitable
time, at the most profitable locations, and, as a result, having some degree of
control over prices and profits. No marketing method can assure a producer of
the price he wants or even of a profit. Unlike a seller, who is a price taker,
the futures market offers a wide range of prices quoted over a long period of
time.
The futures market is just one marketing tool available to producers. A
producer can price his product at delivery by using the cash market or forward
price by using a cash contract or the futures market. The following paragraphs
will compare these different marketing alternatives.
- 5-
The greatest advantage of the cash market is that it is very simple to use.
The producer is a price taker and simply takes the price offered at selling time.
Another plus for the cash market is that everyone gets about the same price for
their product at the time of the sale. Regardless of whether the price is high or
low, it's about the same for everyone. Relative to the futures market, the farmer
does not have to put up margin money on the cash market. In essence, there is
no worrying about marketing until the product is ready to sell.
A disadvantage of the cash market is that the farmer seldom receives the
highest possible price. A producer usually has an opportunity to price some
time during the year at a higher price than is ultimately offered in the cash
market. Price selection is difficult but, nonetheless, the possibility exists.
Another disadvantage of the cash market is that producers take full risk of
adverse price changes; they produce for an unknown price. Farmers don't know
whether they are going to make a profit or a loss on their operation until all
costs have been sunk. A third disadvantage of the cash market is that it is
very difficult to make production decisions. When the price of the product is
uncertain, it is difficult to decide what and how much to produce.
Cash contracts also have advantages and disadvantages. The primary ad-
vantage is that price is established before delivery. The producer knows in
advance whether he is going to make a profit or loss in the operation. The exact
price and terms of sale are known in advance, unlike the futures market where
the price can only be set in some range. Another advantage of cash contracts
is that there are no margin deposits required. Also in contrast to the futures
market, cash contracts don't have a set standard size and are less complicated
and complex.
Looking on the other side of the fence, a major disadvantage of using
cash contracts is the reduction in flexibility. For example, if a corn producer
contracts to deliver his grain at harvest, he must deliver; he can't decide later
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to wait for a higher price. Generally, contracts offer lower prices when compared
to the futures market. The contractor takes some risk in setting an exact price,
so he reduces his offering price to offset this risk. Another disadvantage is
that the producer must deliver at the contract price, regardless of what current
market prices are at the time of delivery. The price is set when the contract
is signed.
One advantage of the futures market, as with cash contracts, is that the
price is established before delivery. Since the price is established within a
narrow range, the producer can evaluate the profit potential of a production
process before it is completed. The futures market also provides maximum
market flexibility in that the producer doesn't necessarily have to deliver ac-
cording to the futures contract, but can offset the contract at any time. A third
advantage of the futures market is that prices are set in a competitive market en-
vironment. The futures market is a highly active market with many buyers and
sellers; not a situation of one person dealing with one or two other people.
On the other hand, a main disadvantage of the futures market is that it is
considerably more complex and complicated in comparison to cash markets. It
requires a knowledge of how the market works. Another negative of the futures
market is the requirement of margin money. Margin money is needed in advance
of delivery of the product to insure performance of the contract. A third dis-
advantage is that the futures market requires difficult decisions. It is difficult
to select a price from the wide range of alternative prices offered even if one is
knowledgeable of the mechanic of futures trading. Lastly, the futures market
contracts are generally large which is a disadvantage to smaller producers. For
example, corn is traded in 5,000 bushel contracts on the Chicago Mercentile
Exchange and 1,000 bushel contracts on the Minneapolis Exchange. A farmer
that produces less than 1,000 bushels would be unable to use the futures market.
-7-
Storage Cost
Another aspect of the marketing process that a producer must consider is
the cost of storage. Such items as interest rate, shrinkage, actual storage costs,
and the number of months the corn is to be stored should be analyzed before
storing corn.
The decision making process can be made easier by computing break-even
price and storage costs. The break-even price is the price needed sometime in
the future to cover all storage costs and make the producer as well off financially
as if he had sold the grain at harvest and either paid off a note that he owed or
invested the money in a certificate of deposit or another interest-bearing instru-
ment. The storage costs consist of interest rate, shrinkage and the physical
storage costs. The cost of storage can be found by the following equation:
Cost of storage = H(i + s + p) x m
where as,
H = Harvest selling price per bushel
i = interest rate
s = shrinkage
p = physical storage cost as a percent of market price
m = number of storage months
Once the cost of storage is known, break-even price can be figured by
adding cost of storage per bushel to the market price. The future selling price
must exceed the cost of storage in order to yield a profitable return to manage-
ment and risk.
Table 1: Estimated Costs of Producing One Acre of Corn Under Irrigation, North
Florida, 1982.
Item Unit Quant. Price Value
Cash expenses:
Seed
Fertilizer (12-8-12)
Lime
Insecticide
Herbicide
Tractor (135 hp)
Truck, pickup
Truck, 2-ton
Other machinery
Combine
Labor
Irrigation costs
Land rent 1
Interest on cash exp.-
Total cash expenses
Fixed costs:
Tractor (135 hp)
Truck, pickup
Truck, 2-ton
Combine
Other machinery
Irrigation
Total fixed costs
Total costs
Ib.
lb.
ton
Ib.
lb.
hr.
mi.
mi.
hr.
hr.
hr.
acre
acre
$
hr.
mi.
mi.
hr.
hr.
acre
18.0
1500.0
.33
15.0
5.5
1.44
20.0
20.0
1.44
.6
4.0
1.0
1.0
283.86
1.44
20.0
20.0
.6
1.44
1.0
1.20
.10
18.00
.95
4.00
7.96
.10
.15
1.83
12.62
3.75
36.60
35.00
.075
11.06
.13
.16
38.52
3.20
65.20
21.60
150.00
5.94
14.25
22.00
11.46
2.00
3.00
2.64
7.57
15.00
36.60
35.00
21.29
305. 15
15.93
2.60
3.20
23.11
4.61
65.20
114.65
419.80
15% for 6 months
- 15% for 6 months
Table 2: Break-even Corn Prices With Various Inputs and Yields, North Florida.
Seed Total Yield Prices
Population Cost (bu/acre) ($/bu)
24,000 273.70 100 2.74
322.23 151 2.13
370.75 179 2.07
419.28 202 2.07
516.33 196 2.63
30,000 347.75 76 4.58
418.90 149 2.81
561.21 240 2.34
36,000 280.93 65 4.32
353.72 164 2.16
426.50 210 2.03
499.28 231 2.16.
"644.85 231 2.79.
Break-even Price = Total Costs
Yield
Table 3: Effects of Applied Fertilizer or Corn Yield Per Acre, North Florida, 1981.a
Py = $3.00 Px = $ .10b
X Y AX AY AY/AX. Py AY PyY PxX
Fertilizer Input Output Additional Additional Bu. Corn AX Returns after
Applications Fertilizer (Ibs) Corn (bu) Input Output Lbs. Fert. (VMP) Fertilizer
1 0 100 450 51 .11 $ .33 $ 300.00
2 450 151 450 28 .06 .18 408.00
3 900 179 447.00
3 900 179 450 23 .05 .15 447
4 1350 202 900 -6 -.007 -.02 471.00
5 2250 196 363.00
population of 24,000 seed per acre
Average cost of fertilizer and ammonium nitrate per pound
24,000 PLANTS/A
3.00
100 APC .-
1.00
o !I I
0 100 200 300 400 Amm. Nit.
0 350 700 1050 1400 5-10-15
LB/A
Fig. 1 Yield response of irrigated corn to increasing levels
of ammonium nitrate and a mixed fertilizer (5-10-15).
Average production cost (APC) is shown in dollars per
bushel. Hybrid "A" at 24,000 plants per acre.
300
200 5.00
< 4.00 D
APC 3.00
100 ---.
S2.00
/
/ -1.00
/
0 150 300 Amm. Nit. 600
500 1000 (5-10-15) 2000
LB /A
Fig. 2. Yield response of irrigated corn (Hybrid "B")
to increasing levels of ammonium nitrate and a
mixed fertilizer (5-10-15). Average production cost
(APC) is shown in dollars per bushel. Residual nu-
trient levels in the soil were low.
300
200 5.00
4.00
m
\ APC 3.00
100 -
0 0... -- 2.00
300
1050
1.00
450
I I 1 1 575
0 200 400 600 Amm. Nit.
700 1400 .2100 (5-10-15)
LB/A
Fig. 3. Yield response of irrigated corn to increasing levels of
ammonium nitrate and a mixed fertilizer (5-10-15). Average
production cost (APC) is shown in dollars per bushel. Hy-
brid "A" at 36,000 plants per acre.
REFERENCES
1. Leftwich, Richard H., The Price System and Resource Allocation, Oklahoma
State University, The Dryden Press, 1979.
2. Nichols, T. Everett, Jr., and John E. Ikerd, Hedging and Other Marketing
Strategies, M. E. P. 118, North Carolina State University.
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