Chances of lower crop income for corn and soybeans in 2021 • farmdoc daily


Harvest time futures for corn and soybeans continue to trade at levels well above those recorded since 2013. In a recent article (farmdoc every day, May 11, 2021), we used the agricultural doc Price discovery tool to illustrate the risk of falling prices based on market-based valuations at that time. Today’s article expands this analysis to take into account the downside risks and upside potential associated with crop income using simulation methods suited to a central Illinois scenario. The increased price volatility compared to recent years and the lingering uncertainty surrounding crop yields lead to the potential for significantly lower income from current expectations. Still, the chances that high income levels will deliver excellent returns for 2021 are highly probable.

Description of the simulation

Simulation methods are used to model a typical commercial grain farm in Champaign County, Illinois. Liquidation price of the 2021 harvest contracts (December for corn, November for soybeans) as well as the price of options on June 14e, 2021 were used to define lognormal price distributions from which 5,000 corn and soybean prices were derived. The expected harvest prices are $ 5.81 for corn and $ 13.95 for soybeans. Price volatilities – measures of price variability – are 28% for corn and 15.5% for soybeans.

Trend yield estimates of 200 bushels per acre for corn and 65 bushels per acre for soybeans were assumed based on historical yield data for Champaign County. The crop insurance rates for Champaign County were used to define the Weibull distributions from which 5,000 random corn and soybean yields were derived. Just as option prices reflect price volatility, crop insurance rates can be used to reflect the volatility or potential variability of crop yields.

Finally, a negative correlation between simulated crop prices and yields was imposed to take into account the historical relationship between realized yields and prices. The negative correlation recognizes the fact that prices tend to fall (rise) when production levels are high (low). This results in below average returns which tend to be associated with above average prices, and vice versa. Each of the simulated yields and prices was then multiplied to provide a distribution of 5,000 potential income levels that could be realized at harvest based on market-based assessments of price variability (futures and options). and yields (crop insurance rate).

Corn recipes

Figure 1 shows the probability distribution of income from the maize crop based on the simulation. The expected harvest income for corn is just over $ 1,100 per acre, as shown in Figure 1, with bars of about $ 1,100 being in the middle of the distribution and having the greatest probability ( the bars are the highest). The gap in the distribution gives an idea of ​​the likelihood of lower (or higher) income levels than expected income. Income levels become less likely as they move away, below or above expected level. Figure 1 shows that, although relatively unlikely, crop income levels below $ 500 an acre are possible based on current market assessments for prices and potential yield variability in Champaign County. Corn revenues of around $ 2,000 an acre are also possible, but relatively unlikely.

Figure 2 provides another way to illustrate the distribution of harvest income for corn using a cumulative distribution function (cdf). The values ​​plotted on the CDF can be interpreted as the probability or probability that actual earnings will be at or below a certain level. For example, the value of the corn revenue cdf at $ 1,100 is just over 50%. There is about a 50% chance that corn harvest income will be less than $ 1,100, but also a 50% chance that harvest income is over $ 1,100.

The Champaign County corn income simulation without insurance suggests:

  • 14% chance that harvest income will be less than $ 750 per acre

(Note: $ 750 per acre would be roughly the lowest average income level for corn in central Illinois since 2013)

  • 24% chance that harvest income will be less than $ 850 per acre

(Note: $ 850 per acre is roughly equal to total non-property costs plus cash rents for corn in central Illinois based on the most recent crop budgets for 2021)

  • 37% chance that income from harvest exceed $ 1,200 per acre

(Note: $ 1,200 per acre was about the record average income level for corn in central Illinois in 2011 and 2012)

  • 13% chance that income from harvest exceed $ 1,500 per acre

To illustrate the impact of crop insurance on the downside risk associated with harvest income, an 85% income protection (RP) policy was also considered using the projected price of $ 4.58 in 2021 and the actual historical production yield (TA-APH) of 200 bushels adjusted to the trend. per acre. This provides a guaranteed minimum income of $ 779 acre (0.85 x $ 4.58 x 200). The collateral could increase if the price of the crop exceeds the projected price. Since futures contracts are currently trading well above the projected price, the chances of increasing the collateral for the PR policy are relatively high (around 20-25%) compared to the price discovery period in February, when the markets were lower. This has the effect of reducing the chances of low income levels:

  • 34% chance of receiving benefits from an RP-85 policy
  • 0% chance of crop income below $ 779 per acre
  • 13% chance of crop income below $ 850 per acre

Soybean income

The probability distribution for the simulated soybean earnings is shown in Figure 3. The expected soybean earnings are approximately $ 900 per acre. The revenue generated from the simulation exercise ranges from less than $ 300 per acre to over $ 1,500 per acre. Although incomes are much lower or higher than expected, they become less likely as they move away from expected income.

Figure 4 provides the CDF for soybean income. Again, the value of CDF at expected soybean income of $ 900 is about 50% – the odds of soybean earnings below $ 900 are about as likely as earnings above $ 900 an acre.

The Champaign County soybean revenue simulation suggests:

  • 12% chance of crop income below $ 650 per acre

(Note: $ 650 per acre would be roughly the lowest average income level for soybeans in central Illinois since 2013 and roughly equal to the average total non-property costs plus cash rent for soybeans. in central Illinois based on the most recent 2021 harvest budgets)

  • 33% chance of crop income below $ 800 per acre

(Note: $ 800 per acre was the record average soybean income in central Illinois in 2013)

  • 30% chance that income from harvest exceed $ 1,000 per acre
  • 4% chance that income from harvest exceed $ 1,250 per acre

An 85% RP policy for soybeans would provide a guaranteed minimum crop income of $ 656 per acre (0.85 x $ 11.87 projected price x 65 bu TA-APH). The inclusion of 85% of RP payments reduces the likelihood of lower harvest income:

  • 27% chance of claims being triggered by an 85% RP policy
  • 0% chance of income below $ 656 per acre
  • 22% chance of income below $ 800

Conclusion

Volatility in corn and soybean futures and options continues to suggest the potential for significant price movements between now and harvest. In addition, significant uncertainty still surrounds crop yields for 2021. Given the potential variability in prices and yields, this results in a wide range of crop income levels that could occur for corn and soybeans. A simulation exercise adapted to a scenario in central Illinois shows that there is a high likelihood that corn and soybean crop incomes will be at their highest level since 2013.

As of June 14, expected harvest revenues for corn in central Illinois would be about $ 1,100 an acre for corn and $ 900 an acre for soybeans. Combinations of price and yield that result in incomes below these values ​​are about as likely as combinations that would result in crop incomes above these expectations.

In terms of downside risk, there is a 12-14% chance that harvest revenues will even be below some of the lowest levels recorded since 2013 ($ 750 per acre for corn; $ 650 per acre for corn; $ 650 per acre for corn). soy). In these cases, crop insurance protection would be very likely to trigger support to compensate for these declines in income. In terms of upside potential, the probability that incomes will exceed even the highest levels recorded during the last farm income boom is 37% for corn (above $ 1,200 an acre) and 67%. for soybeans (over $ 800 per acre).


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