Economic considerations of replacing existing wheat with corn or soybeans
Understanding the potential of harvesting the year's harvest of wheat, and how to make sure the harvest is successful.
With the extreme rainfall and wet conditions that Michigan has seen in the months of April and May, many wheat producers have raised concerns about the potential for this year’s harvest. It has been a challenging spring as fields have washed out or had water standing in them for long periods of time. As fields in some areas of the state begin to dry out, some producers are trying to decide what do to with their fields. Do they keep the current wheat crop or till the fields up and replace them with alternative crops, such as corn or soybeans?
Economics on the farm place a key role in this decision. Does the opportunity of an alternative crop(s) provide the farm with a greater opportunity for Net return than the existing crop? What does the farm do about the expenses that were paid to raise the wheat?
In order to understand whether the opportunity of raising an alternative crop is greater than the opportunity to raise wheat, the producer first needs to determine the potential yield of their wheat crop. Dennis Pennington, MSU Extension wheat specialist, recently presented on this topic during the MSU Virtual Breakfast on May 2nd, describing how to assess winter wheat stands and determining yield potential in the fields: https://www.canr.msu.edu/resources/assessing-winter-wheat-stands-in-michigan.
Once a producer understands what the yield potential of their wheat crop is, the next step is to begin comparing the potential opportunities to Net return on all three crops (i.e. wheat, corn, soybeans). To do this, there are several steps involved:
Step 1: Develop a budget of what has already been spent on the existing wheat field. Identify what cost can’t be recovered if the wheat is replaced by another crop.
These “sunk” costs will become the responsibility of the alternative crops to cover in their Net returns to the farm. One way to think about this is that the wheat crop has effectively turned into a cover crop for the corn or soybeans, which means a “cover crop” cost should be included in their consideration.
Step 2: Identify those costs (i.e. credits) that can still be used or recaptured by the alternative crops of corn or soybeans.
For example, what is the possibility that some of the fertilizer applied to the wheat may still be available to the corn or soybeans crops? Determine what reasonable amount of fertilizer is left and assign a value to this amount. Note: based on the type fertilizer applied and the alternative crop’s ability to utilize what remains, the value assigned may be different for corn or soybeans. Follow this same process for other potential “credits” that may exist for the alternative crops.
Step 3: Develop a budget of what it will cost to plant and raise the corn and soybeans crops.
Note: remember to include the “sunk costs” and “credits” into these budgets.
Step 4: Finish the wheat budget to reflect the remaining expenses of growing that crop.
Step 5: Compare the three crops to determine which presents the best opportunity for Net returns to the farm.
Note: Be sure to include reasonable yield goals and potential prices for each of the three crops in their respective budgets.
One tool that MSU Extension has developed to help with these type of decision-making processes is a new budgeting tool, the Crop Budget Estimator, that allows producers to compare the economics (and agronomics) of raising corn, wheat, and soybeans. Producers can use their own information of the exact costs they’ve had for fertilizer, seed, etc., for their wheat crop as well as develop their corn or soybean budgets. Whether using a tool like the Crop Budget Estimator or other budgeting tools, the goal is to compare all three crop budgets to determine what the potential net returns are to the farm.
Once a farm knows what its potential net returns are, a producer can more accurately answer the question of staying with their wheat crop or shifting gears to either corn or soybeans.
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