Crop Sequence: A Long-Term Decision that Impacts Annual Profitability and Risk

Soybean field beside a corn field

Crop Sequence: A Long-Term Decision that Impacts Annual Profitability and Risk April 6, 2017

A simple example using available information.

Introduction

In a recent UNL CropWatch article University of Nebraska-Lincoln agronomists compared yields of corn and soybean in various rotations. Many crop scientists are adamant that crop diversity is superior in providing relief from disease and insect pressures as well as providing other benefits. These are all important concerns, but producers may wonder “What are the economics of crop rotation? How does it affect the bottom-line?”

Profitability is not simply a result of physical production or its efficiency. When combined, costs and markets also play key roles in determining profitability. For instance a perfect knowledge of crop values (price at the time of crop sales) will lead to adjustments in production techniques as well as crop type. With these concepts in mind, this article compares simulations of four crop sequences:

  • Rotation 1. Continuous corn production
  • Rotation 2. Corn-soybean
  • Rotation 3. Continuous soybean
  • Rotation 4. Corn-corn-soybean

The decision to rotate crops over time across a farm in a predetermined sequence is a long-term choice and is quite different from making that choice annually by field. The annual choice motivation is subject to understanding the current year’s market expectations, yield potential, and costs. While costs may be predictable, yield and markets are somewhat unpredictable, making annual planting choices more risky. Maintaining a consistent crop rotation allows farmers to better capture long-run outcomes such as:

  1. Changes in price cycles among crops that may be somewhat counter-cyclical,
  2. Savings with pesticide or fertilizer costs,
  3. Enhanced productivity, and
  4. Production and market risk that will be at least partially mitigated by its implementation.

The Simulations

Each crop rotation is built using the production practices in the UNL CropWatch article Rotation Impact on Irrigated Corn and Soybeans Yields in Nebraska ( February 23, 2017). Prices and costs were estimated using 1995 to 2015 historical data collected by Iowa State University and the USDA since these values were unavailable for Nebraska. However yields were adjusted to represent Nebraska.

The method for calculating the annual expected profit is not complex but does require a few assumptions. (Descriptions of these assumptions are beyond the scope of this short article, but are available from the authors on request.) If the benefits from adopting a rotation exceed the costs, the adoption of that rotation is profitable. The resulting estimates of annual profits for the 21-year period are in Table 1.

Table 1. Historical estimated annual profits for four cropping systems, including two rotations. (Parentheses indicate negative values.)
YearRotation 1
Continuous Corn
Rotation 2
Corn-Soybean
Rotation 3
Continuous Soybean
Rotation 4
Corn–Corn-Soybean
1995 $ 99.16 $89.86 $36.31 $108.74
1996 $ 33.50 $55.67 $36.28 $64.40
1997 $ 6.70 $ 31.96 $ 17.08 $39.22
1998  ($63.45) ($38.04) ($44.82) ($33.98)
1999 ($87.75) ($72.46) ($85.05) ($67.22)
2000 ($62.10) ($51.51) ($70.86) ($43.89)
2001 ($78.30) ($72.56) ($95.58) ($64.67)
2002 ($31.05) ($20.76) ($45.10) ($11.45)
2003 ($16.50) $ 19.52 $15.21 $24.24
2004 ($81.00) ($57.76) ($67.57) ($52.79)
2005 ($129.63) ($77.48) ($58.68) ($81.40)
2006 $ 23.10 $0.34 ($64.92) $22.35
2007 $113.76 $152.77 $128.50 $158.10
2008 $ 73.79 $89.28 $40.16 $101.06
2009 ($132.72) $(52.45) ($34.80) ($61.24)
2010 $237.18 $209.94 $105.90 $240.29
2011 $330.99 $238.98 $62.25 $290.73
2012 $437.19 $328.99 $118.95 $391.27
2013 ($8.85) $64.23 $57.00 $63.70
2014 ($113.28) ($62.13) ($77.55) ($60.30)
2015 ($127.44) ($104.22) ($140.66) ($95.90)
Summed Returns $423.30 $672.16 ($167.93) $931.25


In this period the corn-soybean (Rotation 2) and corn-corn-soybean (Rotation 4) rotations produced the largest summed returns (profits) (Table 1). These rotations also had the fewest negative profit years with 10 (corn-soybean) and 9 (corn-corn-soybean) out of 21 years. The corn-corn-soybean rotation had the highest annual profit or least lost 15 out of 21 years followed by the continuous corn rotation with 3 out of 21 years being the best. Ranked third is the continuous soybean rotation with the highest annual returns 2 out of 21 years followed by the corn-soybean rotation which, in this example, produced the highest annual net return in only 1 of 21 years. Note that while Rotation 2 is only highest once, it never has a lowest annual return, resulting in the second highest cumulative net return; this effectually provides some relief to economic risk.

From a historical perspective (1995-2015) corn-corn-soybean performed best. The added value of the increased soybean yields following two years of corn exceeded the added cost of fertilizer for the second year of corn and the yield loss of that second year of corn. Plus, the diversification of growing soybeans and corn compensated for profitability between the soybean and corn market. Of the 21 years, continuous corn was more profitable than continuous soybeans 11 times, with the reverse being true 10 times. This switching in the market provides a benefit to a diversified cropping system and begs the question: How accurately are producers able to predict market outcomes? The only one who can answer that question is the individual making the predictions, but it is likely less than 100% of the time.

In a Perfect Scenario

Perfect foresight is not highly probable, but if it did occur, the following cumulative profits would have resulted for the period. With perfect foresight and having planted the most profitable crop each year, accumulated profits would be $1298.90 per acre for the 21-year period. Compared to using a corn-corn-soybean rotation without knowing end-of-year values, the accumulated profit for the 21-year period was  $931.25, only $367.65 less than in the perfectly cropped scenario. This is an indication that absolute knowledge could improve profitability; however, in real conditions, growers need to consider how confident they are that they can predict post-harvest market opportunities prior to planting. Please note in both instances used in this example the complete crop for each year was marketed in December following harvest. It is likely that other marketing strategies will alter risk and net results either positively or negatively.

Discussion

This analysis is general. It is recommended that producers make individual calculations relative to their farm and situation. For such calculations a generic Excel workbook has been created by the author and is available upon request to mstockton2@unl.edu or visit the www.Farmcents.unl.edu website. Once a user has decided on the specific crop mix, knowledge of the various effects of the rotations must be estimated or quantified, i.e., yield changes, changes in production practices, changes in inputs (fertilizer, etc.) relative to the field or farm. Any result is only as good as the accuracy of the input costs, amounts, productive responses, and expected market values.

A historical model, such as we’ve used here, is easier to create and, for obvious reason, more accurate, than one estimating future values. A historical model has the disadvantage of only addressing what has happened. A model based on future expectations, while not as accurate, may provide insight into benefits of rotations especially when compared to current cropping systems. The available template is for a four-year period. Assistance in applying it is available through your local extension educator or district office.

Conclusions

To summarize, when corn and soybeans are part of an annual or bi-annual corn-soybean rotation (corn-soybeans, corn-corn-soybeans), they invariably yield more for first-year corn and first-year soybeans and reduce the need to add nitrogen fertilizer to maintain similar yields. These facts effectually decrease per bushel costs versus crops grown continuously (continuous corn or continuous soybeans). Notably soybeans in the (corn-corn-soybeans) rotation have a yield advantage over the (corn-soybeans) rotation. If historical differences in corn and soybean markets continue, the corn-soybeans and corn-corn-soybeans rotations are likely to remain the most profitable on average.

There may be other advantages/disadvantages in the economics of the corn-soybean and corn-corn-soybean rotations not considered here, i.e., weed resistance to herbicides, insect, or pest populations, and disease pressures. However, it is likely that the multi-crop rotations will positively reduce costs and/or increase yields over continuous rotations. Most importantly, each producer must make the crop mix and rotation choices individually based on their particular costs, productivity, and markets. According to this analysis, there may be a substantial difference among rotations making it a worthwhile endeavor.