Corn, Wheat and Soybeans OH MY! I calculate "Economic Profit" for each. See which one gets planted.

In my last posting (HERE) I used USDA cost and crop yield data to show the different costs per bushel a farmer faces when choosing to produce Corn, Soybean or Wheat.  I balanced that against the Price Floor for each crop as established by the 2014 Farm Bill ("PLC or "Price Loss Coverage" provision) to show that the price floor amounts were enough to cover all the farmers Variable Costs but only some of the Fixed Costs. Please re-read that post for more clarification.

In this posting, I want to compare the two different cost numbers I calculated to the current market price for the respective commodity.  I used the table below from the USDA to show costs per acre for each crop.

The USDA projects yields for each of these crops to be (in 2013-14):

   Corn: 165 bushels per acre.
   Soybean: 43 bushels per acre.
   Wheat: 47 bushels per acre.

If we divide these projected bushels per acre into the "TOTAL ALLOCATED COSTS " (Variable PLUS Fixed and Opportunity Costs) for each commodity we will arrive at a "Cost per Bushel" for growing each of these crops:

    Corn: $4.18
    Soybean: 11.10
    Wheat: $6.78

If we divide the projected bushels per acre into just the "TOTAL OPERATING COSTS", or ONLY the Variable Costs then the cost per bushel would be:

Corn: $2.19
Soybean: $4.27
Wheat: $2.77

Here are the current market prices (per bushel) for these crops according to Agriculture.com:

The prices are highlighted in YELLOW and you should read them as follows:

Corn: $4.47 
Soybeans: $12.21 
Wheat: $5.86 

If we subtract "TOTAL ALLOCATED COSTS" from the market prices we find:

Corn yields an "Economic Profit" of $.29 per bushel
Soybean yields an "Economic Profit"of $1.11 per bushel
Wheat yields an "Economic LOSS" of $.92 per bushel

Result?

This year (2014) the projected plantings for:

     Wheat down 347,000 acres
     Corn down 3,674,000 acres
     Soybean UP 4,960,000 acres (yes, that is almost 5 million acres)

At $1.11 per bushel in potential "economic profit" the market has reallocated agricultural resources suitable to produce corn, wheat or soybean to its highest (or higher) value commodity.

As always, constructive comments on methodology are welcome.

Perfect Competition, Price Floors, VC's, FC's, Opportunity Costs, Farm Policy---this blog entry has it ALL!

I am going to attempt a layman's (VERY layman!) view of how farm policy, in terms of Price Floors, works in the US. I am using actual US Dept of Agriculture data to do my calculations.

Not claiming it is perfect and I am SURE I am leaving out some (a lot?) of details, but I think for the AP Microeconomics Unit on Perfectly Competitive firms AND Price Floors it will be instructional.  Any constructive criticisms are welcome.

First, here are the projected cost data (2014-15 growing season) for a typical farm growing either Corn, Soybeans or Wheat.

The costs are very conveniently divided up into "Variable Costs" (Operating Costs) and "Fixed Costs" (Allocated Overhead).

What make this a bonus for Economics teachers is the Fixed Costs include explicit money costs ("hired labor, taxes and insurance, general farm overhead") AND implicit "opportunity costs".  The opportunity costs are "Unpaid Labor, Rental Rate of Land and Capital".

This distinction will be important at the end of this lesson.

Source: USDA ERS

The USDA projects yields for each of these crops to be (in 2013-14):

   Corn: 165 bushels per acre.
   Soybean: 43 bushels per acre.
   Wheat: 47 bushels per acre.

If we divide these projected bushels per acre into the "TOTAL ALLOCATED COSTS" (Variable PLUS Fixed and Opportunity Costs) for each commodity we will arrive at a "Cost per Bushel" for growing each of these crops:

    Corn: $4.18
    Soybean: 11.10
    Wheat: $6.78

If we divide the projected bushels per acre into just the "TOTAL OPERATING COSTS", or ONLY the Variable Costs then the cost per bushel would be:

Corn: $2.19
Soybean: $4.27
Wheat: $2.77

The latest Farm Bill (2014), which dictates US farm policy through 2018, set Price Floors (called "Reference Prices") for these commodities at:

Corn: $3.70
Soybean: $8.40
Wheat: $5.50

The means that if the actual market price in any given year falls BELOW these floor/reference prices then the Federal government will compensate farmers for the difference between what they sell their crop for at market and the above reference price. In other words, the reference prices you see above are the guaranteed minimum per bushel the farmer will receive for their crop.  If the market price is ABOVE the reference price then the farmer receives that price and the reference price is "non-binding".

IMPORTANT POINT:  Notice how these Price Floor/Reference prices fall IN BETWEEN the two versions of costs I calculated above.

The Floor/Reference Price is higher than the farmers Variable Costs BUT lower than his/her TOTAL ECONOMIC COSTS.

So, the price floor guarantee helps the farmer cover ALL Variable Costs and some of their Fixed Costs, but not ALL of the Opportunity Costs of being a farmer.

Anyways, I think this is interesting and I have never seen it broken down like this before.

Makes me understand farm policy and the plight of the farmer a little bit better.

Again, any comments, corrections or guidance as to where I went wrong are welcome.

We are all fellow travelers on the road to knowledge.

NOTE: This particular aspect of the Farm Bill is called "Price Loss Coverage (PLC)".  There are other important programs that complement/substitute for the one I described above.  More on the PLC and these other programs can be found HERE.

Updated map showing US Gross State Product (GSP) vs the Rest of the World. Students love this!

Mark Perry over at AEI has quickly put together the latest (2013) "Gross STATE Product (GSP)" data onto a map that students find interesting every time I have shown it in the past. It gives a great perspective as to just how large the US economy is and will continue to be (hopefully!).

In place of the name of the US State it puts a country whose dollar value of Gross DOMESTIC Product (GDP) is equal/similar to the dollar value of output of that State.

For instance, Australia's GDP is roughly the same of that of Texas's GSP. Brazil similar to California, so on and so forth.

Source: Carpe Diem at AEI

Here is the accompanying data in Excel form that show the numbers used for each State.

The total acreage of which US State is used for fuel instead of food?

In the US in 2013 we planted 97.2 million acres of Corn. Of that, 37.78 million acres were used to produce ethanol (39%). (Source HERE--I did the calculations for acres based on data given for bushels per acre)

In the US in 2013 we planted 77.2 million acres of Soybeans.  Of that, 10.9 million acres were used for Bio-diesel (14%). (Source HERE--I did the calculations for acres based on data given for bushels per acre. Data on Soybean for bio-diesel HERE)

The total number of acres used to grow "food for fuel" was 48.68 million acres. That is 28% of the total planted Corn and Soybean crop.

How much is 48.68 million acres?

The State of Nebraska is a little over 49 million acres. In other words, we have an energy and agricultural policy that diverts the whole State of Nebraska to producing fuel instead of food.

Perspective.

Source of map HERE

Where the jobs are and wage range. A two for one graphic!

I saw these two informative graphics from two different sources and put them on one slide.

They tell a good story about the employment recovery in the US and the distribution of jobs among wage rates.

Here is the gist of it:

We lost a total of 6,819.000 higher and mid-wage jobs (maroon bars) and then gained back +4,885,000 (gold bars), for a net LOSS -1,933,000 jobs.

We lost a total of 1,973 low wage jobs but gained back 3,824,000 for a net GAIN of +1,891,000.

Subtract those two and you get a total jobs deficit of -82,000 jobs. (Note:Data for bar chart on RIGHT only goes to Feb of this year. Does not count March, April, May).

According the the Bureau of Labor Statistics, 417,000 of those 2.15 million "Health care and Social Assistance" jobs were in "Social Assistance" (19.4%).  Also, according to the BLS those jobs have a median income of $13.87 (just barely into the mid-wage category) so the bottom half for the most part fall into the low wage category.

Source: Wall Street Journal AND AEI