Price swings affect farm profitability

  From the August 20, 2018 issue of Agri-News
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 Price swings in crop markets are inevitable. Weather, currency values, and trade wars are all affecting prices and expected crop returns. Dean Dyck, farm business management specialist at the Alberta Ag-Info Centre, explains why farmers need to monitor both costs and prices to gauge profit, and how to make adjustments to their risk management plan.

Dyck looks at the two predominant crops in Alberta – canola and HRS wheat – and says that budgets are looking much tighter today than at the start of the growing season. “Using the AgriProfit$ Cropping Alternatives data for each of the five soil zones in the province and April 1 prices on PDQ, both crops showed the potential to cover variable costs and cash rental rates before seeding. Factoring in all costs, canola showed a provincial average projected economic profit of roughly $15 per acre while HRS wheat showed a $4 per acre provincial average projected economic profit. This suggests that farmers would need a combination of good growing conditions and price improvements to have favourable profitability. The risk was high that profit could be negative if prices and/or yields decreased.”

“Unfortunately, growing conditions in some parts of the province have taken a bite out of the profit as yield expectations are down,” says Dyck. “However, current price swings in the market have made up for lower yields.”

Dyck takes a look at the black soil zone. “I am using an expected yield of 46 and 60 bushels per acre for canola and HRS wheat, respectively. At this point, the costs of growing the crop have not changed significantly since planting, so any changes to the profit are due to price changes. In April, the estimated profit over all costs was $40 per acre for canola and $13 per acre for HRS wheat. Using August 20, 2018 prices from PDQ for October delivery, the profit for canola has increased to $54 per acre, an increase of 33 percent. HRS wheat now shows a profit of approximately $46 per acre, an increase of $34 per acre. In bushel terms, the break-even yield needs to be 41 and 54 bushels per acre for canola and HRS wheat respectively.”

Similar changes in profitability were calculated for the dark brown, grey wooded and Peace soil zones. Says Dyck, “In the brown soil zone, using expected yields of 30 and 38 bushels per acre for canola and HRS wheat, respectively, there was no profit over all costs with either crop. In fact, there was not a lot of money left over to pay cash rental in that area. October delivery prices as of August 20, 2018, are still showing an economic loss for HRS wheat, with a break-even yield of 39 bushels per acre.”

Estimated profit over total costs - canola

Soil ZoneEstimated profit April 1 (per acre)Estimated profit
October delivery (per acre)
Break even yield
Dark brown
Grey wooded

Estimated profit over all costs - HRS wheat

Soil ZoneEstimated profit April 1 (per acre)Estimated profit
October delivery (per acre)
Break even yield
Dark brown
Grey wooded

“This analysis shows that expected profitability continues to be impacted by commodity price swings,” explains Dyck. “Compared to the first week in April, average profitability in the province for canola has increased by $14 per acre and HRS wheat by $28 per acre. On a 2,000 acre farm in rotation, that would amount to a cash flow swing of approximately $42,000.”

Dyck adds that these swings are affected by many factors often beyond the farmer’s control and shows the importance of production and price risk management. “While it is possible that prices could swing upward and improve the budget, it is also possible that declines could make a farm budget quite unpleasant.”

For more information about how price swings affect farm profitability, call the Alberta Ag-Info Centre at 310-FARM (3276).

Alberta Ag-Info Centre
310-FARM (3276)

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For more information about the content of this document, contact Dean Dyck.
This document is maintained by Christine Chomiak.
This information published to the web on August 10, 2018.