1. The Economic Drama of Soybean Rust in 2005
Corinne Alexander, Chris Hurt, Craig Dobbins, George Patrick
Agricultural Economists, Purdue University
Sponsored by:
PURDUE COOPERATIVE
EXTENSION SERVICE

2. Will national yields be sharply reduced??????
Will the threat of rust cause U.S. farmers to abandon soybeans in 2005??????
Will national yields be sharply reduced??????
Soybean rust will not have tragic results, it will be costly, but it can be managed.
Can rust be Managed??????

3. Brazilian yields since getting rust in 2001 have been above average in three of the four years of rust infestation.

4. National Economic Impacts
Soybean
producers
Livestock
Other crop
Consumers
Total
impact
First year, worst case: Yield loss of 9.5%
Expected impact ($million)
-1,004
-52
-14
-271
-1,341
Percent change
-19.9%
-0.1%
-0.3%
After 3 years: Medium spread
-828
-57 5
-287
-1,168
-14.3%
-0.2%
0.03%
Source: Economic Research Service, USDA, OCS-04D-02
Yield impact: average -4.3%, range is -9.5% to +0.9%
All estimates in 2004 dollars
In the medium spread case, farmers pay an additional $779 million in fungicide costs and soybean price increases 2.76%--the cost increases are much larger than the price increases, so farmers lose.
The percent change is in terms of net revenue.

5. The chances of rust will vary around the country
The chances of rust will vary around the country. The south, southeast and east coasts have the highest odds of infestation. The state of Indiana may be more like 60% to 80% likely to have rust.

6. Regional Acreage Responses (After 3 Years, Medium Spread)
Regions
Lake
States
Corn
Belt N.
Plains
App. SE
Delta
South US
Suitability index
0.59
0.70
0.54
0.78
0.83
0.66
0.38
2001 soybean acres (million)
8.6
37.6
8.5
5.5
3.3
9.4
0.3
74.2
Percent change in acreage, 2008
2.3
-1.9
2.1
-11.3
-13.3
-10
1.2
-3.2
The largest reduction in soybean acreage will likely be where the highest odds of the disease are at. Also the long growing season in the south means they would have to treat more often. This would make their expected costs for rust treatment higher and reductions in acreage would be higher. Western corn belt reductions in soybean acres will likely be less than in the eastern corn belt. These are USDA estimates as noted.
Source: Economic Research Service, USDA, OCS-04D-02

7. Planning yields & prices
Your 2005 Decisions
Planning yields & prices
Cont. Corn
Rot. Corn
Rot. Beans
Wheat
Yield (bu/a)
133
143
46.2
69.1
Futures: Jan. 4
$2.33
$5.48
$3.10
Basis
-.22
-.25
-.30
2005 harvest
($/bu)
$2.11
$5.23
$2.88
Prices are based on the November soybean futures contact, current November soybean futures contract, and current July wheat contract with an adjustment for the basis. The date prices were checked was January 4, 2005.
Average Quality Land

8. Expected 2005/acre return: January 4, 2005
Market is sending signal that rotated corn and soybeans are about the same. Last year at about this time, the signal was much stronger that the market needed soybeans. With the increased risk and potential increased cost of producing soybeans, the market at this time is not encouraging soybean production.
The return is being influenced by a decline in expected revenues compared to last year and an expected increase in production costs.

9. Estimated production costs
The estimated production costs for all the crops increased, driven by hire fertilizer, seed, fuel, and interest expenses.

10. Assumptions on Fungicide and Application Costs for One Application?
Material……………$13 to $16 per acre
Application…..………$5 to $6 per acre
Total………$18 to $22 per acre
These are estimated costs for one application of fungicides in 2005.

11. Have to Play the Cards you have been dealt for 2005!
If you have been near a 50/50 rotation (corn/soybeans), Then What are the Alternatives to Soybeans for 2005?
Have to Play the Cards you have been dealt for 2005!
Winter wheat????
Buckwheat?????
Idle the land????
Corn back to corn!!!!!!
The alternative to planting soybeans in Indiana for 2005 is primarily planting corn on land that was also in corn in This is corn-on-corn and may begin to have yield and costs implications compared to the more normal 50/50 corn/soybean rotations.

12. 100% Susceptible Adding fungicide & No RUST ONE TWO
If one can get by with a single treatment of fungicide for soybean rust, soybeans still provide a better alternative that second year corn or wheat. This assumes a cost of $20 per acre of a fungicide treatment on soybeans. This also assumes that there will be a 7% reduction in the yield of second year corn. If two fungicide treatments are required, wheat would provide slightly better returns than soybeans, but soybeans would still provide better returns than second year corn.

13. June
Another persons view of the possibility of rust infestation in the month of June. Note there are differences in the state of Indiana.
Number of years in ten suitable for an epidemic, hatched areas indicate soybean production (courtesy of R. Magarey)

14. 60% Susceptible
ONE
TWO
If one can get by with a single treatment of fungicide for soybean rust, soybeans still provide a better alternative that second year corn or wheat. This assumes a cost of $20 per acre of a fungicide treatment on soybeans. This also assumes that there will be a 7% reduction in the yield of second year corn. If two fungicide treatments are required, wheat would provide slightly better returns than soybeans, but soybeans would still provide better returns than second year corn.

15. The expected return from soybeans would need to decline by $35 per acre before it would be replaced by wheat and by $44 per acre before it would be replaced by second year corn. If this loss of return is measured in yield, soybean yields would need to decline 5.7 bushels or about 12% before replacing soybeans with wheat. Soybeans yields would need to decline 7.2 bushels or about 16% before replacing soybeans with second year corn. It is likely that there will be some combination of increased costs and reduced yields.

16. Market Logic for 2005 Soybeans
Say all U.S. farmers decided beans were to risky in 2005 and cut all U.S. bean acres and switched to corn!!!!
Price Impact???
If many farmers cut soybean acres, soybean prices would tend to rise, and corn prices would tend to drop.

17. $/Acre
$/Acre
If expected returns of soybeans are lower than corn, then there will be a shifting out of beans and into corn, until…..
IF expected returns to soybeans are much lower than to corn prior to planting, THEN producers would reduce bean acreage and increase corn.

18. Any Proof....... $/Acre $/Acre
With a NEW Expected Costs for Fungicide application on Beans. New Crop bean Prices should adjust upward relative to corn to provide incentives to plant sufficient bean acres.
Those expected returns reach equilibrium.
Any Proof

19. Rust in U.S.---Nov. 10
On the day of the announcement of soybean rust discovery in the U.S., November 2005 soybean futures rose sharply relative to December 2005 corn futures. This points out that prices will adjust to give producers some added incentives to stay with their soybean/corn rotations in 2005.

20. So in the Pre-Plant period
Expect the new-crop futures market to provide a price premium to plant beans on average quality Midwest soils that is roughly equal to the Expected Costs of Rust Treatment
Our Guess is:
$10 to $20 per acre of soybean premium without rust treatment costs
Our guess is that the futures market will provide a $10 to $20 per acre premium to stay with soybean/corn rotations in This will help cover the costs of potential rust treatment if needed in 2005.
Note: Price relationships for corn and soybeans can also depend on
other world and other U.S. factors

21. Pricing Implications: SOYBEANS
Greater yield, production, and price uncertainty in 2005
Fewer bean acres: Our thought 3% to 5%
Volatility in price could be high
Diversified pricing---spreads risks
Tendency to use options to price 05 Beans
Bushels not committed
Price not committed if rust is a major problem
Continue to do some pricing in the March-April-May spring “premium” window.

22. Pricing Implications: CORN
More acres in 2005: Our guess up 3 to 4%
Weaker price increases into this spring
Price danger of storing too far into the summer
Expect strong carry to continue in to 05 crop. Favorable returns for storage.
Stay with pricing some new-crop in the March-April-May spring “premium” window

23. What about Crop Insurance??
64.2% of IN crop acres insured in ’04
Soybeans = 62.3% of acres
Corn = 66.8% of acres
Two types of insurance products
County-based (group) products GRP and GRIP (18.7% in ’04)
Individual producer-based products APH, CRC, RA & IP (81.3% in ’04)
County Loss
Individual Loss

24. Individual Crop Insurance
Plant diseases, including soybean rust, due to natural causes are a covered peril
Expected to use “good farming practices”
Crop Insurance would also pay if:
No effective control is available, or
A lack of supplies of fungicide for effective control
What about Inability to get a custom applicator???---(We don’t know if this will be covered by insurance)
Losses NOT covered by insurance if:
There is insufficient or improper application of plant disease control measures
Damage due to producer’s decision not to buy and apply available control measures

25. Individual Crop Insurance
Remember insurance only covers losses from yield/revenue below the coverage level of insurance
Coverage level can vary between 50% and 85% of producer’s historical yields times “price” for revenue products
15% to 50% insurance “deductible”
Point: For insurance to cover losses from rust, you will likely have to apply fungicide, and if you properly apply fungicide treatments the proper number of times, you likely won’t have a yield loss from rust that is in excess of 15%.

26. Critical Questions Asked if You Claim Rust Loss:
Could producer have applied recommended fungicides in a timely manner??????
Were fungicides applied in a timely manner
for optimum control (rate) regardless of cost?
How will Crop Insurance Adjuster Decide????
Probably case-by-case decisions, especially in 2005 until better guidelines can be developed
Keep good records on rust identification and spray activity for your soybean insurance in 2005.
Document Your Rust Monitoring and Spray Activity

27. Crop Insurance Decisions
Crop insurance premiums are based on
historical results
Soybean rust is a new risk of possible losses
and is not reflected in current premiums
Crop insurance, combined with forward pricing, can increase average returns and
reduce downside risk for producers

28. Insurance Bottom Line:
Start with insurance you have used in the past, Then.
Consider that Rust is a new risk of loss and you will not have to pay more for insurance
The new rust threat tends to cause one to:
--Stay with insurance you have had, or
--Increase soybean coverage levels in 2005

29. Conclusions: National Perspective
Rust can be managed!
Primary impact is on production costs not yields
Soybean producers bear most of the negative impacts
Consumers also bear some
Livestock producers to a small extent
Impacts will vary by region of the county
Bigger bean acreage reduction in the Eastern Corn Belt (ECB) and Southeast compared to WCB
Somewhat more corn and lower prices in ECB compared to WCB
Somewhat more growth of animal industries in ECB compared to WCB

30. Conclusions: Indiana Producers
For 2005 alternative to soybeans is corn-on-corn
With 7% yield drag, corn-on-corn tends not to be a good “economic” alternative
Susceptibility % may vary around the state and remains uncertain for 2005
November 2005 bean futures are expected to “bid for bean acres” maybe $10 to $20 per acre over corn
Most will tend to stay with corn/soybean rotations
Insurance is a better deal in 2005
New risks of loss from rust is included, but
Premiums will not be higher in 2005, but
Will have to spray if you have rust, and if you spray yield losses from rust may not exceed 15%.

31. Policy Implications Government costs-share for fungicides
Should the broader society help farmers bear
some of the negative implications?
Government costs-share for fungicides
Provide Disaster Assistance legislation
Establish a rust detection system
Crop insurance programs:
Soybean premium rates could be adjusted downward or be subsidized more
Farm programs:
Increase soybean Target Price as an example.
This disease hits farmers very hard. Should the costs of this disease be spread more uniformly across society? How could that be done???