Farmers across the midwestern US are gearing up for planting season. Economic logic says they should be planting substantially more acres this year because prices are high. However, last week's USDA prospective planting report appeared to indicate that this is not the case. 

Futures prices of corn, soybeans, and wheat increased by about 35% from August 2020 to February 2021.  This increase mostly reflects increasing demand, notably from China for corn and soybeans, as I discussed in a previous Ag Data News article. 

 

So, how much would we expect planted acreage to increase in response to these price increases? In economist-speak, what is the supply elasticity?

The right answer is "there's no such thing as THE supply elasticity". There are lots of different elasticities depending on changes in the prices of other crops and production costs, or the length of time we give farmers to respond.  For example, farmers will switch from soybeans to corn if the corn price increases and the soybean price does not, but they will not switch if both prices increase equally.

A relevant elasticity can be found in this paper by Michael Roberts and Wolfram Schlenker. Using data from 1960-2007, they estimate that US corn, soybean, wheat, and rice production increases by 0.3% for every 1% increase in a price index of those commodities (see Panel B of their Table 3).  Students in my ARE 231 class have replicated this estimate using updated data (assignment here).  This is the relevant analysis for 2021 because all prices have increased, rather than one price increasing while the others remain constant. Using this elasticity estimate, a 35% price increase portends a 10.5% acreage increase.

Farmers planted 218m acres of corn, wheat, and soybeans in 2020. A 10.5% increase would imply an additional 23m acres. Instead, USDA's projection, which is based on farmer surveys, predicts an increase of 7m acres: 5m in soybeans, 2m in wheat, and essentially no increase in corn.  

 

The USDA survey reports no change in hay acreage and a slight decrease in acreage of other principal crops. Principal crops are basically things we don't grow in California (I kid).  Specifically, they are corn, soybeans, hay, wheat, sorghum, oats, barley, rye, rice, peanuts, sunflower, cotton, dry edible beans, chickpeas, potatoes, sugarbeets, canola, proso millet, tobacco, and sugarcane.1

Futures markets were surprised by the prospective planting report. Corn and soybean prices jumped by 6% on the day the report was released (March 31), and wheat increased by 3%.  These price jumps indicate that futures traders think the supply response is insufficient to meet demand, but 6% and 3% are small price increases in comparison to the huge lack of acreage expansion. 

 

One possible explanation is that the USDA is wrong. Perhaps farmers are lying on the survey or the survey sample is not representative. However, USDA does not systematically under-estimate actual planted acreage. 

The two recent years with the largest errors are 2019 and 2020, when the survey over-estimated acreage because heavy rains prevented farmers from planting as many acres as they planned. Accounting for prevented planting makes this year's aggregate even more puzzling because, despite higher prices, farmers are actually planning to plant fewer acres than they had planned last year.

 

Corn and soybeans make up about 60% of principal crop acres and tend to have larger projection errors than the other principal crops. Most of the prevented planting acres in 2019 and 2020 were corn and soybeans.

 

The projected acreage changes differ across states. In the cornbelt states, which I define here as IA, IL, IN, WI, MI, and OH, corn and soybeans dominate. There isn't as much scope to increase cropland acres in these states, and there isn't much land in other principal crops to convert to corn or soybeans. 

The Great Plains states (plus Minnesota) have more scope for corn, soybean, and wheat expansion and accordingly project an extra 6m bushels of these commodities in 2021, or about an 8% increase. This outcome mimics the findings of Nick Pates and Nathan Hendricks, who show using satellite data that farmers in this region respond much more to price changes than those in the central cornbelt.

Surprisingly, the remainder of states see no projected increase in corn, soybean or wheat acreage. 

 

So, why aren't farmers planning to plant more principal crops this year, especially corn, soybeans and wheat?

One answer is that costs have increased. Fertilizer prices are up 20-30% this year and oil prices are up 50% since November.2 For corn, these two factors generate costs of about a quarter of the value of the crop. So, if we consider a 40% increase on a quarter of the crop's value, that is a loss of 10% of the crop's value. Equivalently, we could say the net price increase is really 25% instead of 35%. A 0.3 elasticity on a 25% rice increase implies a 7.5% increase in acreage. USDA projects 3.2%.

After accounting for these cost increases, we're left with an increase in acreage less than half what standard elasticity estimates imply.  Past years show no indication of systematic errors in the prospective planting report, but maybe this is the year.  I expect final planted acreage to come in above the number in this report, perhaps from areas outside the central cornbelt and great plains. 

 

I generated the graphs in this article using this R code. 

• 1I omit potatoes, tobacco, and sugarcane from these plots because Quickstats has missing data for those commodities.
• 2In economics-speak, the supply curve has shifted left and the demand curve has shifted right, so the % change in quantity is less than the elasticity times the % change in price. In econometric-speak, the price increase is endogenous to supply.