Diversified vs. Specialized Swine and Grain Enterprises in Iowa

1
Diversified vs. Specialized Swine and Grain
Enterprises in Iowa

• Laura Borts, Gary May, and
• John Lawrence
• Iowa State University

2
Background and Justification

• Iowa 1980 2001
• Number of farms -22
• Average acres per farm 23
• Hog producing farms
• 1980 over 53 of farms
• 2002 only 11 of farms

3
Research Questions

• The research committee from the Iowa Pork
  Producers Association approach ISU with the
  following questions
• Is there still a role for traditional diversified
  crop-hog farms?
• Is the trend toward specialization likely to
  continue?
• Role of public policy

4
Previous Studies

• Purdy, B.M., M.R. Langemeier, and A.M.
  Featherstone. 1997. Financial Performance, Risk,
  and Specialization. Journal of Agricultural and
  Applied Economics, 29,1(July 1997) 149-161
• Grain operations that diversified into beef
  cattle production reduced mean return on
  investment as well as the variability in return
  on investment.
• Diversification into swine and dairy production
  increased mean income and decreased variability.

5
What Other Studies Have Said

• Advantages of Diversification
• Complementary characteristics
• Byproduct of one enterprise serves as an input
  for another
• Matching feed requirements with feed supply
• More efficient distribution of labor and risk
• Advantages of Specialization
• Farm resources may offer an advantage to a
  specific enterprise
• Productivity improvement from specialized skills
• Volume discounts on larger purchases
• How to have both????

6
The Model

• Whole Farm Budget Comparison
• Cash grain v. diversified grain-hog farm
• Farrow to finish
• Breed to wean
• Wean to finish
• Measures of profitability
• Return to labor, management, and owned assets.
• Rate of return on investment

7
Model Assumptions

• 6,000 hours of labor per year
• No seasonal labor constraint
• Corn production corn demand
• Corn acres soybean acres
• Manure applied ahead of corn
• Tractors shared between crop and hogs

8
Cash Grain v. Hog-Grain Farms With 6,000 Hours of
Labor per Year

• Enterprise Acres Sows Hogs Sold
• Cash Grain 2,400
• Farrow-Finish w/G 550 191 3,270
• Breed - Wean w/G 229 616 12,200
• Wean - Finish w/G 723 5,963

9
Data Sources

• Budget coefficients were derived from Iowa State
  University livestock and crop enterprise budgets
• Crop and livestock prices were derived from
  USDA-AMS

10
Stochastic Component of the Model

• A simple budget comparison represents a single
  point in time.
• How does enterprise diversification impact income
  variability?
• How frequently is one combination of enterprises
  more profitable than another?
• Monte Carlo simulation is a common method of
  addressing these issues

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Input Variables Designated as Stochastic
Input Name Dist. Type Mean Mean Std Dev 90 Percent Interval 90 Percent Interval
Corn Price (/bu) Lognormal 2.27 0.42 0.42 1.67 2.99
Soybean Price (/bu) Lognormal 5.81 0.96 0.96 4.39 7.46
SBM Price (/Ton) Lognormal 185 35 35 135 246
Market Hog Price (Live, /cwt) Lognormal 43.79 7.28 7.28 33.00 56.46
Weaner Pig Price (/Head)1 Lognormal 30.66 5.12 5.12 22.99 39.42
Sow Price (/cwt)1 Lognormal 32.85 5.44 5.44 24.77 42.34
12
Input Variables Designated as Stochastic
Input Name Dist. Type Mean Std Dev 90 Percent Interval 90 Percent Interval
Corn Yield Dev. from Trend (bu/ac) Logistic (0.1) 16.9 (27.2) 26.7
Soybean Yield Dev. from Trend (bu/ac) Logistic (0.1) 4.2 (6.8) 6.5
Nitrogen Price (/lb) Uniform 0.17 0.03 0.13 0.22
Market Hogs per Litter Normal 7.80 0.25 7.39 8.21
Weaned Pigs per Litter Normal 9.00 0.50 8.17 9.82
Market Hog Weight Normal 260 5 252 268
13
Role of 2002 Farm Bill

• Compared models that included and excluded farm
  program payments
• Specific programs we modeled
• Loan deficiency payments
• Counter cyclical payments
• Direct payments

14
Results
15
Net Return to Labor and Management Excluding
Government Payments (/yr)
  Mean Std Dev 90 Interval 90 Interval
Cash Grain 18,414 124,520 -164,984 226,791
F-F w/G 78,807 73,283 -29,760 207,421
B-W w/G 91,555 68,697 -11,351 208,914
W-F w/G 55,492 90,643 -84,884 212,825
16
Net Return to Labor and Management Including
Government Payments (/yr)
  Mean Std Dev 90 Interval 90 Interval
Cash Grain 127,564 81,819 56,591 285,458
F-F w/G 104,119 67,430 7,490 221,214
B-W w/G 102,079 66,344 4,085 216,494
W-F w/G 88,758 82,814 -30,681 236,775
17
Percent of Observations by Rank and that Beat
Cash Grain Government Payments Included
  Profitability Rank Profitability Rank Profitability Rank Profitability Rank Beat
Enterprise 1 2 3 4 Cash Grain
Cash Grain 55 8 9 28
F-F w/G 15 44 37 4 39
B-W w/G 20 32 31 17 38
W-F w/G 10 16 23 51 32
18
Research Questions Revisited

• Is there still a role for traditional diversified
  crop-hog farms?
• Conclusion Yes, there appears to be an
  acceptable return to labor for producers who wish
  to operate a diversified crop/livestock farm.
• Is the trend toward specialization likely to
  continue?
• Conclusion Not directly addressed in this study.
  
• Our model suggests farm subsidies have trumped
  the income stabilization benefits of
  diversification.

19
Summary

• Cost savings from diversification
• Less acres per person with livestock
• Impact of 2002 Farm Bill
• Without cash grain was lowest average and
  highest risk
• With cash grain is highest average and lowest
  risk

20
Pulling It All Together Managing Cattle and
Crops through Feed and Fertilizer

• John Lawrence, Iowa Beef Center at ISU
• Evan Vermeer, Iowa Cattlemens Association

21
Commercial Supplement
DGS
Diet Formation
Crop Sold
Cattle Bought

Management
Cattle
Crops
Rules Regulations Information Records Advice
Service
Cattle Sold
Commercial Fertilizer
Manure Export
Manure Application
22
Guiding Principles

• What goes in comes out
• Everything has a cost or value
• Nutrients only have value if they are needed
  (applies to feed or fertilizer)
• Influence outputs through inputs

23
Value of Applied Manure Supply and Crop Demand

Nutrients have value where they are needed
24
300 Head Feedlot ExampleNutrient Supply, Value
/T PAN Price Supply Value
N 14 3,990 0.39 1,556
P 11 13,200 0.26 3,432
K 14 16,800 0.24 4,032
9,020
26/A available 2nd year
25
Feedlot Example C-C Crop Demand, Value
N-Balance Rate /a Rate /a P-Balance P-Balance Rate /a
27 acres 88,889 88,889 65 acres 65 acres 36,923
N 1,556 148 148 1,556 1,556 61
P 618 489 489 3,432 3,432 203
K 888 622 622 4,032 4,032 258
Value 3,062 9,020 9,020
Difference Difference Difference 5,958
Cannot apply at low rates so use 3 year rotation
26
Maximize Farm Profit While Balancing Farm
Nutrients
27
Iowa Farms - Nitrogen
28
Iowa Farms - Phosphorus
29
Historic Perspective
Pork
Nitrogen
Corn
Milk
P2O5
Eggs
Soybeans
K2O
Beef
30
Future Perspective
?
Pork
Nitrogen
Corn
P2O5
Milk
?
Soybeans
K2O
?
Eggs
?
Beef
?
Ethanol
DGS
31
Profit Advantage
Assume 95 of corn price, 0.10/bushel increase
corn price, costs covered, 153 days
32
Optimum Use
Assume 75 of corn price, 0.10/bushel increase
corn price, costs covered, 153 days (Calculated
from 2006 U. of Nebraska Analysis)
Source Dan Loy, ISU
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Impact of DGS Inclusion on Nutrient Management

• Great N and P excretion
• Greater land requirements.
• Greater travel distances and time requirements
  impacting labor, capital and operating costs.
• Book values of nutrient concentration will not be
  representative.

35
Annual net value of manure, spreading cost and
total fertilizer value of manure (1,000 per
year) for a 20,000 head beef open lot under
corn-soybean rotation.
No DGS Inclusion in Diet No DGS Inclusion in Diet No DGS Inclusion in Diet No DGS Inclusion in Diet 40 DGS Inclusion in Diet 40 DGS Inclusion in Diet 40 DGS Inclusion in Diet 40 DGS Inclusion in Diet
Basis for Manure Application N-Based N-Based 1-Yr P-Based 4-Yr P-Based N-Based 1-Yr P-Based 1-Yr P-Based 4-Yr P-Based
20.000 head feedlot 20.000 head feedlot 20.000 head feedlot 20.000 head feedlot 20.000 head feedlot 20.000 head feedlot 20.000 head feedlot 20.000 head feedlot 20.000 head feedlot
Annual fertilizer value of manure 373 430 430 430 563 766 766 766
Total value of N 144 144 144 144 217 217 217 217
Total value of P2O5 85 286 286 286 346 548 548 548
Annual cost 177 344 344 244 240 669 329 329
Net value of manure 195 86 86 185 323 97 437 437
36
Paradigm Shift

• Do crop farmers buy and apply P2O5?
• How much do they pay for it?
• Do livestock producers have enough land for
  P-Index based applications?
• What is the value of excess P2O5?
• Is there an opportunity for these two people?
• What are possible outcomes?
• Win-win Feedlot sells P2O5 at reduced rate
• Win-draw Feedlot sells at full price or gives
  away
• Lose-lose-lose Cropper imports, Feedlot wastes,
  and P levels continue to accumulate in Iowa soils
  or Iowa exports value added potential

37
Natural, Organic, and Grass-fed Beef Production
Economics and Transition
Nicolas Acevedo, Margaret Smith, and John D.
Lawrence Funded by Leopold Center for
Sustainable Ag http//www.iowabeefcenter.org/cont
ent/Organic_Natural_Grass_Fed_Beef_2006.pdf
38
Scenarios

• Cow-calf to slaughter operation
• Spring born calves
• November 1 weaning date
• Five production systems
• Three grain-fed systems
• Conventional, natural, organic
• Two grass-fed systems
• Natural, organic
• Conventional and CRP conversions

39
Scenarios

• Three grain-fed systems
• Medium frame cattle
• 475 weaned calf
• 1250 slaughter weight
• Conventional slaughter 1400 with implants
• Two grass-fed systems
• Small frame cattle
• 425 weaned calf
• 1030 slaughter weight
• 18 lower cow feed cost

40
Production Model

• Seasonally available forage
• MIG in all systems
• Animal growth based on the Cornell Net
  Carbohydrate and Protein System (CNCPS)

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Long-run Feed and Cattle Prices and Organic
Premiums Used in Analysis
Production Inputs Conven tional Premium Price
Corn grain (/bu) 2.25 160 5.85
Corn silage -- 50 grain (/T) 20.25 160 52.65
Soybean meal -- 48 protein (/T) 195.00 210 604.50
Orchardgrass Alfalfa Hay (/T) 100.00 20 120.00
Choice SH Live (/cwt) 79.32 54 122.15
Choice Natural SH Live (/cwt) 85.62  
Natural Grass-fed SH Live (/cwt) 122.00 73 137.25
44
Marketing Date and Weight
Organic Organic Natural Natural Convntnl
Grass-fed Grain-fed Grass-fed Grain-fed Grain-fed
Marketing date 2-Nov 26-Aug 2-Nov 26-Aug 31-Jul
Final weight, lbs 1,029 1,252 1,029 1,251 1,401
Dressing percent 61 63 61 63 63
Carcass weight, lbs 623 783 623 782 876
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Estimated Prices, Costs and Returns by System
Organic Organic Natural Natural Conven tional
Grass- fed Grain- fed Grass- fed Grain- fed Grain- fed
Lifetime Return /hd -10 12 -173 44 67
Sell Price /lb 2.18 1.94 1.94 1.36 1.26
Breakeven Price /lb 2.20 1.92 2.22 1.30 1.18
Premium to equal Conventional /lb 0.43 0.27 0.40 0.06 0.00
Prices and costs are in /lb carcass weight
47
Profitability Summary

• Inputs are priced at opportunity cost
• Organic prices and costs near breakeven
• Natural grass-fed premium not high enough for
  cost
• Grass-fed cost of wintering weaned calf is a
  challenge

48
Cash Flow Analysis

• 100 cow conventional herd
• Five systems modeled
• Stay conventional
• Convert to organic grain or grass over a 3 year
  period
• Convert to organic grain or grass more quickly
  using CRP land
• Sell natural while transitioning

49
Estimated Annual Cash Flow
50
Net Present Value at Differing Organic Premiums