1992-1998 Economic Analysis of the Wisconsin Integrated Cropping Systems Trial

Rick Klemme[1] and Don Schuster [2]

Introduction

The 1998 economic analysis for the Wisconsin Cropping Systems Trials marks a new approach to evaluating the systems. In the past, the economic analysis has been compiled by different economists and agronomists that evaluated the data a year at a time. This year’s evaluation uses a more consistent process over 1992-1998 for Cropping Systems (CS) 1, 2 and 3 (cash grain systems) and 1993-1998 for CS 4 and 5 (forage based systems). Each cropping system from 1992-1997 has been reevaluated, so comparison to prior reports should be made with this in mind. This report initially focuses on the economic analysis for the cash grain and then the forage based cropping systems. The remainder of the report then examines the changes that have been made in the economic analysis to provide a more consistent and realistic assessment of the five cropping systems.

Economic Analysis

Economic Analysis (CS 1, 2 and 3) – Gross Margins

Cropping systems 1 through 6 are described in Figure 1. The 1992-98 WICST economic analysis calculated in terms of gross margins per acre for the cropping systems (CS) 1-3 for the Arlington and Lakeland sites (Figures 2 and 3). In 1998, CS2 had the highest gross margins at both sites followed by CS1. In 1998 corn yields were very good in both of these systems. Even with the lowest commodity prices in the history of the WICST, gross margins for CS1 and CS2 were the best or second best they have been. Cropping system 3 at Arlington had the best corn yield in the past seven years, while soybean and wheat yields were a little better then the average. But, these relatively good yields were not enough to offset poor prices. The price effect at Lakeland was felt more because the yields were just average compared to other years.

The economic analysis is based on the concept of gross margins. This concept deducts the variable cost of production (seed, fertilizer, chemical, drying cost, fuel, and repairs) from the gross revenue generated per acre. This gross revenue is based on the actual yield, its quality (in the case of alfalfa), and the price for the product when harvested. This gross margin figure equals the dollars available to cover the overhead costs of capital, land, labor and management. The way to interpret the adequacy of the gross margin figure is to estimate the amount of dollars needed per acre to cover those overhead costs. We would estimate that a cash grain farmer would need approximately $35-$40 per acre to cover labor and management, $80 to $140 for rent, and approximately $40-$60 to cover the depreciation and interest costs associated with machinery and drying facilities owned on the farm. This adds up to approximately $200 to $250 per acre to be covered by gross margins. Since 1994, the three cash grain-cropping systems have generally been able to generate $200/acre in gross margins at Arlington. The Lakeland results have been less successful in that the gross margins have been less than $200/acre more often than not.

1998. The gross margins for CS2 exceeded those of CS1 and CS3 in that order and at both sites. Gross margins at Lakeland for CS3 were substantially lower than that of CS1 and CS2 (Figure 2 and 3). The gross margins for CS2 in 1998 exceeded those of CS1, which in turn exceeded those of CS3. This was due to a number of factors including late planting, weed pressure, poor yields and low prices of wheat and soybean. This is the first time since 1992 that CS3 didn't have higher gross margins then CS1, at either site.

1992-98. Over this 7-year period Arlington's CS2 and CS3 have had higher average gross margins than CS1. The gross margin average for CS2 over CS1 was $31.84 per acre or $37,541 per year over 1200 acres. CS3’s gross margin averaged $25.45 per acre or $30,540 per year over 1200 acres more than CS1.

Comparing Lakeland's CS1 gross margin average to CS2 and CS3 for the years 1992-1998 showed similar, yet more striking results than those at Arlington. The gross margin average for CS2 is $70.92 per acre or $85,106 per year higher than CS1. CS3 averaged $51.98 per acre or $62,374 per year more than CS1.

Economic Analysis (CS 4 and 5) – Gross Margins

Comparing the shorter term forage rotation, CS5, to the longer and more intensive forage rotation, CS4 (Figures 4 and 5). Over the period 1993-1998 these rotations generate similar amounts of gross margins per acre.

Comparing Arlington's CS4 gross margin to CS5 for the years 1993-1998 showed only a small difference of $18.37 per acre or $2755.25 per year on a 150-acre farm. Comparing Lakeland's CS4 gross margins to CS5 for the same time period shows even a smaller difference than Arlington with $10.49 per acre or $1573.25 per year. The 4 cut alfalfa management system being used for both CS4 and CS5 could be affecting CS4 more because of the problem of winter kill on the alfalfa and the need to maintain a longer stand in CS4.

Economic Analysis (CS 1, 2, and 3) - Net Returns to Land & Management

The net returns to land and management of cropping system's 1, 2 and 3 are calculated by subtracting the allocated overhead from the gross margins.

Allocated overhead includes labor, interest, insurance, and depreciation expenses. Three items not included in the allocated overhead are the rental rate for land, property taxes, and a management charge. These were excluded because no group consensus could be obtained about the rental or tax values or the appropriate management charge. Since these costs are common across systems, that is the land and management are there regardless of the system, we felt comfortable leaving these figures out. Readers of this document can deduct an appropriate value for rent, taxes, and management to arrive at a net return for the three systems with all costs included.

Machinery costs are a function of the following factors for each piece of farm equipment used in these budgets: number of times the equipment goes across the field, repair and energy cost, and labor, depreciation, and interest costs.

At Arlington, CS2 has the lowest average machinery costs over the 7-year period at $49.93/a compared to $54.19/a for CS1 and $59.64/a for CS3. At Lakeland, machinery expense was also the lowest in CS2 at $49.10/a compared to CS1, $52.19/a and CS3 at $54.84/a. Details can be found in the Tables 1 and 2.

The net returns to land and management for both Arlington and Lakeland CS1, CS2 and CS3 peaked in 1995. Arlington's net returns to land and management on average fell after 1995 but remained relatively constant and positive from 1996-98. Lakeland, on the other hand, had zero or negative net returns in 1996, but rebounded in most cases in 1997 and 98.

When comparing the cropping systems over the period 1992-98, CS2 and CS3 had average net returns to labor and management greater than CS1 at both Arlington and Lakeland. At Arlington, CS2 averaged over $63/a or $76,323 per 1200 acres more than CS1 and CS3 averaged almost $25/a or $29,693 per 1200 acres more than CS1.

At Lakeland, CS2 averaged almost $70/a or $83,767 per 1200 acres more than CS1 and CS3 averaged almost $53/a or $63,447 per 1200 acres more than CS1.

Changes from Past Analyses

Having a complete data set from this entire period of time gives the opportunity to re-analyze the data in a more consistent manner.

Corn Moisture

The most significant data problem in past analyses involved the reporting of corn moisture contents. They were reported for high moisture feed grain being fed to the dairy herds on the farms where the research trials were located. These high moisture contents increased the drying costs in the corn enterprises in CS 1, 2 and 3. Corn was being dried from moisture contents as high as 37% down to 15.5%. This moisture content is higher than would be normal for a cash grain operation. Using these values lowered the gross margins and net returns of CS 1 (100% in corn) more than those for CS 2 (50% corn) and CS 3 (33% corn), respectively.

To remedy this problem, project participants were surveyed to develop a solution that would lead to more realistic corn moisture contents and still evaluate any changes in the net returns of these cropping systems caused by differences in corn moistures. The project participants agreed to use the moisture contents from the same corn varieties tested in the Wisconsin's Corn Hybrid Trials (WCHT) location closest to the WICST research location. The moisture results from the Arlington WCHT plots were used for Arlington's results and the Janesville WCHT plots were used for the Lakeland results. It was also agreed that the WCHT result would serve as the base moisture content for CS1 and then the differences in reported moisture contents from CS2 and CS3 would be added or subtracted from the WCHT to get the revised moisture contents.

Example: WCHT moisture for variety X is … 24%
CS1 reported moisture content is = 36%
CS2 reported moisture content is = 33%
CS3 reported moisture content is = 32%

The adjusted moisture content for CS1 is now 24%, CS2 is 21%, and CS3 is 20%. It would be from these adjusted moisture contents that the corn would be dried down to 15.5% at a cost of $0.02 per point removed per bushel.

The reported moisture contents for corn grown in CS4 and CS5 were not altered because these are considered livestock cropping systems. With livestock, in most cases, corn is harvested at higher moisture contents and stored in high moisture facilities with no drying costs incurred.

Labor Cost

In the past, labor costs associated with operating machinery were charged at a $5 per hour rate in all years. This rate, though it may have been relevant, though low, in 1992 when the experiment started, did not increase over the years as wages have risen. These costs were updated for this analysis using the wages for farm workers reported in the National Agricultural Statistic Service's Lake Region (includes Wisconsin, Minnesota and Michigan). The following labor costs by year were used in the analysis:

Corn and Soybean Price

The corn and soybean prices used the past evaluations have equaled the cash price taken at time of harvest from the nearest grain elevator. Unfortunately, this price – usually taken on a given day – could be a peak or valley for the grain price for the harvest period. Since the analysis assumes a 1200-acre farm farmed with standard practices, it would be impossible to harvest and market the grain in one day.

In order to solve this data problem, the Wisconsin Agricultural Statistic Service's cash grain reports were used. These prices represent the average daily price reported by country elevators from several regions in the state. The southeast region was used for the Lakeland site and the south central was used for Arlington. The average October price was used for both corn and soybeans.

The wheat price did not change. Since no area cash prices are recorded for wheat, the cash price at the time of harvest was used.

Forage Price

In the past, forage (hay) prices for CS4 and CS5 have been computed at $80 per ton. Project participants have been concerned about the reliability of this value that is the same regardless of the forage’s quality. Since the alfalfa is harvested in a timely manner (probably more so that it would be on a farm), it was argued that alfalfa quality was high and should be compensated accordingly. However, the current analysis has attempted to be realistic with regard to assumptions made about how the results should be translated to a 150-acre farm situation. In actual farm situations, hay is not always harvested in a timely manner and its average quality may deviate from that achieved in WICST.

To adjust the forage price, the average relative feed value (RFV) was computed for the years 1993-1996. The average RFV for those years was 144. This 144 RFV was assigned a price of $80 per tdm (ton of dry matter) and any deviations in RFV from 144 were used to adjust the forage price by adding or subtracting $1 per RFV point.

Example: RFV is 160, haylage is worth $96/tdm
160 - 144 = 16 + 80 = $96/tdm

RFV is 120, haylage is worth $56/tdm
120 - 144 = -24 + 80 = $56/tdm

CS3 Chemical Inputs

The debate over the use of chemicals in CS3 still continues. In past analyses, the herbicide input costs were omitted. There were many reasons for this omission. Sometimes, only the outside rows were sprayed to control border effect weeds. Since products from these rows were not harvested, the net returns were not affected by the spraying. In other situations, it was assumed that the crops could have been organically grown if adequate labor resources were available.

Since 1992, neither the Lakeland nor Arlington site has gone three years without chemical use. The system cannot be classified as organic, although it is very close. Therefore for this analysis, the sprayer has been included in the machinery since there are years in which herbicides have been applied to the interior (harvested) rows as a crop saving measure. In years where only the outside rows were sprayed, the chemical use was left off of the analysis. But, in years where Stinger was used to control thistle and years where Buctril, Accent, and Poast have been sprayed to rescue a crop, herbicide costs have been included.

Machinery Set

The size of the farms has been set at 1200 acres for CS1, CS2 and CS3, which is representative of cash-grain farm sizes in south-central and southeast Wisconsin. Though previously 1000 acre farm size was projected, now all years are standardized to 1200, with a minimum differences in machinery costs. To obtain realistic machinery inputs surveys were sent to farmers on the WICST committee. These farmers provided input on tractor sizes and the width of tillage and planting equipment they would use to farm 1200 acres in each of the three WICTS cash-grain systems. We also looked at actual farm machinery sets used by farmers and county extension agents who had worked with UW Ag. Economist Gary Frank using ABCS. Using these data sets we chose a farm machinery set for each of the three systems (Table 1). Before entering the data into ABCS, we met with the three farmers from the Columbia County WICST committee and incorporated their suggestions regarding equipment size and purchase prices.¹

In the years prior to 1994, CS2 was considered a conventional tillage system. In 1994, CS2 was converted to a no-till system. The machinery sets defined for CS2 in these two time periods are based on conventional tillage prior to 1994 and no-till thereafter.

For the most part, CS1, CS2, and CS3 have similar machinery set defined to be as similar as possible, but there are a few differences. CS1 and CS3 contain the same tillage systems and tractors. Because CS2 is a no-till system, it has a 140 horse power tractor instead of a 225 horse powered 4 wheel drive in CS1 and CS3. CS1 and CS2 use a 175 horse powered combine, while CS3 uses a 145 horse powered combine (only 400 acres in any given crop with harvesting spread over more months during the year). Grain hauling for CS 1 and 2 is the same, 2 tandem trucks and 1 350-bu. grain cart. CS 3 has 1 tandem truck, 1 350-bu. grain cart and 2 - 250 bu. gravity boxes for its grain hauling.

CS 4 and 5 are considered dairy cropping systems. We used the same equipment sets for both rotations and assumed a 150-acre farm. The equipment set was compiled by members of the WICST team and was refined at the summer field days at Lakeland in 1997.

Figure 1. Schematic drawing of cropping systems in the Wisconsin Integrated Cropping Systems Trial.

Figure 2. Gross Margins – CS1, CS2, and CS3, Arlington Agricultural Research Station

Figure 3. Gross Margins – CS1, CS2, and CS3, Lakeland Agricultural Complex

Figure 4. Gross Margins – CS4 and CS5: Arlington Agricultural Research Station.

Figure 5. Gross Margins – CS4 and CS5: Lakeland Agricultural Complex.

Figure 6. Net Returns to Land and Management for CS1, CS2, and CS3 ($/acre).

Figure 7. Net Returns to Land and Management for CS1, CS2, and CS3 ($/acre).

Table 1. Field Equipment and Operations for the three WICST Cash-Grain Systems.

Table 2. Field Equipment and Operations for the two WICST Dairy Cropping Systems.

1 Professor – Agricultural & Applied Economics and Associate Dean of Extension at the University of Wisconsin-Madison. Email: rlklemme@cals.wisc.edu

2 Outreach Specialist – Center for Integrated Agricultural Systems at the University of Wisconsin-Madison. Email: schuster@aae.wisc.edu

¹Mulder, Tom; The Wisconsin Integrated Cropping Systems Trial, 1995 p.36

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