Economic analysis of WICST: Gross margins and government programs

To do a complete analysis of cropping systems, we have to look at yields, nutrient management/environmental impact and profits. Profitability, or the ‘bottom line’ is what most farmers seem to pay closest attention to. The 2001 and 2002 economic analysis for the Wisconsin Integrated Cropping Systems Trials (WICST) adds to the previous years of analysis that were initiated in 1992. In addition we have included an analysis of the effect of government programs on gross margins in the cash grain systems. See Figure A for description of the 6 systems studied in WICST.

METHODS

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 price for the product when harvested. This gross margin 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 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 per acre for rent, and approximately $40-$60 per acre to cover the depreciation and interest cost associated with machinery and drying facilities owned on the farm. This adds up to approximately $155 to $240 per acre (or on average ~ $200/acre) to be covered by gross margins.

In the 8^th WICST Technical Report (1999-2000) it was determined that CS3 had labor constraints in both the spring and fall that would make it very difficult to manage from a time perspective. In this report, changes have been made to alleviate this problem. For example, to lessen the spring workload, more than two rotary hoeings or more than one row cultivation was custom hired; to lessen the fall workload, wheat planting was custom hired (see Fig. 9).

1. Commodities prices^[4] in 2001 were below the trial average price by just over 18% but prices were above the trial average in 2002 by just over 2%. The 2002 commodity prices were the highest received since 1997 with corn seeing the largest percentage gain.

2. Labor cost saw the highest increase since the beginning of the trial—jumping by 12% in 2001. Overall, labor costs have risen 42% from $5.35/hour in 1992 to $9.28/hour in 2002.

During the course of this trial, farmers have been receiving price support payments under two farm bills. The first was The Food, Agriculture, Conservation, and Trade Act of 1990, a.k.a. the 1990 Farm Bill, which covered the time period from 1990-1995. The 1990 Farm Bill had price supports for corn and wheat, but not soybeans. The other farm bill in effect during the WICST trial was The Freedom to Farm Act of 1996, a.k.a. the 1996 Farm Bill, which spanned from 1996-2002. In past reports, we have ignored these subsidies with the exception of some exploratory analysis with Loan Deficiency Payments in 1999. Each year that price supports were paid, they have been added to the gross margins. To facilitate the analysis, in this report, all government payments have been paid in the same cropping year as the program year. In reality, payments are made according to the farm bill protocol and market prices.

The average county yield was used in payments in cases where USDA assigned yields. For Arlington, the county average for corn was 109.5 bu/acre and 43.5 Bu/acre for wheat; at Lakeland, the county average was 113.2 Bu/acre for corn and 42.0 Bu/acre for wheat. Only with soybeans were farmers allowed to use proven yields. Farmers were paid the deficiency price for the commodity times the county-assigned yields (i.e. 109.5 Bu/acre in the case of corn at Arlington) multiplied by the number of base acres. Table 1 shows the deficiency prices received by farmers from 1992 – 2002.

Table 1. Deficiency payments under two different farm bills in effect during the trial.

*set-a-side is the amount of cropland that a farmer would have to seed down and keep mowed for the year of the program. A charge for seeding and mowing was added to cover these costs at $33.77/acre.

RESULTS

Gross margins in the grain systems were at or below the long-term trial average in both years at both sites. In 2001, low commodity prices help to explain the modest returns, and in 2002, a dry growing season, especially at Lakeland, adversely affected yields, resulting in modest returns -although commodity prices were higher.

Arlington GM without price supports (see Fig 1). Gross margins for all the grain systems at Arlington in 2001 were below the overall average -CS1 was down 3%, CS2 was down 13%, and CS3 was down 37%. Soybeans had the lowest price in the trial history at $4.03/Bu With improved commodity prices in 2002, gross margins for CS1 and CS2 were above the 11-year average by 35% and 4%, respectively. CS3 was below the overall average by 15%. Overall the years, CS2 (the no-till corn-soybean system) has been the most profitable grain system.

Lakeland GM without price supports (see Fig 2). Gross margins at Lakeland in 2001 were on average a dismal 83% below the trial average, with CS1 responsible for most of the decline with a 200% reduction. Both CS2 and CS3 were down as well by 53 and 59%, respectively. A wet spring and ineffective weed control which led to poor yields, coupled with low prices, severely impacted gross margins for Lakeland in 2001. In 2002, gross margins were again very low due to extremely dry weather from June through August, poor weed control, and resultant poor yields.

Arlington GM with price supports (see Fig 3 and 4). Under the 1990 Farm Bill, (averaging the years 1992-1995) Arlington’s CS1 received almost twice as much in price support at $35.98/acre than CS2 at $17.58/acre, and CS3 at $19.11/acre (see Fig. 3 and Table 2). During this farm bill, soybeans were not subsidized thus any system with soybeans saw a reduction in gross margins vs. continuous corn. Also of interest is that even with no prices support given in 1995, each system had its highest gross margin of the trial. With the price supports under the 1990 Farm Bill, all three grain systems had about the same gross margins (Table 2).

Under the 1996 Farm Bill, (averaging over 1996-2002) Arlington’s CS 1, $47.13/acre, again received almost twice as much in price support as CS2, $26.64/acre and CS3, $28.21/acre (see Fig. 4 and Table 2). Soybeans were only subsidized for 2 years out of 7 under the 1996 Farm Bill. Under both farm programs, it was more profitable for farmers to grow more corn.

Lakeland GM with price supports (see Figs 5 and 6). Under the 1990 Farm Bill, CS1 received $40.07/acre in government payments, over twice as much in price support than CS2, $19.22/acre, and CS3, $19.41/acre (see Fig. 5 and Table 2). However, CS2 was most profitable.

Under the 1996 Farm Bill, CS1 received a little more per acre in government payments than under the 1990 Farm Bill at $48.71/acre. However, government payments on CS1 were a staggering 62% of the gross margins (Table 2). CS2 and CS3 also faired better under the 1996 Farm bill vs. the 1990 Farm Bill by $8.04/acre and $8.89/acre respectively (see Table 2 and Fig. 6). However, as was the case at Arlington, both government programs paid farmers more per acre for growing continuous corn than growing corn in a rotation.

Arlington. Forage production was excellent in both years and with both systems. This resulted in above average gross margins for both CS4 and CS5 (see Fig. 7). Over the course of the trial, CS4, on average, has done just over 6% better then CS5 or $16.27/acre. That would to compute to $2400 of extra income per year under the assumptions that are laid out for this trial. The trial average for both systems was around $250/acre at Arlington.

Lakeland. Forage production in the high input alfalfa system (CS4) was very poor in both 2001 and 2002 resulting in very low gross margins (see Fig. 8). Poor management due to the transfer of responsibility from the farm manager to an NGO is partly to blame for this situation. However, the low input forage system (CS5) fared much better than the high input system suggesting that it is more robust to poor timing of operations on these heavy soils. Over the course of the trial, CS5, on average, has done almost 7% better than CS4 or $10.76/acre. That would compute to just over $1600 of extra income per year under the assumptions that are laid out for this trail. The trial average for both systems was below $150/acre in gross margins.

With the adjustments made with custom hire, most all of the tasks for CS3 can be completed in a nine hour day or less. The one exception is early May when a few 12 hour days are needed when planting and mechanical tillage of corn and beans over lap. (See Fig 9).

SUMMARY

Comparison of the cash grain systems shows CS2 to be the dominant systems in terms of highest gross margins. When adding government payments, CS2 still has better gross margins than CS1 and CS3. Adding the government payments under the 1990 Farm Bill helped growers reach the $200 break-even point in gross margins for all three systems at Arlington but only CS2 at Lakeland (see Table 2). The 1996 Farm Bill only reached the break-even mark in CS1 and CS2, at Arlington only. Farmers lost money on an organic 3-crop system on either soil type under the 1996 Farm Bill. Under both farm bills, there was significant advantage to continuous corn production but rotating with soybeans was ultimately the best option financially.

Table 2. Average gross margins with government payments 1992-1995 under 1990 Farm Bill and 1996-2002 under 1996 Farm Bill on the WICST plots. Percentage of gross margin from government payments in parenthesis

[1] Outreach Specialist - Center for Integrated Agricultural Systems at the UW-Madison.

[4] Prices starting in 2002 come from the Dane County Co-op. The WI State Statistical Service no longer compiles these prices.

ECONOMIC ANALYSIS OF WICST: GROSS MARGINS AND THE IMPACT OF GOVERNMENT PROGRAMS -1992-2002

INTRODUCTION

METHODS

RESULTS

SUMMARY

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