Crop Rotation Economics Rodney Jones Oklahoma Farm Credit - PowerPoint PPT Presentation

Crop Rotation Economics Rodney Jones Oklahoma Farm Credit Agricultural Finance Chair, OSU, And Agricultural Producer, Enid OK

Economic Realities • Long term (whatever that is!) average “economic” returns to any enterprise are expected to be zero • Points about “average” – I assume that most in this room would be better than average producers in any single enterprise situation over time – The average is always improving as the less efficient producers are replaced over time with more efficient producers

Challenges • The past several years have been not only challenging for producers, but also challenging for those of us trying to evaluate the true long-term economics of crop rotations • We simply don’t have reliable estimates of the long-term yield impacts and potential because of recent weather

Some Examples Based On A NC Oklahoma Farm Wht Milo Corn DC DC Milo Sbns 2015 $200 $225 $273 $170 $145 Costs 2015 $5.40 $3.46 $3.56 $3.46 $8.70 Prices Wht Milo Corn DC DC Wht Wht Wht Wht Milo Sbns Dmilo Dmilo Dsbns Dsbns Milo Corn Milo Corn 2015 27 71 96 51 25 Yield 2015 $-54 $23 $73 $8.5 $63 Return $-11 $13.45 $16.55 $41.10 over Cost

2015 Results • If every year were like 2015!!!!! – Stop raising wheat, raise corn every year, If you did rotate, include lots of soybeans in the rotation……… • 2014 was an even worse year than 2015 for wheat, better for Milo, not quite as good for soybeans. Last few years the “rotation” returns have been pulled down by the wheat

Some Examples Based On A NC Oklahoma Farm Wht Milo Corn DC DC Milo Sbns 2015 $200 $225 $273 $170 $145 Costs 2015 $5.40 $3.46 $3.56 $3.46 $8.70 Prices Wht Milo Corn DC DC Wht Wht Wht Wht Milo Sbns Dmilo Dmilo Dsbns Dsbns Milo Corn Milo Corn LT Ave 37 73 82 45 16 Yield 2015 $0 $31 $22 $-12 $-5 Return $9 $5 $12 $8 over Cost

‘09 – ‘15 Yields Combined With Current Costs and Prices • Should have eliminated wheat!!! Would have been better off with Milo and Corn. • Double crops (intensification) not economically helpful under this assumption – 2011 and 2012 really hurt the DC yield averages Likely need to dig a little deeper to understand true crop Rotation economics

With That Said, There Are Likely Economic Benefits Of Rotation, Even If Not Intensifying • “Rotation” yield bump you might realistically expect. – I don’t know what that number is (5% to 10%?, Does it grow over time as soil improves?) – If it is 5%, you don’t just increase profit by 5%. Revenues are going up, but costs are not, so profits are increasing by more than the yield bump.

Potential Sources of Economic Benefits Of Rotation, Even If Not Intensifying • Lowering machinery cost for equipment necessary to farm same acreage. – Operations spread over different seasons – Mach costs are 30 to 40% of total cost – Top 1/3 profit producers have machinery cost that are $20 to $40 per acre lower than bottom 1/3 profit producers – Machinery costs are important, and they can be managed – Rotating crops is not the only way to be a low machinery cost operator, but it may help

Change Our Analysis Based On Three “Assumptions” We can get back to long-term average wheat yields (4 of last 6, or 5 • of last 8 have been significantly below long-term average in our area) • We will not have “too many” 2011 – 2012 time periods, so Double Crop yields will be more like 2014 – 2015. (These were not abnormally wet years in our area, but were closer to long-term averages) • Prices will come off of this year’s low levels (don’t know where the long term average will settle, but it will be higher than current prices).

Examples Based On A NC Oklahoma Farm Wht Milo Corn DC DC Milo Sbns 2015 $200 $225 $273 $170 $145 Costs Higher $6.00 $3.84 $3.96 $3.84 $9.66 Prices Wht Milo Corn DC DC Wht Wht Wht Wht Milo Sbns Dmilo Dmilo Dsbns Dsbns Milo Corn Milo Corn Ave 40 73 82 51 22 Exp Yield Exp $40 $55 $52 $26 $67 Return $61 $59 $81 $80 over Cost

Expected Long Term Average Yields, Prices, and Costs • Without considering the rotation, returns across crops are more similar, which has to be closer to expected reality • Rotation starts to show some advantages Likely some additional benefits

What We Think Is Likely The Case Long-Term, But We Don’t Have Enough Good Data To Prove It Yet • Rotation will allow us to bump at least the wheat yield by 10% relative to long-term average • Rotation allows us to capture some Economies of Scale (mostly in equipment costs) – For illustrative purposes assume we can lower cost for each crop in the rotation by $6.00 per acre

Examples Based On A NC Oklahoma Farm Wht Milo Corn DC DC Milo Sbns 2015 $200 $225 $273 $170 $145 Lower Each by $6.00 per acre for Costs the rotation examples Higher $6.00 $3.84 $3.96 $3.84 $9.66 Prices Wht Milo Corn DC DC Wht Wht Wht Wht Milo Sbns Dmilo Dmilo Dsbns Dsbns Milo Corn Milo Corn Ave 40 73 82 51 22 Exp Yield Exp $40 $55 $52 $26 $67 Return $82 $80 $102 $101 over Cost

Expected Long Term Average Bumped Yields, Prices, and Lowered Costs • Rotation starts to show some significant economic advantages (average of $25 to $50 higher average annual returns than any single crop system) • Even in the tough environment of the last few years, Rotations have likely shown some net economic benefits

Hurdles • Landlord acceptance, and negotiating fair lease arrangements – Our experience has been that it is difficult to explain that the “pie can get bigger, but it will likely have to be divided up differently”. • How often will a 2011 – 2012 time period come along? – For wheat, will the pattern of tough crop years (2007, 2009, 2011, 2014, 2015) continue? Same weather patterns that make it challenging to grow wheat, also challenge Canola. • Lower crop insurance guarantees (compared to traditional crop patterns). It takes a long time to build a yield history (However, we have taken several fields from 40 Bu. milo T-yields to 55 to 65 in 4 years.

• Thank You • Questions or Discussion !!!!