Diversified vs. Specialized Swine and Grain Enterprises in Iowa

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

Background and Justification

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Iowa 1980 – 2001

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Number of farms -22%

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Average acres per farm +23%

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Hog producing farms

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1980 over 53% of farms 2002 only 11% of farms

Research Questions

The research committee from the Iowa Pork Producers Association approach ISU with the following questions

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Is there still a role for traditional diversified crop-hog farms?

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Is the trend toward specialization likely to continue?

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Role of public policy

Previous Studies

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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

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Grain operations that diversified into beef cattle production reduced mean return on investment as well as the variability in return on investment.

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Diversification into swine and dairy production increased mean income and decreased variability.

What Other Studies Have Said

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Advantages of Diversification

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Complementary characteristics

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Byproduct of one enterprise serves as an input for another

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Matching feed requirements with feed supply

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More efficient distribution of labor and risk Advantages of Specialization

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Farm resources may offer an advantage to a specific enterprise

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Productivity improvement from specialized skills

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Volume discounts on larger purchases

The Model

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Whole Farm Budget Comparison Cash grain v. diversified grain-hog farm

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Farrow to finish

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Breed to wean Wean to finish

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Measures of profitability

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Return to labor, management, and owned assets.

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Rate of return on investment

Model Assumptions

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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

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

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

Data Sources

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Budget coefficients were derived from Iowa State University livestock and crop enterprise budgets

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Crop and livestock prices were derived from USDA-AMS

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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

Input Variables Designated as Stochastic

Input Name Corn Price ($/bu) Dist.

Type Lognormal Soybean Price ($/bu) Lognormal SBM Price ($/Ton) Market Hog Price (Live, $/cwt) Lognormal Mean 2.27

5.81

185 Lognormal 43.79

Weaner Pig Price ($/Head) 1 Sow Price ($/cwt) 1 Lognormal 30.66

Lognormal 32.85

Std Dev 0.42

0.96

35 7.28

5.12

5.44

90 Percent Interval 1.67

4.39

135 2.99

7.46

246 33.00 56.46

22.99 39.42

24.77 42.34

Input Variables Designated as Stochastic

Input Name Corn Yield Dev. from Trend (bu/ac) Dist.

Type Logistic Mean (0.1) Std Dev 16.9

90 Percent Interval (27.2) 26.7

Soybean Yield Dev. from Trend (bu/ac) Nitrogen Price ($/lb) Market Hogs per Litter Weaned Pigs per Litter Market Hog Weight Logistic Uniform Normal Normal Normal (0.1) 0.17

7.80

9.00

260 4.2

0.03

0.25

0.50

5 (6.8) 0.13

7.39

8.17

252 6.5

0.22

8.21

9.82

268

Role of 2002 Farm Bill

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Compared models that included and excluded farm program payments Specific programs we modeled

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Loan deficiency payments Counter cyclical payments Direct payments

Results

Net Return to Labor and Management

Excluding

Government Payments ($/yr) Cash Grain F-F w/G B-W w/G W-F w/G Mean 18,414 78,807 91,555 55,492 Std Dev 124,520 -164,984 226,791 73,283 90% Interval -29,760 207,421 68,697 90,643 -11,351 -84,884 208,914 212,825

Net Return to Labor and Management

Including

Government Payments ($/yr) Cash Grain F-F w/G B-W w/G W-F w/G Mean 127,564 Std Dev 81,819 104,119 67,430 102,079 88,758 90% Interval 56,591 7,490 285,458 221,214 66,344 4,085 216,494 82,814 -30,681 236,775

Percent of Observations by Rank and that Beat Cash Grain Government Payments Included

Profitability Rank Beat Enterprise 1 2 3 4 Cash Grain Cash Grain F-F w/G B-W w/G W-F w/G 55% 15% 20% 10% 8% 44% 32% 16% 9% 37% 31% 23% 28% 4% 17% 51% 39% 38% 32%

Research Questions Revisited

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Is there still a role for traditional diversified crop-hog farms?

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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?

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Conclusion: Not directly addressed in this study.

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Our model suggests farm subsidies have trumped the income stabilization benefits of diversification.

Summary

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Cost savings from diversification Less acres per person with livestock Impact of 2002 Farm Bill

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Without: cash grain was lowest average and highest risk

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With: cash grain is highest average and lowest risk

Future analysis

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Stochastic analysis of beef and dairy Include crop insurance Seasonal labor constraints Optimization programming with greater detail on production and price

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Inter-farm v. intra-farm optimization

Fertilizer is ½ of the energy used in corn production. Drying of DDG can be 30% of the energy costs of ethanol production

Graphic developed for ISU Extension, Farm Progress Show Display

$160 $140 $120 $100 $80 $60 $40 $20 $ Crude Oil Spot Price, Cushing, OK

Energy Information Administration

Gas and Diesel Price Forecast, 2007 Cents/gallon Taxes Included 450 400 350 300 250 200 150 100 50 0 Gasoline Diesel Diesel and gas near 2006-07 in 2011-13 then near 2008 Gas averaged $2.57 in 2006 and $2.81 in 2007 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Percent Change in Rail Rates from Omaha or Chicago, May 2003 is Base 120% 100% 80% 60% 40% 20% 0% May-03 -20% May-04 Amarillo, TX May-05 Los Angeles, CA May-06 May-07 Raleigh, NC May-08 Buffalo, NY

Corn Basis to Chicago Cash for Cattle Feeding Regions $0.40

$0.30

$0.20

$0.10

$0.00

-$0.10

-$0.20

-$0.30

Iowa Elevators OMAHA SWNE 91-95 Dodge City 96-00 NECO '01-05 TX N of Canadian '06-08 TX Triangle

Average US Farm Prices, April each Year ($/ton)

33.20

$1,200 $1,000 $800 $600 $400 $200 $-

7.35

8.49

9.16

10.60

12.14

14.06

26.52

2002 2003 AA 2004 2005 DAP 2006 2007 2008 Potash 2009

Change in Iowa Livestock and Poultry Advantage: 2009 v. 2004, $/head Grow-Finish Dairy Cows Beef Feedlot Layers Turkeys Manure Nutrients $6.12

$95.00

$17.37

$0.78

$1.32

Nutrient value based on corn-soybean rotation, N=$.30, P 2 O 5 =$.86, K 2 O=$.58.

$ $3 $2 $1 $7 $6 $5 $4 Corn Price: Market and Cost of Production Market COP+Land COP no Land

Iowa’s Advantage

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Higher energy prices help Iowa relative to other regions

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Helps ethanol

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Transportation savings

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Capture higher fertilizer value

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

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

DGS Crop Sold

Crops

Commercial Fertilizer Commercial Supplement

Diet Formation

$

Management

Rules & Regulations Information & Records Advice & Service

Manure Application Cattle

Cattle Bought Cattle Sold Manure Export

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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 P-Index is flexible New rules, new feedstuff, new thinking

30 25 20 15

Profit Advantage

At Plant 30 Miles 60 Miles 100 Miles 10 5 0 0 10 20 30 40 50 -5 WDGS Inclusion, % of DM Assume: 95% of corn price, $0.10/bushel increase corn price, costs covered, 153 days

Optimum Use

At Plant 30 Miles 60 Miles 100 Miles 40 35 30 25 20 15 10 5 0 -5 0 10 20 30 WDGS Inclusion, % of DM 40 50 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

Value of Applied Manure

Supply

and Crop

Demand

Nutrients have value where they are needed

Table 1: Value of Manure Applied to Corn

Nutrient N P 2 (46-0-0) O 5 (18-46-0) Applied Needed Lbs valued $/lb 135 125 135 54 135 54 $0.26

Value/A

$0.39

$52.65 $14.04

K 2 O Total (0-0-60) 110 41 41 $0.24

$9.84 $76.53 Table 2: Value of Manure on Corn Needing P

Applied Needed Lbs valued $/lb

Value/A

N P 2 O 5 K 2 O Total 135 125 110 135 125 41 135 125 41 $0.39 $0.26 $0.24

$52.65 $32.50 $9.84 $94.99 Table 3: Value of Manure on Soybean Acres

Nutrient Applied Needed Lbs valued $/lb

Value/A

N P 2 O 5 K 2 O Total 135 125 110 0 31 48 0 31 48 $0.39 $0.26

$0 $8.06

$0.24

$11.52 $19.58

N P K

300 Head Feedlot Example Nutrient Supply, Value

#/T PAN 14 3,990* 11 13,200 14 16,800 Price 0.39

0.26

0.24

Supply Value $1,556 $3,432 $4,032 $9,020 * 26#/A available 2nd year

Feedlot Example C-C Crop Demand, Value

N-Balance Rate #/a P Balance Rate #/a N P K 27 acres $1,556 $618 $888 88,889 148 489 622 65 acres $1,556 $3,432 $4,032 Value $3,062 $9,020 Cannot apply at low rates so use 3 year rotation Difference $5,958 36,923 61 203 258

P-Index

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Field level planning tool “Flexible regulation” for a creative person

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User defines the field Opportunity to manage P-Index factors

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Depending on soils, management, etc, producer can store P

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For later crops Forever

Maximize Farm Profit While Balancing Farm Nutrients

Helping Clients Make Decisions

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Maximizing profit to the whole farm within the constraints of regulations, resources, and skills

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Tools available to help evaluate decisions, but management is essential

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Decisions are dynamic Plan-Do-Check-Act Start with an assessment of farm

Plan-Do-Check-Act

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Does the plan meet their objectives?

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Profits, stewardship, regulations Do they understand the plan?

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Do they know what to do, when, whom?

Do they know what to monitor and what good is suppose to look like?

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Measure, record, evaluate?

Do they/you review and revise to make it better?

Pork Corn Milk Eggs Soybeans Beef

Historic Perspective

Nitrogen P2O5 K2O

Future Perspective

Pork

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Corn Milk

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Soybeans Eggs

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Beef

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Ethanol DGS

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Nitrogen P2O5 K2O

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Paradigm Shift

Do crop farmers buy and apply P 2 O 5 ?

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How much do they pay for it?

Do livestock producers have enough land for P-Index based applications?

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What is the value of excess P 2 O 5 ?

Is there an opportunity for these two people?

What are possible outcomes?

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Win-win: Feedlot sells P 2 O 5 at reduced rate

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Win-draw: Feedlot sells at full price or gives away

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Lose-lose-lose: Cropper imports, Feedlot wastes, and P levels continue to accumulate in

Take Home

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Ethanol production is changing Iowa ag

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Ethanol production does not create P2O5, but it does concentrate it in the DGS DGS is a feeding opportunity for cattle How to capture greater profit for clients by thinking, planning, and managing the integrated crop, ethanol, cattle, system