Diversified vs. Specialized Diversified vs. Specialized Swine and Grain Swine and Grain

Enterprises in IowaEnterprises in Iowa

Laura Borts, Gary May, and Laura Borts, Gary May, and

John LawrenceJohn Lawrence

Iowa State UniversityIowa State University

Iowa 1980 – 2001Iowa 1980 – 2001 Number of farms -22%Number of farms -22%

Average acres per farm +23%Average acres per farm +23%

Hog producing farmsHog producing farms 1980 over 53% of farms 1980 over 53% of farms

2002 only 11% of farms2002 only 11% of farms

Background and Background and JustificationJustification

Research QuestionsResearch Questions

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

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

Is the trend toward specialization likely to Is the trend toward specialization likely to continue?continue?

Role of public policyRole of public policy

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.

What Other Studies Have What Other Studies Have SaidSaid

Advantages of DiversificationAdvantages of Diversification Complementary characteristicsComplementary characteristics

Byproduct of one enterprise serves as an input Byproduct of one enterprise serves as an input for anotherfor another

Matching feed requirements with feed supplyMatching feed requirements with feed supply More efficient distribution of labor and riskMore efficient distribution of labor and risk

Advantages of SpecializationAdvantages of Specialization Farm resources may offer an advantage to a Farm resources may offer an advantage to a

specific enterprisespecific enterprise Productivity improvement from specialized skills Productivity improvement from specialized skills Volume discounts on larger purchasesVolume discounts on larger purchases

How to have both????How to have both????

The ModelThe Model Whole Farm Budget ComparisonWhole Farm Budget Comparison Cash grain v. diversified grain-hog farmCash grain v. diversified grain-hog farm

Farrow to finishFarrow to finish Breed to weanBreed to wean Wean to finishWean to finish

Measures of profitabilityMeasures of profitability Return to labor, management, and owned assets.Return to labor, management, and owned assets. Rate of return on investmentRate of return on investment

Model AssumptionsModel Assumptions

6,000 hours of labor per year6,000 hours of labor per year No seasonal labor constraintNo seasonal labor constraint Corn production = corn demandCorn production = corn demand Corn acres = soybean acresCorn acres = soybean acres Manure applied ahead of cornManure applied ahead of corn Tractors shared between crop and hogsTractors shared between crop and hogs

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

Labor per YearLabor per Year

EnterpriseEnterprise AcresAcres SowsSows Hogs Hogs SoldSold

Cash GrainCash Grain 2,4002,400

Farrow-Finish w/GFarrow-Finish w/G 550550 191191 3,2703,270

Breed - Wean w/GBreed - Wean w/G 229229 616616 12,20012,200

Wean - Finish w/GWean - Finish w/G 723723 5,9635,963

Data SourcesData Sources Budget coefficients were derived Budget coefficients were derived

from Iowa State University livestock from Iowa State University livestock and crop enterprise budgetsand crop enterprise budgets

Crop and livestock prices were Crop and livestock prices were derived from USDA-AMSderived from USDA-AMS

Stochastic Component of Stochastic Component of the Modelthe Model

A simple budget comparison represents a A simple budget comparison represents a single point in time.single point in time.

How does enterprise diversification How does enterprise diversification impact income variability?impact income variability?

How frequently is one combination of How frequently is one combination of enterprises more profitable than another?enterprises more profitable than another?

Monte Carlo simulation is a common Monte Carlo simulation is a common method of addressing these issuesmethod of addressing these issues

Input Variables Designated as Stochastic

Input NameInput NameDist.Dist.TypeType MeanMean

Std Std DevDev

90 Percent 90 Percent IntervalInterval

Corn Price ($/bu)Corn Price ($/bu) LognormalLognormal 2.272.27 0.420.42 1.671.67 2.992.99

Soybean Price ($/bu)Soybean Price ($/bu) LognormalLognormal 5.815.81 0.960.96 4.394.39 7.467.46

SBM Price ($/Ton)SBM Price ($/Ton) LognormalLognormal 185185 3535 135135 246246

Market Hog Price Market Hog Price (Live, $/cwt)(Live, $/cwt) LognormalLognormal 43.7943.79 7.287.28 33.0033.00 56.4656.46

Weaner Pig Price Weaner Pig Price ($/Head)($/Head)11 LognormalLognormal 30.6630.66 5.125.12 22.9922.99 39.4239.42

Sow Price ($/cwt)Sow Price ($/cwt)11 LognormalLognormal 32.8532.85 5.445.44 24.7724.77 42.3442.34

Input Variables Input Variables Designated as StochasticDesignated as Stochastic

Input NameInput NameDist.Dist.TypeType MeanMean

Std Std DevDev

90 Percent 90 Percent IntervalInterval

Corn Yield Dev. from Corn Yield Dev. from Trend (bu/ac)Trend (bu/ac) LogisticLogistic (0.1)(0.1) 16.916.9 (27.2)(27.2) 26.726.7

Soybean Yield Dev. Soybean Yield Dev. from Trend (bu/ac) from Trend (bu/ac) LogisticLogistic (0.1)(0.1) 4.24.2 (6.8)(6.8) 6.56.5

Nitrogen Price ($/lb)Nitrogen Price ($/lb) UniformUniform 0.170.17 0.030.03 0.130.13 0.220.22

Market Hogs per LitterMarket Hogs per Litter NormalNormal 7.807.80 0.250.25 7.397.39 8.218.21

Weaned Pigs per LitterWeaned Pigs per Litter NormalNormal 9.009.00 0.500.50 8.178.17 9.829.82

Market Hog WeightMarket Hog Weight NormalNormal 260260 55 252252 268268

Role of 2002 Farm BillRole of 2002 Farm Bill

Compared models that included and Compared models that included and excluded farm program paymentsexcluded farm program payments

Specific programs we modeledSpecific programs we modeled Loan deficiency paymentsLoan deficiency payments

Counter cyclical paymentsCounter cyclical payments

Direct paymentsDirect payments

ResultsResults

Net Return to Labor and Net Return to Labor and Management Management ExcludingExcluding

Government Payments ($/yr)Government Payments ($/yr)

   MeanMean Std DevStd Dev 90% Interval90% Interval

Cash GrainCash Grain 18,41418,414 124,520124,520 -164,984-164,984 226,791226,791

F-F w/GF-F w/G 78,80778,807 73,28373,283 -29,760-29,760 207,421207,421

B-W w/GB-W w/G 91,55591,555 68,69768,697 -11,351-11,351 208,914208,914

W-F w/GW-F w/G 55,49255,492 90,64390,643 -84,884-84,884 212,825212,825

Net Return to Labor and Net Return to Labor and Management Management IncludingIncluding

Government Payments ($/yr)Government Payments ($/yr)

   MeanMean Std DevStd Dev 90% Interval90% Interval

Cash GrainCash Grain 127,564127,564 81,81981,819 56,59156,591 285,458285,458

F-F w/GF-F w/G 104,119104,119 67,43067,430 7,4907,490 221,214221,214

B-W w/GB-W w/G 102,079102,079 66,34466,344 4,0854,085 216,494216,494

W-F w/GW-F w/G 88,75888,758 82,81482,814 -30,681-30,681 236,775236,775

Percent of Observations by Percent of Observations by Rank and that Beat Cash Rank and that Beat Cash

Grain Government Payments Grain Government Payments IncludedIncluded

   Profitability RankProfitability Rank BeatBeat

Enterprise Enterprise 11 22 33 44CashCashGrainGrain

Cash GrainCash Grain 55%55% 8%8% 9%9% 28%28%

F-F w/GF-F w/G 15%15% 44%44% 37%37% 4%4% 39%39%

B-W w/GB-W w/G 20%20% 32%32% 31%31% 17%17% 38%38%

W-F w/GW-F w/G 10%10% 16%16% 23%23% 51%51% 32%32%

Research Questions Research Questions RevisitedRevisited

Is there still a role for traditional diversified Is there still a role for traditional diversified crop-hog farms?crop-hog farms? Conclusion: Yes, there appears to be an acceptable Conclusion: Yes, there appears to be an acceptable

return to labor for producers who wish to operate a return to labor for producers who wish to operate a diversified crop/livestock farm. diversified crop/livestock farm.

Is the trend toward specialization likely to Is the trend toward specialization likely to continue?continue? Conclusion: Not directly addressed in this study. Conclusion: Not directly addressed in this study. Our model suggests farm subsidies have trumped the Our model suggests farm subsidies have trumped the

income stabilization benefits of diversification.income stabilization benefits of diversification.

SummarySummary

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

Without: cash grain was lowest average Without: cash grain was lowest average and highest riskand highest risk

With: cash grain is highest average and With: cash grain is highest average and lowest risklowest risk

Pulling It All Together:

Managing Cattle and Crops through Feed

and Fertilizer

John Lawrence, Iowa Beef Center at ISU

Evan Vermeer, Iowa Cattlemens Association

Cattle

Diet Formation

Manure Application

Crops Management

DGS Commercial Supplement

Commercial Fertilizer

Crop Sold

Manure Export

Cattle Bought

Cattle Sold

Rules & Regulations

Information & Records

Advice & Service

$

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

Value of Applied Manure Supply and Crop Demand

Nutrient Applied Needed Lbs valued $/lb Value/A

N (46-0-0) 135 135 135 $0.39 $52.65

P2O5 (18-46-0) 125 54 54 $0.26 $14.04

K2O (0-0-60) 110 41 41 $0.24 $9.84

Total $76.53

Nutrient Applied Needed Lbs valued $/lb Value/A

N 135 135 135 $0.39 $52.65

P2O5 125 125 125 $0.26 $32.50

K2O 110 41 41 $0.24 $9.84

Total $94.99

Nutrient Applied Needed Lbs valued $/lb Value/A

N 135 0 0 $0.39 $0

P2O5 125 31 31 $0.26 $8.06

K2O 110 48 48 $0.24 $11.52

Total $19.58

Table 2: Value of Manure on Corn Needing P Buildup

Table 1: Value of Manure Applied to Corn

Table 3: Value of Manure on Soybean Acres

Nutrients have value where they are needed

300 Head Feedlot ExampleNutrient Supply, Value

* 26#/A available 2nd year

#/T PAN PriceSupplyValue

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

Feedlot Example C-C Crop Demand, Value

N-Balance Rate #/a P-Balance Rate #/a

27 acres 88,889 65 acres 36,923

N $1,556 148 $1,556 61

P $618 489 $3,432 203

K $888 622 $4,032 258

Value $3,062 $9,020

Difference $5,958

Cannot apply at low rates so use 3 year rotation

Maximize Farm Profit While Balancing Farm Nutrients

Iowa Farms - Nitrogen

1.5 to 11.6 to 11.3 to 11.6 to 1In/Out Ratio

C-4C-3C-2C-1Farm

173 ac452 ac446 ac160 acCropland

3,300 hd4,000 hd4,000 hd2,200 hdFacility

69,000115,000158,00067,000Outputs

105,000185,000211,000109,000Inputs

35,00069,00053,00068,000Imbalance

Iowa Farms - Phosphorus

1.1 to 11.3 to 11.0 to 11.1 to 1In/Out Ratio

C-4C-3C-2C-1Farm

173 ac452 ac446 ac160 acCropland

3,300 hd4,000 hd4,000 hd2,200 hdFacility

14,00021,00028,00014,000Outputs

16,00028,00029,00016,000Inputs

2,0007,00003,000Imbalance

Corn

Milk

Nitrogen

P2O5

Pork

Beef

Eggs

Soybeans K2O

Historic Perspective

Corn

Milk

Nitrogen

P2O5

Pork

Beef

Eggs

Soybeans K2O

Future Perspective

Ethanol DGS ??

?

?

?

Profit Advantage

-5

0

5

10

15

20

25

30

0 10 20 30 40 50

WDGS Inclusion, % of DM

$/h

d a

bo

ve 0

% W

DG

S p

er

153 d

Assume: 95% of corn price, $0.10/bushel increase corn price, costs covered, 153 days

At Plant

30 Miles

60 Miles

100 Miles

Optimum Use

-5

0

5

10

15

20

25

30

35

40

0 10 20 30 40 50

WDGS Inclusion, % of DM

$/h

d a

bo

ve 0

% W

DG

S p

er 1

53 d

Assume: 75% of corn price, $0.10/bushel increase corn price, costs covered, 153 days(Calculated from 2006 U. of Nebraska Analysis)

At Plant

30 Miles

60 Miles

100 Miles

Source: Dan Loy, ISU

Figure 2. Dietary P in Beef Feedlot Diets

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.27% P

85% corn, 0% DGS

0.50% P

40% DGS

Future (?)

75% DGS & CGF

% diet P (DM-basis)

0.40% P

20% DGS

Excretedby

animal

Retained by animal

Animal PRequirement

Inclusion rate of DGS and CGF in diet

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.

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 40% DGS Inclusion in Diet

Basis for Manure Application:

N-Based 1-YrP-Based

4-YrP-Based

N-Based

1-YrP-Based

4-YrP-Based

20.000 head feedlot

Annual fertilizer value of manure $373 $430 $430 $563 $766 $766

Total value of N $144 $144 $144 $217 $217 $217

Total value of P2O5 $85 $286 $286 $346 $548 $548

Annual cost $177 $344 $244 $240 $669 $329

Net value of manure $195 $86 $185 $323 $97 $437

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

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/content/Organic_Natural_Grass_Fed_Beef_2006.pdf

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

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

Production Model Seasonally available forage

MIG in all systems

Animal growth based on the Cornell Net Carbohydrate and Protein System (CNCPS)

Estimated Cost of Calf Production

$500

$520

$540

$560

$580

$600

$620

$640

$660

$680

Grass-fed Grain Grass-fed Grain Grain

Organic Natural Conventional

$1.20

$1.25

$1.30

$1.35

$1.40

$1.45

$/hd $/LB

Post Weaing Gain and Days to Slaughter

-

100

200

300

400

500

600

700

800

900

1,000

Grass-fed Grain Grass-fed Grain Grain

Organic Natural Conventional

Total Days Total Gain

Long-run Feed and Cattle Prices and Organic Premiums Used in

Analysis

Production InputsConventional 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 S&H Live ($/cwt) $79.32 54% $122.15

Choice Natural S&H Live ($/cwt) $85.62  

Natural Grass-fed S&H Live ($/cwt) $122.00 73% $137.25

Organic 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

Marketing Date and Weight

Costs per Head for Slaughter Cattle by System

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Grass-fed Grain-fed Grass-fed Grain-fed Grain-fed

Organic Natural Conventional

Total feeder cost Total Feed Costs

Non-feed Variable Costs Fixed Cost

Estimated Prices, Costs and Returns by System*

Organic NaturalConventional

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 equalConventional $/lb 0.43 0.27 0.40 0.06 0.00

* Prices and costs are in $/lb carcass weight

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

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

$(30,000)

$(20,000)

$(10,000)

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2005 2006 2007 2008 2009 2010 2011

ConventionalOrganic grain-fedOrganic grain-fed (CRP land)Organic grass-fed (CRP land)Organic grass-fed

Estimated Annual Cash Flow

Net Present Value at Differing Organic Premiums

$(100,000)

$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Organic price premium

Organic grain-fedOrganic grain-fed (CRP land)Organic grass-fed (CRP land)Organic grass-fedConventional