Diversified vs. Specialized Swine and Grain Enterprises in Iowa

1. Diversified vs. Specialized Swine and Grain Enterprises in Iowa Laura Borts, Gary May, and John Lawrence Iowa State University

2. Background and Justification • Iowa 1980 – 2001 • Number of farms -22% • Average acres per farm +23% • Hog producing farms • 1980 over 53% of farms • 2002 only 11% of farms

3. Research Questions The research committee from the Iowa Pork Producers Association approach ISU with the following questions • Is there still a role for traditional diversified crop-hog farms? • Is the trend toward specialization likely to continue? • Role of public policy

4. 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.

5. What Other Studies Have Said • Advantages of Diversification • Complementary characteristics • Byproduct of one enterprise serves as an input for another • Matching feed requirements with feed supply • More efficient distribution of labor and risk • Advantages of Specialization • Farm resources may offer an advantage to a specific enterprise • Productivity improvement from specialized skills • Volume discounts on larger purchases

6. The Model • Whole Farm Budget Comparison • Cash grain v. diversified grain-hog farm • Farrow to finish • Breed to wean • Wean to finish • Measures of profitability • Return to labor, management, and owned assets. • Rate of return on investment

7. Model Assumptions • 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

8. Cash Grain v. Hog-Grain Farms With 6,000 Hours of Labor per Year Enterprise Acres Sows Hogs Sold Cash Grain 2,400 Farrow-Finish w/G 550 191 3,270 Breed - Wean w/G 229 616 12,200 Wean - Finish w/G 723 5,963

9. Data Sources • Budget coefficients were derived from Iowa State University livestock and crop enterprise budgets • Crop and livestock prices were derived from USDA-AMS

10. 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

11. Input Variables Designated as Stochastic

12. Input Variables Designated as Stochastic

13. Role of 2002 Farm Bill • Compared models that included and excluded farm program payments • Specific programs we modeled • Loan deficiency payments • Counter cyclical payments • Direct payments

14. Results

15. Net Return to Labor and Management Excluding Government Payments ($/yr)

16. Net Return to Labor and Management Including Government Payments ($/yr)

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

18. Research Questions Revisited • Is there still a role for traditional diversified crop-hog farms? • 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? • Conclusion: Not directly addressed in this study. • Our model suggests farm subsidies have trumped the income stabilization benefits of diversification.

19. Summary • Cost savings from diversification • Less acres per person with livestock • Impact of 2002 Farm Bill • Without: cash grain was lowest average and highest risk • With: cash grain is highest average and lowest risk

20. Future analysis • Stochastic analysis of beef and dairy • Include crop insurance • Seasonal labor constraints • Optimization programming with greater detail on production and price • Inter-farm v. intra-farm optimization

21. 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

23. Diesel and gas near 2006-07 in 2011-13 then near 2008 Gas averaged $2.57 in 2006 and $2.81 in 2007

26. 33.20 26.52 14.06 12.14 10.60 8.49 9.16 7.35

27. Change in Iowa Livestock and Poultry Advantage: 2009 v. 2004, $/head Nutrient value based on corn-soybean rotation, N=$.30, P2O5=$.86, K2O=$.58.

29. Iowa’s Advantage • Higher energy prices help Iowa relative to other regions • Helps ethanol • Transportation savings • Capture higher fertilizer value

30. Pulling It All Together: Managing Cattle and Crops through Feed and Fertilizer John Lawrence, Iowa Beef Center at ISU Evan Vermeer, Iowa Cattlemens Association

31. Commercial Supplement DGS Diet Formation Crop Sold Cattle Bought $ Management Cattle Crops Rules & Regulations Information & Records Advice & Service Cattle Sold Commercial Fertilizer Manure Export Manure Application

32. 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

33. At Plant 30 Miles 60 Miles 100 Miles Profit Advantage Assume: 95% of corn price, $0.10/bushel increase corn price, costs covered, 153 days

34. At Plant 30 Miles 60 Miles 100 Miles Optimum Use 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

35. Value of Applied Manure Supply and Crop Demand Nutrients have value where they are needed

36. 300 Head Feedlot ExampleNutrient Supply, Value * 26#/A available 2nd year

37. Feedlot Example C-C Crop Demand, Value Cannot apply at low rates so use 3 year rotation

38. P-Index • Field level planning tool • “Flexible regulation” for a creative person • User defines the field • Opportunity to manage P-Index factors • Depending on soils, management, etc, producer can store P • For later crops • Forever

39. Maximize Farm Profit While Balancing Farm Nutrients

40. Helping Clients Make Decisions • Maximizing profit to the whole farm within the constraints of regulations, resources, and skills • Tools available to help evaluate decisions, but management is essential • Decisions are dynamic • Plan-Do-Check-Act • Start with an assessment of farm

41. Plan-Do-Check-Act • Does the plan meet their objectives? • Profits, stewardship, regulations • Do they understand the plan? • Do they know what to do, when, whom? • Do they know what to monitor and what good is suppose to look like? • Measure, record, evaluate? • Do they/you review and revise to make it better?

42. Historic Perspective Pork Nitrogen Corn Milk P2O5 Eggs Soybeans K2O Beef

43. Future Perspective ? Pork Nitrogen Corn P2O5 Milk ? Soybeans K2O ? Eggs ? Beef ? Ethanol DGS

44. 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

45. Take Home • Ethanol production is changing Iowa ag • 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