Organic Transitioning From an Economic Viewpoint… Craig Chase Farm Management

Section 1. Economic comparisons

Organic vs. Conventional Budgets Key assumptions: Conventional corn yields are about 18% higher than organic yields, conventional soybean yields are 20% higher. Prices are from USDA sources, yields are steady. Costs based on ISU’s cost of production work. Some cost estimates were from industry sources.

Yields by Crop and Rotation

Production Costs by Crop/Rotation - 2016

Returns to Management - 2016 Prices: $3.50, $9.20; $8.75, $19.00, $4.00, $160

Returns to Management; 2006-2016

Bottom Line If managed properly, organic rotations: Are more profitable. Allow farmers to farm a smaller land base. Offer beginning/limited resource farmers an opportunity to farm. Allow more farmers to reside in rural Iowa supporting local communities.

Profitability of Organic Questions Questions on Profitability of Organic Row Crop Production?

Section 2. Transition Economics

Organic Transition Economics Step 1: develop a transition production plan… Example – You inherited a 400-acre farm. It is currently in a corn-soybean rotation. You want to transition into organics. You decide to transition field-by-field.

Field Plan For simplicity, Assume you can divide the 400 acres into 4, 100-acre fields. And you will be producing conventional and transitioning crops on the same farm.

Field Plan Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Field 1 Conv Corn Conv Sb Trans Oats Trans Alfalfa Field 2 Org Alfalfa Organic Corn Field 3 Organic Sb Field 4 Organic Oats

Field-by-Field Transition You have your field plan, but will it be profitable? Step 2: To determine profitability, let’s shift to a budget-driven decision tool…

http://www.extension.iastate.edu/agdm/crops/html/a1-26.html

Field Plan What would your field plan look like? Would you go into all oats or try to start the rotation immediately? What changes would need to be made to the budgets for a whole-farm transition?

Whole-Farm Transition You can put your assumptions into the decision tool and see what happens… Tool is at: http://www.extension.iastate.edu/agdm/crops/xls/a1-26organictransition.xls So what happened? How profitable? What risks were involved? Which transition made more sense to you?

Transition in Review… How to transition - for row crops the following questions related to economics should be answered: What’s the optimum rotation and order of crops (which crop to transition first)? Whole farm or field-by-field transition? Weed management techniques; which combination of mechanical field operations?

Transition in Review – cont’d Machinery implements; purchase, lease or custom hire for implements not already owned? Manure/compost source – should livestock be integrated into the whole farm system, which type, and if not, where should manure be sourced? Note: the economic evaluation should be focused on both individual enterprises and the entire farming operation.

Transition in Review – cont’d Individual enterprise evaluation Develop enterprise budgets for each crop in the rotation (both during and after the transition). Enterprise budgets show where the weaknesses and strengths are of the rotation and where production changes can be made. Whole farm evaluation Combine all enterprise budgets including livestock, if applicable, to determine whole-farm profitability.

Questions on the economics of transitioning row crop production systems?

Thank You for This Opportunity! Questions….. Any questions or comments? Thank You for This Opportunity! Craig A. Chase Local Foods and Marketing and Food Systems Initiative 209 Curtiss Hall Iowa State University Ames, IA 50011 (515) 294-1854 cchase@iastate.edu http://www.extension.iastate.edu/agdm/fieldstaff/cchase.html

Vegetable Economics Will go over this if we have questions…. Section 3. Vegetable Economics

Vegetable Economics The focus is different when dealing with fruits and vegetables. Pricing and determining the marketing outlet have huge implications on profitability. Production practices are still important, but there appears to be less variability on production than prices received by farmers. Profitability is therefore more influenced by market prices and cost containment, then yields.

Enterprise Budget An enterprise budget is an estimate of costs and returns to produce a product. For producers who grow a large number of different products. Develop budgets for those products that contribute the most to your business goals. Think of the 80/20 rule – for most businesses 80% of their profits (not revenue) are provided by 20% of their products.

Enterprise Budget You can develop enterprise budgets for each major part of your business. Example, CSA with poultry/livestock. Complete a CSA and livestock budget. CSA with multiple seasons and use of high tunnels/greenhouses. Complete an enterprise budget for each season (spring, summer, fall) or production system (open ground, high tunnel, greenhouse). The process is the same for all scale of farming operations.

Simplified Enterprise Budget Green Beans (4x100 ft bed) Revenue: 120 lbs @ $3.00/lb $360.00 Crop inputs: (Seed, fertilizer, etc.) 25.00 Labor 180.00 Supplies 4.00 Ownership (machinery, land, irrigation) 11.00 Total production cost $ 220.00 Marketing costs $ 68.00 Profit margin (%) $ 72.00 (20%)

Profit Margin Analysis Your goal was to have a profit margin of 25%; or $0.25 out of every $1.00 of sales to stay in your business. Profit margin is what is left over to pay for your general farm overhead, family living expenses, savings, and farm growth.

Profit Margin Analysis You determine your profit margin analysis for each of your six major crops and put them in a table (that follows)…these are the six major crops that contribute 80% or more of your whole-farm profit margins.

Profit Margin Analysis Revenue Total Costs Profit Margin Carrots $ 136.00 102.00 $ 34.00 (26%) Specialty Green Beans $ 360.00 288.00 $ 72.00 (20%) Greens $ 150.00 97.00 $ 53.00 (35%) Heirloom Tomatoes $ 700.00 443.00 $ 257.00 (37%) Potatoes 126.00 $ 24.00 (16%) Snow Peas $ 175.00 153.00 $ 22.00 (13%) This is a summary table illustrating 13 of the 14 budgets from the Iowa Vegetable Production Budgets bulletin. Note the wide range in returns over total cost, hours of labor per bed, and returns over total cost per hour. 30

Profit Margin Analysis Three (half) of your crops have a profit margin below your goal of 25%; potatoes, snow peas, and specialty green beans. What do you do to increase their profit margins? Three (half) of your crops have a profit margin above your goal of 25%; greens, carrots, and heirloom tomatoes. Do you analyze these as well or are you happy with the numbers?

Reducing Cost – Enterprise Budget Use the budgets to calculate break-even prices and yields. For example, cost per lb. of beans sold was $2.40 ($288/120 lbs). Compare this number to other producers or published budgets to determine where costs are different and why. 32

Reducing Cost – Enterprise Budget A second reason – track key costs. Green bean example, $180 (or 82%) of the total production cost is labor. Most of the labor is weeding and harvesting. Question - can labor be lowered without reducing yields (i.e., can labor be more efficient)? Crop inputs is a small percentage (10%) of total production costs, a 10% reduction in costs won’t affect total production costs significantly. Don’t spend time on small items… A second way enterprise budgets can be used to change production practices is when tracking key costs. Again, for the carrot example, $54.46 (or 66%) of the total production cost is labor. Can labor be lowered without reducing yields. In other words, can labor be utilized more effectively and efficiently? Note that supplies make up only 14% of total production costs so a management decision to reduce supplies by 10% would not affect total production costs significantly. The lesson here is don’t spend time on small items. 33

Pricing So if your margin goal is 25% and your break-even cost is $3.06 per lb., your sales price would need to be $4.08 per lb. (3.06/.75). Will your consumers and competition allow this price? If not, what price will they allow and what is your profit margin at that price? If you can’t get to where you want, what do you do?

Pricing Same process regardless of what you are producing… Example – CSA share cost you $240 per share to produce and market, price it at $320 ($240/.75). Chickens cost you $2 per lb. to produce and market, price at $2.67 per lb. ($2/.75).

Looking Beyond a Single Enterprise You should analyze profit margins for each of your major enterprises and if they fit into the 80/20 rule should all be equal to or higher than your profit margin goal. But what about the non-major enterprises? To keep track of all your non-major enterprises you need to calculate your whole-farm profit margin and make sure you do not go below your overall profit goal.

Whole-farm Profit Margins Whole-farm profitability can be illustrated by the income statement. You can use Quicken, QuickBooks, or other program to develop a qualified income statement. Remember that some programs Profit and Loss or Income Statements are not really Income Statements. You will probably need to make adjustments.

Income Statement; Yr ending 12/31/2015 Sale of products $140,000 Car and truck, gas and oil 13,200 Depreciation, repairs and maintenance 18,000 Crop or livestock inputs 19,800 Insurance, interest, repairs, taxes 18,400 Labor 24,600 Supplies 8,000 Utilities 8,000 Total Expenses $110,000 Net Income $ 30,000

Questions What was the whole-farm profit margin? Answer : 21% ($30,000 / $140,000) What was your profit margin goal? Answer: 25% Was your own labor covered in the income statement? Your income statement is primarily for you so put it in the form that will help you make decisions.

Discussion What do you do if your major products had an operating profit margin over your goal and yet your whole-farm operating profit margin was under? Were you consistent in how you accounted for revenue and expense items between your enterprise budgets and whole-farm records? Are your non-signature products heavily capital or labor-intensive?

Discussion – More questions Are you in the development stage of your business? In other words are you trying to promote a new marketing outlet and/or product that will take time to become profitable? Are you at the right scale of operation regarding all your products? Do you have a lot of machinery expense for a non-profitable enterprise? If yes, could this be accomplished in another manner.

Summary Enterprise budgets can be used to determine current profit margins and determine where they can be improved. If you are below your profit margin goal, what can you do to make it better? What are the opportunities for increasing your price – do you have the right customers? What are the opportunities for changing production practices (to increase production levels or reduce expenses) or product mix?