Conventional vs Organic Crop Production Financial Analysis

Organic crop demand has continued to increase over the last two decades. Some crop producers have transitioned at least part of their land to organic production. Those crop producers have reported higher net returns. (Table 2) One of the issues though is the transition period that organic growers must go through. This transition period leads to lower net returns than either organic or conventional production due to the lower yields during the transition period which are sold at conventional prices. Long run organic returns are important to recoup reduced returns during the transition period.

Recent articles using real farm data were published at the University of IL Farmdoc DAILY web site. The data comes from the University of Minnesota’s Center for Farm Financial Management (CFFM) FINBIN web site. FINBIN is an aggregation of several state’s farm financial data, which is searchable and sortable based on the needs of the analysis. The authors of the recent articles compared corn/soybean and corn/soybean/wheat rotations of conventional, transition and fully certified organic crop production. Enterprise budgets were produced for all three crops and all three production methodologies. Transition yields would have to be about 17% lower for the transition and organic years to breakeven with conventional cropping. Organic prices would need to be 17.8% lower for the conventional cropping system to be equal in net returns. (Table 3) But organic crop producers show a much wider range of net returns, in the FINBIN data, than do conventional producers. Likely this wider range is due to management that conventional producers don’t experience. (See Figures 1 and 2 below)

Organic corn producers in all cases had higher net returns than One aspect of the variation of conventional versus organic soybeans is that the lowest 20% of organic soybeans do not perform better than conventional soybean production. (Figure 3) Some 70% of conventional soybean producers have positive net returns while 80% of organic producers have positive net returns.

Langemeier, M. and X. Fang. “Comparison of Conventional and Organic Crop Rotations.” farmdoc daily (10):103, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 5, 2020.

Langemeier, M. and M. O’Donnell. “Conventional and Organic Enterprise Net Returns.” farmdoc daily (10):161, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, September 4, 2020.

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2019 Seed, Fertilizer and Chemical Costs: What do we know now?

Here I am discussing 2019 and in my area, we haven’t yet cut 2018 wheat. Am I thinking too far ahead? I don’t think so when looking at 2018 and 2019 corn prices. As of this writing, Dec 19 corn is trading at $3.96 with Dec 18 corn 23 cents lower. Those aren’t prices I like, but those are the prices I currently have to live with. On the other side of profit is cost. If my variable costs decline in 2019, maybe $4 corn can make me money. If variable costs don’t decline in 2019, I would rather know that now than one year from now.

Gary Schnitkey, University of Illinois Agricultural Economist, recently reviewed seed, fertilizer and chemical cost trends, both long run and short run. The trends do not portend declines in variable costs for farmers. Seed cost appears to have flattened and are likely to be the same as 2017 and 2018. Fertilizer prices rose beginning in late 2017, leading to farmers who bought 2018 fertilizer late with higher costs than those who bought early. So a reasonable fertilizer forecast is that 2019 fertilizer costs might be slightly higher than 2017 and about the same as 2018. Chemical costs, however, are likely to be higher, not due to price but due to usage. Increasingly resistant weeds are showing up in farmer’s fields, and thus more product or new products are used to control weeds.

Source: Schnitkey

From its peak in 2013, seed, fertilizer and chemical costs declined from $373 to $323 in 2017. That decline was due entirely to lower fertilizer prices. Anhydrous ammonia declined $370/ton. Diammonium phosphate dropped $186 from 2013 to 2017 although during 2018 it has risen by nearly $50/ton. Other fertilizer prices have also risen since mid-2017. All nitrogen prices have increased while potash has remained flat.

Source: Fertilizer Outlook: http://www.farmfutures.com/story-weekly-fertilizer-review-0-30765

Source: Fertilizer Outlook: http://www.farmfutures.com/story-weekly-fertilizer-review-0-30765

That brings us to planning for 2019 crops. Using current trends, it seems reasonable for farmers to plan for slightly higher pesticide, seed and fertilizer costs for 2019. This means crop marketing will be a significant management activity for grain produced in 2019. A question all farmers might ask is whether to start marketing 2019 corn or soybeans now.  And with current oil price trends, farmers should probably consider pre-paying for fertilizer as well. The past two years, fertilizer prices have been lower in the fall preceding planting.

Sources:

Fertilizer Outlook – Fertilizer costs rise despite weak crop prices, Accessed 27 June 2018, http://www.farmfutures.com/story-weekly-fertilizer-review-0-30765.

Schnitkey, G. “Historic Fertilizer, Seed, and Chemical Costs with 2019 Projections.” farmdoc daily (8):102, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 5, 2018.