Relative Cost Efficiency of No-Till Farms 2008 Ag Profitability Conference: McPherson Michael Langemeier January 15, 2008.

Relative Cost Efficiencyof No-Till Farms

2008 Ag Profitability Conference: McPherson Michael Langemeier January 15, 2008

Outline of Presentation

Introduction KFMA Data Detailed Cost Comparisons Whole Farm Analysis Summary and Conclusions

Introduction

Using the 2006 Crop Residue Management Survey, the adoption of no-till production has increased from 7.4% of planted acres in 1990 to 31.5% of planted acres in 2006.

This paper documents cost differences between farms that have adopted a no-till production system, and those with a conventional or reduced tillage system.

KFMA Data

Identification of No-Till Farms Participating Associations:

Northwest North Central South Central Northeast (Atchison, Jackson, Leavenworth,

and Nemaha)

KFMA Data

Detailed Cost Comparisons (2006 data) North Central South Central

Whole-Farm Analysis (2002 to 2006 data) Central Kansas

142

265

8 2

92

71

3713

318

132

30

41

409

175

60

4 1

10

00

00

10

154

00

70

1910

84

82

4015

80

10

20

00

2210

3616

80

144

152

00

00

31

42 13

5120

247

111

65

103

137

135

195

40 32

13 158

30

104

153

122

278

4917

2214

6826

2911

22 4

3112

184

2511

365

4612

274

25

14 5

4011

356

3110 0

030

6

8

7

1

234 31

9254

205

248

273

5320

356

4725

2719 29

10

517

215

3913

3618 29

13

203

335

3415

4912

4912

2112

7715

3214

7711

238

365 15

14

5535

167

4010

Top Number = Number of Farm Units Per CountyBottom Number = Number of Extra Partners or Persons in the Multi-Operator Farm Units

Kansas Farm Management Associations2006 Membership

Detailed Cost ComparisonsPer Harvested Acre

Labor Hired labor and opportunity charges on operator and family

labor Machinery

Repairs on machinery and equipment, machine hire, gas, fuel, oil, and depreciation on machinery and equipment

Crop Seed, crop insurance, fertilizer, herbicide, and miscellaneous

costs such as irrigation energy, crop storage and marketing, and crop supplies

Improvement Asset Charges Other Expenses

Detailed Cost AnalysisTotal Crop Cost per Harvested

Acre

202 196 205

275

201189 193

269

$0

$50

$100

$150

$200

$250

$300

$350

NW NC SC NE

Item

Avera

ge

TillNo-Till

Detailed Cost AnalysisHistorical Total Crop Cost: NC KFMA

157169

187 196 196

159 161177 184 189

$0

$50

$100

$150

$200

$250

$300

2002 2003 2004 2005 2006

Year

Avera

ge

TillNo-Till

Detailed Cost AnalysisCost Categories: NC KFMA

26

50 5449

24

41

63

45

$0

$15

$30

$45

$60

$75

$90

Labor Mach Crop Asset

Item

Avera

ge

TillNo-Till

Detailed Cost AnalysisCost Categories: SC KFMA

28

59 58

46

22

49

73

38

$0

$15

$30

$45

$60

$75

$90

Labor Mach Crop Asset

Item

Avera

ge

TillNo-Till

Detailed Cost AnalysisMachinery Cost: NC KFMA

16

9

1412

14

5

11 11

$0

$5

$10

$15

$20

$25

Repairs Hire Fuel Depr

Item

Avera

ge

TillNo-Till

Detailed Cost AnalysisMachinery Cost: SC KFMA

18

11

161313

8

1316

$0

$5

$10

$15

$20

$25

Repairs Hire Fuel Depr

Item

Avera

ge

TillNo-Till

Detailed Cost AnalysisCrop Cost: NC KFMA

13

28

1216

30

17

$0

$5

$10

$15

$20

$25

$30

$35

Seed Fert Herb

Item

Avera

ge

TillNo-Till

Detailed Cost AnalysisCrop Cost: SC KFMA

14

28

12

20

28

21

$0

$5

$10

$15

$20

$25

$30

$35

Seed Fert Herb

Item

Avera

ge

TillNo-Till

Detailed Cost AnalysisCentral Kansas

Labor cost, machinery cost, and asset charges are relatively lower for the no-till farms.

Crop cost is relatively higher for the no-till farms.

Whole-Farm AnalysisCentral Kansas

Comparison of Whole-Farm Characteristics Total Acres Crop Acres Crop Intensity (Harvested Acres/Crop

Acres) Percent of Crop Acres Planted to Wheat,

Feed Grains, and Oilseeds

Whole-Farm AnalysisCentral Kansas

Comparison of Whole-Farm Characteristics Value of Farm Production Net Farm Income Labor Cost as a Percent of Value of Farm

Production Value of Farm Production per Worker Expense Ratios Operating Profit Margin Asset Turnover Ratio

Whole-Farm AnalysisDefinitions

Value of Farm Production Value of farm production (VFP) equals the sum

of livestock, crop, and other income computed on an accrual basis minus accrual feed purchased. VFP provides a measurement of value added and if often used as a measure of farm size.

Net Farm Income Return to operator’s labor, management, and

equity (net worth) computed on an accrual basis.

Whole-Farm AnalysisDefinitions

Expense Ratios Total Expense Ratio

Total Expense / Value of Farm Production Adjusted Total Expense Ratio

(Total Expense + Opportunity Charge on Operator and Family Labor) / Value of Farm Production

Economic Total Expense Ratio (Total Expense + Opportunity Charge on Operator and

Family Labor + Opportunity Charge on Owned Assets) / Value of Farm Production

Whole-Farm AnalysisDefinitions

Operating Profit Margin Ratio (Net Farm Income + Interest – Opportunity

Charge on Operator and Family Labor) / Value of Farm Production

Asset Turnover Ratio Value of Farm Production / Average Total

Assets

Acres Farmed andCrop Intensity

Tillage No-Till

Total Acres 1,626 2,062

Crop Acres 1,208 1,645

Crop Intensity 100.1% 104.4%

Crops Planted

51%

22%

13%

40%

31%25%

0%

10%

20%

30%

40%

50%

60%

Wheat Feed Grains Oilseeds

Crop

Perc

ent

TillNo-Till

Yield ComparisonsNorth Central Kansas

Tillage No-Till

Wheat Yield 46.8 45.3

Grain Sorghum Yield

63.5 71.9

Soybean Yield 24.4 26.1

Corn Yield 73.7 73.0

Value of Farm Production andNet Farm Income

Tillage No-Till

Value of Farm Production

273,706 370,847

Net Farm Income

47,422 64,519

Farm Size Categories

18%

40%

30%

12%

2%

36%

41%

20%

0%

10%

20%

30%

40%

50%

< 100 100 to 250 250 to 500 > 500

Value of Farm Production (thousands of dollars)

Perc

ent of Farm

s

TillNo-Till

Number of Workers andLabor Efficiency

Tillage No-Till

Number of Workers

1.38 1.56

Labor Cost as a Percent of Value of Farm Production

19.28% 16.54%

Value of Farm Production per Worker

$198,338 $237,875

Expense Ratios

0.83

0.98

1.16

0.830.95

1.09

0.00

0.25

0.50

0.75

1.00

1.25

1.50

TER ATER ETER

Expense Ratio

Ratio Till

No-Till

Expense Ratios

Percent of Farms with ETER < 1 Tillage Farms 19.2% No-Till Farms 24.5%

Financial Performance

Tillage No-Till

Asset Turnover Ratio

30.54% 38.33%

Profit Margin 8.47% 11.14%

% of FarmsBottom Quartile

28.33% 7.45%

% of FarmsTop Quartile

23.75% 30.85%

Size Versus Adoption of No-Till?

Correlation Coefficients ETER and Total Acres -0.143 ETER and Value of Farm Production -0.292 ETER and Number of Workers -0.119 ETER and No-Till -0.110

Both size and NT adoption are significantly correlated with the economic total expense ratio (ETER).

Economies of Size

Significant economies of size exist among KFMA farms. The profit margin for large farms is

substantially higher. The economic total expense ratio, one of

best indicators of economies of size, is substantially lower for large farms.

Performance Benchmarks KFMA Farms with Continuous Data

1,160 Farms 2002 to 2006 5-Year Averages:

VFP = $259,095 Expense Ratios:

Total Expense Ratio = 0.803 Adjusted Total Expense Ratio = 0.967 Economic Total Expense Ratio = 1.156

Operating Profit Margin = 0.0940 Asset Turnover Ratio = 0.2942

Profit Margin Ratio(2002-2006 KFMA Average)

0.0940

-0.2114

0.04410.1174

0.1595

-0.400

-0.200

0.000

0.200

0.400

All < 100 100 to 250 250 to 500 > 500

Value of Farm Production (thousands of dollars)

Ratio

Economic Total Expense Ratio(2002-2006 KFMA Average)

1.16

1.75

1.24

1.111.04

0.75

1.00

1.25

1.50

1.75

2.00

All < 100 100 to 250 250 to 500 > 500

Value of Farm Production

Ratio

Economies of Size

Economic Total Expense Ratio

0.001.002.003.004.00

0 500 1,000 1,500 2,000

Value of Farm Production ($1,000)

Ind

ex

Summary and Conclusions Cost per harvested acre is relatively lower for farms

that have adopted a no-till system. In addition to having a relatively lower cost per

harvested acre, on average, the no-till farms exhibited a lower economic total expense ratio, improved labor efficiency indices, and higher operating profit margin and asset turnover ratios.

However, it is important to note that some of the no-till farms were in the bottom operating profit margin quartile and that some of the mixed tillage farms were in the top operating profit margin quartile.

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