Full Season Soybeans Enterprise 1998 Costs and Returns

Transcription

1 Full Season Soybeans Enterprise 1998 Costs and Returns KENTUCKY FARM BUSINESS MANAGEMENT PROGRAM Agricultural Economics Extension No March 2000 By: WAYLON RAMMING, CARL DILLON, AND GREGG IBENDAHL University of Kentucky Department of Agricultural Economics 400 Charles E. Barnhart Bldg. Lexington, KY Phone: Fax:

2 KENTUCKY FARM BUSINESS MANAGEMENT PROGRAM A Special Note to Our Readers FULL SEASON SOYBEANS ENTERPRISE 1998 COSTS and RETURNS Waylon Ramming, Carl Dillon, Gregg Ibendahl * The data for this study are drawn from the detailed financial records of producers cooperating with the Kentucky Farm Business Management Program. The data are not drawn from a random sample of farms in the state. However, these data are the most accurate and detailed farm financial information available and represent the closest approximation to real world farm financial data which are available to researchers and educators. Every attempt has been made to select a set of farms for these research studies which are typical and have complete financial information available for analysis. These data are carefully cross-checked by our farm management specialists before inclusion in this analysis. Bear in mind that farms included in this study are representative of large, commercial farms producing major commodities and livestock but not of all farms in Kentucky. Acknowledgments Special recognition is extended to the Farm Business Analysis Specialists and farmers in the Kentucky Farm Business Management Program. Without their involvement, this study would not have been possible. Considerable time and effort were invested allocating costs of inputs used by more than one enterprise, and making other judgments necessary to ensure the accuracy of the data. The Area Farm Business Analysis Specialists and Kentucky Farm Business Management Program extension faculty for the period of this study include: Rick Costin Darwin V. Foley Craig D. Gibson David L. Heisterberg Rush Midkiff Russell Morgan Terry W. Moss Bart Peters Waylon Ramming Craig L. Infanger Gregg Ibendahl Lincoln Trail Association Louisville Association Ohio Valley Association Pennyroyal Association Pennyroyal Association Purchase Association Pennyroyal Association Pennyroyal Association Ohio Valley Association State Coordinator State Farm Management Specialist * The authors are Area Farm Business Analysis Specialist, Associate Professor and State Farm Management Specialist, respectively, all with the Department of Agricultural Economics, University of Kentucky. -i-

3 Table of Contents Introduction...1 Soybean Production in Kentucky: Characteristics of the Sample...1 Methodology...1 State Average Costs and Returns...3 Variability in Costs and Returns...3 Average Costs and Returns by Area...4 Summary...5 Tables and Figures Figure 1. Kentucky State Map By Area... ii Table 1. Statewide Full Season Soybean Enterprise Accounting Costs and Returns, Overall Average and By Management Results...6 Table 2. Ohio Valley Full Season Soybean Enterprise Accounting Costs and Returns, Overall Average and By Management Results...7 Table 3. Full Season Enterprise Accounting Costs and Returns by Area...8 Figure 1. Kentucky State Map By Area -ii-

4 FULL SEASON SOYBEANS ENTERPRISE 1998 COSTS and RETURNS Introduction This is the first in what will be a continuing series of annual reports on the costs and returns of full season soybean production based on data provided by the Kentucky Farm Business Management Program (KFBM) 1. This report provides summary financial data on the costs and returns for full season soybean producers in Kentucky and will illustrate the major factors affecting net income. It is hoped that this data will assist in the planning and control functions of management for producers and also gives useful insights to extension personnel, researchers, agribusiness representatives, policy makers and others interested in agriculture. The focus of this report is upon accounting profits. Results do not indicate economic profit or measures of profitability but rather an accounting profit (gross returns less total specified costs); therefore, not all opportunity costs of resources are represented here. As this is the first report on soybean enterprises taken from KFBM data, no trend analysis is presented. Trend information will be included in future reports. This report is limited to an analysis of full season soybean production. Other enterprise studies of potential interest to the reader are available including: double crop 1 The Kentucky Farm Business Management Program is a cooperative effort between the Department of Agricultural Economics at the University of Kentucky College of Agriculture and incorporated Farm Analysis Groups (made up of and run by farmers). These farmers are located in 75 counties in Central and Western Kentucky. Ten Extension Farm Analysis Specialists work with these farmers on a regularly scheduled basis to ensure accurate and complete record keeping. At year s end, they provide each farmer with a complete summary and analysis of the farm business. soybeans, wheat, corn, tobacco and various livestock enterprises. Soybean Production in Kentucky - Characteristics of the Sample Kentucky ranked 16 th among the fifty states in 1998 in soybeans, producing 36 million bushels on 1.2 million acres. The soybean crop in Kentucky was valued at million dollars, the fourth highest value crop in the state behind tobacco, hay and corn. The statewide soybean yield (including full season and double crop) was 30 bushels per acre and was valued at $5.60 per bushel. 2 There were 58 full season soybean producers included in this report, representing 19,372 acres of soybeans. Average crop yield (34 bushels/acre) and value of production ($194.42/acre) for the study sample was probably higher than the state average of all producers. Results should be considered as representative of higher yielding producers who perhaps do a superior job of management and marketing. Consequently, insights into various aspects of Kentucky full season soybean production should be obtainable from this analysis. Methodology Production and financial data were calculated as a component of the complete farm business records kept by participants of the KFBM Program. For inputs used by more than one 2 Kentucky Agricultural Statistics Service. Kentucky Agricultural Statistics, United States Department of Agriculture and Kentucky Department of Agriculture. -1-

5 enterprise, the cooperating farmers and their Farm Business Analysis Specialist allocated the appropriate proportion of the costs to the full season soybean enterprise. The following definitions utilized within the farm analysis program are important to the proper interpretation of the material presented: Operator Acre - - Costs and returns for this report are presented on an operator acre basis; by definition the number of acres from which the farm operator receives an equivalent share of the crop. For instance if a farmer rents 120 acres on a 2/3 operator 1/3 landlord share, the renter has 80 operator acres. If the farmer owns or cash rents 120 acres, this would be defined as 120 operator acres. Consequently, operator revenues per operator acre will be comparable to total crop value per total acre. As a whole, operator expenses and operator depreciation presented on a per operator acre basis will be comparable to total per acre expenses. However, where the percentage of certain cost items provided by the operator is in excess of the percentage crop received, the excess is redefined as a cost of landlord acres. For example where the operator is providing 100% of the fertilizer, but receiving 75% of the crop, then 25% of the fertilizer cost will be redefined as a landlord acre cost. This type of re-allocation will most always be necessary for the cost of operator machinery and equipment used in a crop share arrangement. Gross Income - -This is the total of farm operator cash sales of crop produced and sold in 1998, combined with the value of the 1998 crop used for feed and the year end inventory value of crop produced in No crop insurance or USDA, FSA payments of any kind have been included in the gross income. Also, no value for straw harvested and sold is included. Ending inventory value is the value of grain on hand December 31, using either an average statewide price or a contract price for the portion, if any, that was forward priced. Operating Expense - - This is the actual cash expenditures, with accrual adjustments, for farm operators included in the 1998 sample. No opportunity costs or non-cash charges for unpaid labor and management or for equity capital are included. These considerations should be noted if utilizing this information for budgeting purposes or for attempting to arrive at a total cost of production. Land costs are presented as a blended average over all acreage in the sample for both Cash Rent and Cost of Landlord Acres. Numerical values should not be construed as an average cost of cash rented or share rented land. The value reported is not an average Cash Rent per acre because it is too low given it is averaged across total acreage. Rather, these values represent the average per acre whole farm full season soybean production accounting costs for a producer with an average number of acres owned, cash rented and share rented. Only actual cash expenses are included in operating expenses (although depreciation is included below) and opportunity costs are otherwise excluded (e.g., the foregone value of land rent for land owned outright). This weighted average means caution is needed in interpreting several values (e.g., cash rent, hired labor, cost of landlord acres). Machinery and Building Depreciation - - Taken from depreciation schedules designed to reflect economic depreciation as maintained by the KFBM Program, equipment is generally depreciated over ten years. Most farm buildings, with the exception of grain bins or single purpose structures, are depreciated over twenty five years. Net Income - - Is calculated by subtracting operating expenses and depreciation from gross income. This is the amount of net income generated by farm operators in this sample, attributable to the full season soybean crop. Net -2-

6 income represents a return to operator labor, management and equity (land and non-land) devoted to this enterprise. State Average Costs and Returns Net income for full season soybean producers included in this sample averaged a negative $21.47 per operator acre in 1998 (Table 1). This loss of $21.47 per operator acre represents the return to the operator s labor, management and equity devoted to the full season soybean enterprise. It also serves as the soybean crop s contribution to operator s living costs, term debt retirement or investment goals. Obviously, the returns generated did not meet soybean producers goals. The drop in commodity prices in 1998 and the resulting farm financial difficulties which followed have been documented. The soybean crop was not immune to the drop in market prices which occurred during the year. Early in 1998 the soybean price offerings for 1998 produced soybean ranged from $6.50 to $6.75 per bushel, depending on contract month and location. By harvest the full season soybean price had dropped by about $1.20 per bushel, resulting in harvest time bids ranging from $5.30 to $5.60 per bushel, again depending on the month of delivery. The December 31 inventory prices on non-contracted full season soybean established within the KFBM system was $5.40 per bushel. The $ per operator acre gross revenue generated by the sample with a 34 bushel yield indicates that many, if not most, producers rode the market much of the way down. Nevertheless, the $5.72 average per bushel value would reflect that some forward pricing did occur. Operating expenses for the sample averaged $ per operator acre. Machinery and building depreciation averaged $24.41 creating a total per operator acre cost (not including other non-cash charges) of $215.89, resulting in a negative net income of $21.47 per acre. With an average yield of 34 bushels per acre, the average producer needed a gross return of $5.63 per bushel to cover operating expenses. A per bushel return of $6.35 was needed to cover operating expenses plus depreciation. Again, these breakeven requirements do not include charges for unpaid labor or equity interest. Operating expenses in this framework are a direct function of cash rent and individual operators should be aware of their own cash and opportunity costs of land. The individual producer must have an understanding of his or her own cost structure, relative to expected yields, in order to do an effective job of farm planning and in order to develop a successful marketing strategy. Selling grain at a price that covered all costs (cash and non-cash) was a difficult task for the 1998 crop. However, the $6.50/bu to $6.75/bu price offering early in the year would have been adequate to generate a positive return for most producers. While covering all costs is always the objective for a successful enterprise, price offerings may not always be available to achieve this objective. Cash flow needs become particularly important during periods of depressed commodity prices. For any given year, producers need to cover operating expenses plus allowances for personal or family needs. Longer term cash flow requirements are more of a function of the individual producer s term debt in conjunction with projected capital purchases of machinery and/or buildings. The producer who can translate these cost needs to a per bushel basis has additional information regarding price levels needed to profitably market the crop. Variability in Costs and Returns In order to study some of the factors that may contribute to income variability, additional averages were computed for producers who -3-

7 ranked in the high and low third of the overall group. A substantial amount of variability exists in the cost structure of Kentucky full season soybean producers. The one-third of farms with the highest net incomes are top third farms while the one-third of farms with the lowest net income are bottom third farms. Similar computations were made for those high and low income producers from the Ohio Valley area. Net income levels varied greatly (Table 1). The high group had a positive return of $35.07 per acre and the low group lost $ per acre, a difference of $ In addition, the top third producers grossed $44.20 per acre more than the bottom third on their full season soybean crop. This is due to the greater yield achieved by top producers. The average yield of the top third producers was eight bushels per acre more than the bottom third producers. There appeared to be little difference in the price received between the two groups. Nonetheless, the largest factor in determining differences in net income was soybean production expenses. The top third producers cost was 63 percent of the cost experienced by bottom third producers ($ less cost per acre). Differences in fertility and pesticide programs accounted for $21.07 of this difference. These less profitable farms had higher expenses for fertilizer and pesticide but did not see any increase in yield for 1998 (i.e, 29 bu/ac versus 37 bu/ac). The lower returns are also partially attributable to a greater need to pay for additional resources as reflected in higher expenses for interest and hired labor for the bottom third net income category. The fact that both machinery repair and depreciation per acre is greater for the bottom third may indicate a need to reexamine machinery management efficiency. Furthermore, it may indicate a need for more appropriately sized equipment for some producers. The Ohio Valley area was the only association with enough observations for a meaningful comparison between high and low income operations (Table 2). Many of the findings from the statewide analysis hold true for the Ohio Valley area. Gross income was more important in the net variation for the Ohio Valley area. The spread between the high and low groups was $55.43 per operator acre. This calculates to 40% of the difference between the high and low income groups rather than the 30% attributed statewide. Nonetheless, soybean production expenses remains the largest factor in determining differences in net income. The two cost categories with the greatest differences that are most useful for comparison were basic physical inputs (fertilizer, pesticide and seed) and power and equipment. For basic physical inputs among the Ohio Valley producers the spread between the high and low producers was $14.12 per operator acre. This accounts for 10.2% of the difference between high and low income producers. Power and equipment accounts for another 9.1%. Power and equipment is defined as machinery repair, machine lease, light vehicle, fuel and machinery depreciation. Average Costs and Returns by Area Full season soybean returns and costs were also calculated on an area basis (Table 3). Figure 1 displays the counties included in each area with the Bluegrass, Lincoln Trail and Louisville regions being combined for the Central Kentucky results. Producers from Central Kentucky displayed the highest yield per acre. Their production levels resulted in Central Kentucky having the highest gross income per acre as well as the highest net income per operator acre of $ The Purchase association was the only other area to obtain a positive net income on average at $2.83 per operator acre. The Pennyroyal and Ohio Valley areas suffered losses of $33.92 and $43.74 per operator acre respectively. -4-

8 The soybean producers from the Purchase area were next to last in both yields and value per bushel of production. Even so, these producers achieved the second highest income per acre. Their ability to generate a profit in the face of less than desirable yields and poor prices is due to their ability to control costs. The Purchase area soybean producers held their costs to the lowest of the four areas studied at $ The overall state average for operating expenses and deprecation was $ per operator acre. The soybean producers from the Pennyroyal and Ohio Valley Areas were able to get the most value for their crop. Producers from those areas generated $5.74 and $5.62 per bushel of production respectively. Their increased marketing success was not enough to overcome the higher costs of production than observed in either of the other two areas. Summary Average net income for full season soybean producers included in this sample was a loss of $21.47 per operator acre. These returns did not contribute to the producer s labor, management and equity (land and non-land) that were used in the full season soybean enterprise. Net income levels were very different between high and low income producers. A major factor accounting for variations in net returns was differences in expenses, including direct input costs. The variance in net income statewide was also influenced by cash interest paid, costs of landlord acres, and hired labor which are cost categories influenced by operator equity, labor, or owned acreage contributed to the enterprise. The other factor accounting for variations in net returns was differences in gross income, a combination of yield and crop value; yields were more important in explaining variations in gross income than value per unit. While large differences in cash labor per acre indicate advantages in labor efficiency for some operations, the data doesn t reflect differences in unpaid family labor as at least partially responsible for these results. Although the values reported for cash rent paid are not directly comparable across farms, the lower corresponding value for the high profit groups suggest a tendency for less cash rented and more crop share or owned acres in the farm mix. Cash interest paid differences are also substantial. Soybeans are not always a profitable crop for Kentucky producers and 1998 was not a typical year for most producers. Low prices combined with diminished yield levels greatly lowered gross income. Soybean producers face substantial production, marketing and financial risk. Learning to manage the risk associated with soybeans will always be a challenge for Kentucky producers. Learning to market the crop well should continue to be a major objective of the soybean producer. In order to develop an effective marketing strategy, the producer must have an understanding of his or her own cost structure relative to individual expected yields. The producer must know prices required to cover all inputs (cash and non-cash) and must also be aware of prices needed to maintain cash flow needs. As always, good records are a must. Producers should keep in mind that this enterprise study is based on one abnormal year. A soybean growing decision should be based on the profitability from several years of data. Because yields and prices were so low in 1998, gross revenue is far below normal. Producers should keep in mind that government payments are excluded from the analysis. Therefore, the decision to grow soybeans needs to be based on more information than shown here. This study is an examination of what happened last year, not necessarily a predictor of what will occur in the future. -5-

9 Table 1. Statewide Full Season Soybean Enterprise Accounting Costs and Returns, Overall Average and By Management Results 1 Average Top Third Bottom Third Number of Farms Operator Acres Yield per Acre INCOME $/Opr AC $/Opr AC $/Opr AC Cash Sales Feed & Seed Value Inventory Value GROSS INCOME 2 $ $ $ OPERATING EXPENSES Fertilizer Pesticides Seed Drying & Storage Utilities Machine Repair Machine Hire Fuel & Oil Light Vehicle Interest Hired Labor Building Repair and Rent Insurance Taxes Miscellaneous Cash Rent Cost of Landlord Acres - Crop Expense Power & Equipment Hired Labor Other TOTAL OPERATING EXPENSES 3 $ $ $ DEPRECIATION - Machinery Buildings Mach Depr Landlord Ac OPERATING EXPENSE & DEPR NET INCOME -$21.47 $ $ Top (bottom) third management results refer to producers in the top (lower) third in terms of net income achieved. Source: KFBM enterprise analysis. Note: results may not add perfectly due to roundoff error. 2 Note that gross income does not include crop insurance payments or government payments such as deficiency payments. 3 Note that care must be taken in interpreting these numbers. Values are the average across all acres in the sample and therefore represent a whole farm average accounting cost for wheat production on a per acre basis, with some land cash rent, some land owned and some rented on a crop share arrangement. Therefore, some values (such as cash rent or hired labor) cannot be taken out of context (e.g. cash rent average is not $26.70/acre and people hire different amounts of labor/acre). -6-

10 Table 2. Ohio Valley Full Season Soybean Enterprise Accounting Costs and Returns, Overall Average and By Management Results 1 Average Top Third Bottom Third Number of Farms Operator Acres Yield per Acre INCOME $/Opr AC $/Opr AC $/Opr AC Cash Sales Feed & Seed Value Inventory Value GROSS INCOME 2 $ $ $ OPERATING EXPENSES Fertilizer Pesticides Seed Drying & Storage Utilities Machine Repair Machine Hire Fuel & Oil Light Vehicle Interest Hired Labor Building Repair and Rent Insurance Taxes Miscellaneous Cash Rent Cost of Landlord Acres - Crop Expense Power & Equipment Hired Labor TOTAL OPERATING EXPENSES 3 $ $ $ DEPRECIATION - Machinery Buildings Mach Depr Landlord Ac OPERATING EXPENSE & DEPR NET INCOME -$43.74 $ $ Top (bottom) third management results refer to producers in the top (lower) third in terms of net income achieved. Source: KFBM enterprise analysis. Note: results may not add perfectly due to roundoff error. 2 See footnote #2 of Table 1. 3 See footnote #3 of Table l. -7-

11 Table 3. Full Season Enterprise Accounting Costs and Returns by Area 1 Purchase Pennyroyal Ohio Valley Central Kentucky Number of Farms Operator Acres Yield per Acre INCOME $/Opr AC $/Opr AC $/Opr AC $/Opr AC Cash Sales Feed & Seed Value Inventory Value GROSS INCOME 2 $ $ $ $ OPERATING EXPENSES Fertilizer Pesticides Seed Drying & Storage Utilities Machine Repair Machine Hire Fuel & Oil Light Vehicle Interest Hired Labor Building Repair and Rent Insurance Taxes Miscellaneous Cash Rent Cost of Landlord Acres - Crop Expense Power & Equipment Hired Labor Other TOTAL OPERATING EXPENSES 3 $ $ $ $ DEPRECIATION - Machinery Buildings Mach Depr Landlord Ac OPERATING EXPENSE & DEPR NET INCOME $2.83 -$ $43.74 $ Source: KFBM enterprise analysis. Note: results may not add perfectly due to roundoff error. 2 See footnote #2 of Table 1. 3 See footnote #3 of Table l. -8-