Generally, the primary farm management objective is to maximize profits, and environmental stewardship can have a positive influence on profits. To achieve both objectives, producers must have an accurate and flexible understanding of expected revenues, production costs and how changes in field conditions and farm operations may affect revenue and costs. Tools available to assist in understanding revenues and expenses include partial budgeting and enterprise budgets. This section reviews these tools and how they can be used to examine the benefits and costs of adopting conservation practices. Conservation tillage is an effective tool used in the Southeast to address soil erosion and low soil organic matter. For farmers currently using the practice and for those who are considering adopting it, it is necessary to understand the economics of conservation tillage.
Partial Budgeting
Partial budgeting is used to analyze the effects of proposed changes in cropping systems or farm enterprises. Partial budgets only consider changes in revenue and expenses due to a management change or the adoption of a new technology. Aspects of production not affected by the change are excluded from the budget. Partial budgeting is used to determine if the proposed change will have a net positive or net negative impact on farm profits. The approach calculates the net change based on changes in revenues and costs.
In addition to the financial estimates derived from partial budgets, personal and social factors are considered. These include level of risk aversion, desired personal time for leisure and family, workload on employees and other factors that are difficult to quantify yet remain important to the overall success of the farm operation [14]. Personal and social factors are included in partial budgets as qualitative components.
The following six steps are needed to complete a partial budget.
- Identify the proposed change in the farm production system. For example, the proposed change might be to adopt no-till or to grow a bioenergy crop. If there are several changes, prepare a separate partial budget for each.
- Record additional revenues. List increases in current revenues and/or new revenue sources generated from the change.
- Record reductions in costs or cost savings from the change.
- Record additional or new costs resulting from the change.
- Record reductions in revenue resulting from the change.
- Calculate the net change by subtracting the negative effects (the sum of steps 4 and 5) from the positive effects (the sum of steps 2 and 3). Before calculating, ensure your numbers in steps 3 and 5 are recorded as positive numbers, not negative, even though they represent a reduction. Including negative numbers in this calculation can lead to inaccurate results. If the result of the calculation is a positive number, there is a net economic benefit or gain to adopting the change. If the result is negative, there is a net economic loss. If the difference is zero, the decision to adopt the change may be based on the personal or social factors described above.
To illustrate, consider the following example. Farmer Diane farms 400 acres of cotton conventionally and one of her long-term goals is to move to conservation tillage. She searches for data on the yield differences between conventional tillage and no-till production. She finds several publications comparing no-till yields to conventional yields and decides that a 50 pound per acre yield increase is a conservative estimate. She finds a no-till planter costing $25,000. The useful life of the planter is expected to be seven years with a $2,500 salvage value. Financing can be secured at 8 percent. Repair and insurance rates are 2 and 2.5 percent, respectively, of the average value, $13,750. (The average value is the actual cost plus the salvage value divided by 2.) Table 15.1 shows the partial-budgeting analysis for this example. The cost per acre of the new planter is expected to be $14.59 per acre. This is equal to the interest cost of $5 per acre ([$25,000 x 0.08]/400), plus repair costs of $0.69 per acre ([$13,750 x .02]/400), plus insurance at $0.86 per acre ([$13,750 x 0.025]/400), plus depreciation of $8.04 per acre ([$25,000-$2,500]/[7 x 400]).
Assuming the price of cotton lint is $0.70 per pound and there is a 50 pounds per acre increase in cotton lint yield, Diane expects an increase in crop revenue of $35 per acre. In addition, converting to no-till eliminates two tillage passes, reducing production costs by $22 per acre. Diane expects to plant a cover crop as part of her conservation tillage system at a cost of $18 per acre. In addition, herbicides and herbicide application costs are expected to increase by $13 per acre for cover crop termination in the spring. As shown in Table 15.1, the net change in returns from adopting a no-till system on a per acre basis is the total added return and reduced costs ($35 + $22) minus the total reduced returns and added costs ($45.59). The net change in returns is $11.41 per acre or $4,564 for the 400 acres of cotton. Based on the partial-budget analysis and her goal to adopt conservation tillage, Farmer Diane decides to buy the no-till planter and adopt no-till.
Enterprise Budgeting
Enterprise budgets are the most common form of budgeting and analysis used by farm managers. Enterprise budgets are used to record the revenue, expenses and returns for a single crop or livestock enterprise on a per unit basis. For example, a unit can be an acre or head of cattle. Consistency among enterprise budgets allows comparisons between different enterprises. Enterprise budgets are specific to the levels of production and technology used, so separate enterprise budgets are developed for different levels and forms of technology. For example, different enterprise budgets are developed for conservation tillage and conventional tillage because the expected revenues, expenses and net income would be different between the two tillage systems.
The components of an enterprise budget include expected revenues and costs of production. Data needed to determine expected revenue includes expected yield, selling price and other sources of income related to the enterprise, such as selling crop stover in addition to the produced commodity. Costs include both variable and fixed costs. Variable costs are typically listed showing the input level and per unit cost of production and non-production inputs. Production inputs generally include seed, inoculants, pesticides, fertilizers, labor, fuel, repair and maintenance, supplies and services. Non-production inputs are defined as interest paid on operating capital, commodity checkoff payments, grading/classing fees and similar expenses. Fixed costs are associated with equipment, machinery and structures, and are prorated over several years. Fixed-cost categories include depreciation, insurance, taxes, interest and major repairs allocable to the enterprise. It is important to allocate annual fixed costs accurately to each enterprise to ensure that the true cost is reflected, and to be consistent over time.
Hidden costs also need to be included in enterprise budgets. These costs are often overlooked because they are not directly allocable to the enterprise. Examples of hidden costs include utilities, overhead and bookkeeping. Include the appropriate portion of these costs in the enterprise budget to ensure an accurate estimate of expenses. Enterprise budgets for the Southeast are available through local county Extension offices, Future Farmers of America (FFA), young farmer organizations or through the websites shown in Table 15.2.
Enterprise budgets serve as a guide to help producers determine their own costs. Data specific to the farm operation is entered for each input since yields, prices and costs vary by farm. Table 15.3 provides an example enterprise budget for cotton production utilizing strip-tillage without a cover crop.
Budget Analysis for Conservation Tillage
Conservation tillage systems have the potential to lower production costs and improve farm profitability. The agronomic benefits associated with conservation tillage, such as improved soil productivity, may increase crop yield and net returns from crop production [6, 18]. While this potential exists, profitability of the cropping enterprise depends on a number of additional factors, including effective management, soil suitability, pest pressures and climate.
Changes in the Costs of Production
Crop yields may decline during the transition to a conservation tillage system. However, with the addition of a winter cover crop, yields may be sustained or improved. During the transition, reductions in the costs of production may be enough to maintain or improve farm profitability. Enterprise budgets comparing conventional tillage systems to conservation systems with strip-till are provided in Table 15.4 for corn, cotton and peanuts. Costs for the conventional system are identified for each crop, and the changes in variable and fixed expenses are provided for a strip-till conservation system. A negative change refers to a savings, while a positive change refers to an increase in costs.
For this analysis, yields are assumed to remain constant when switching from the base system to the strip-till system.
In strip-till and no-till systems, production costs may increase due to increased pest pressures, termination of winter weeds, termination of cover crops and capital investments. Winter weeds are killed with herbicides. Cover crops are killed with herbicides and/or a roller/crimper. The additional trips across the field needed to manage a cover crop will represent a new production cost [3]. However, in total, conservation tillage systems usually result in labor and fuel savings (Table 15.4). Greater insect and disease pressures due to more biomass on the soil surface may further increase pesticide costs. However, the inclusion of high-residue winter cover crops may actually reduce weed pressure, thereby reducing herbicide requirements and costs [29]. The actual cost of adopting a conservation tillage system is site specific, and the decision to adopt is dependent on the overall farm goals.
While conservation tillage systems require less investment in machinery than conventional tillage systems, transitioning may result in additional costs associated with modifying existing equipment or purchasing new equipment. For example, existing planters may need to be modified to include row cleaners ($222–$459 per row), down pressure springs ($38 per row) and spike closing wheels ($96–$192 per row) to assist with planting through residue [4]. The total modification cost depends on the number of rows the machine plants in one pass. Another important cost to consider is management complexity. Conservation tillage systems are usually more complex than conventional systems and require more intensive management. A farm manager who is marginally profitable in a conventional tillage system may have difficulty handling the additional complexities of a conservation tillage system [8].
Cost savings with conservation tillage systems primarily stem from reductions in labor and machinery use. As seen in Table 15.4, the majority of cost savings both in the short and long term come from reductions in labor, fuel and machinery costs. These cost savings will likely differ from farm to farm due to differences in climate and farm characteristics such as farm size, as well as management approaches [38].
Reductions in fuel and machinery costs arise primarily due to fewer passes over the field, fewer pieces of equipment and using smaller, less powerful tractors. While additional pesticide applications may add to machinery and fuel costs, they are not likely to offset the savings from reduced-tillage practices. Machinery costs include fixed costs of the machinery, as well as repair and maintenance costs. A significant machinery cost savings in conservation tillage systems results from a decrease in diesel fuel consumption. Fuel savings (Table 15.4) range approximately $3–$11 per acre for in-field operations. Fuel savings will vary between operations based on the crop grown, geographic region, soil types, climate, soil moisture, amount and type of residue, condition of equipment and how the tractor is operated [8, 13, 27]. Additional fuel savings will result from fewer trips from the farm to the field. These savings can be substantial as many farms are increasingly fragmented and spread out [23]. Thus, fuel savings may be as high as two to three times the figures seen in Table 15.4. If fuel prices increase, fuel savings with conservation tillage systems will increase.
Labor savings are a result of a decrease in preharvest activities. Labor savings include reductions in operator labor for machinery and reductions in labor for other farming activities such as maintenance of equipment. Labor savings may allow farmers to increase the amount of land being farmed, further increasing farm profits and viability. Assuming a 1,000-acre cotton farm and the availability of suitable rental land for $25 per acre, a farmer who converted to conservation tillage would save enough to increase the number of acres farmed by 10 percent without increasing production costs above those of a conventional tillage system [6].
Impact on Net Returns from Crop Production
Studies comparing conventional and conservation tillage systems have found mixed results when analyzing crop yields. In a number of cases, conservation tillage systems resulted in reduced yields but compensated for the reduction with cost savings [30]. In many cases, these studies did not use cover crops in the conservation tillage systems. With a cover crop, many studies show that conservation tillage systems can outperform conventional tillage systems with respect to crop yield and potential net returns. Activities such as winter grazing provide farms with additional sources of income and help reduce risk [2]. Combining livestock grazing with a conservation tillage system is discussed in depth in Chapter 8.
Bergtold et al. [6] examined the profitability of alternative mixtures of high-residue cover crops in conservation tillage systems. They found that net returns to cotton in a conservation tillage system with a rye/black oat cover crop mixture increased 10–37 percent per acre over a conventional tillage system. The net returns to corn production in a conservation tillage system with a lupin/fodder radish/crimson clover cover crop were lower when compared to the conventional tillage system. This was due to the prohibitive cost of the cover crop mixture. The study points out that financial incentives from government programs can help offset the cost of converting to a conservation tillage system or planting a winter cover crop. These programs are discussed later in this chapter.