Twpcm LIBRARY ‘Michigan State University This is to certify that the thesis entitled A COMPARATIVE ANALYSIS OF FINANCING REQUIREMENTS OF SELECTED TYPES OF FARM OPERATIONS IN THE EASTERN CORN BELT FOR 1980 presented by Richard Arthur Benson has been accepted towards fulfillment of the requirements for Ph.D. Agricultural Economics degree in /" r '0 0 /T. / Major professor Date July 17, 1970 0-169 ‘ «x\\\\9\\\3\\\ss\\xxxg§u§\\2\\\g\xxgmyxmu\t 12 (“W “l 12 \Nl h"- ABSTRACT A COMPARATIVE ANALYSIS OF FINANCING REQUIREMENTS OF SELECTED TYPES OF FARM OPERATIONS IN THE EASTERN CORN BELT FOR 1980 by Richard Arthur Benson Tremendous changes have occurred in the agricultural sector of the U.S. econany in the last few years. All indications are that the transformation processes working on the structure of farm firms are only in the embryonic stages of deve10pment. By 1980 , structural changes will have greatly altered the capital and credit needs of many U.S. farmers. The rapidly changing farm envirorment raises many serious questions . (1) What sizes and types of farming units may be important by 1980? (2) What might be the magnitudes of the investments on large, highly specialized farming units by 1980? (3) What will be the probable income generating ability of these units? (A) What size loan requests might reasonably be expected? (5) Will these units have sufficient repayment capacity if various sizes and types of loans are extended? (6) What are the expected risks involved in financing large, specialized fanning units in 1980? The current study was aimed at providing answers to these and similar questions. From a financing point of view, this was a micro—demand study with inplications for micro-supply. Hypothetical farming units were constructed that were believed to represent sizes and types of fanning Operations that will be important by 1980. These included l-, 2-, and greater Richard Arthur Benson than 2-man Operations for dairy , cash grain, and feeder cattle. The farming units employed the most advanced technology projected for 1980, provided the given technology was econanically feasible for the unit being considered. Capital was substituted for labor on the synthesized fanning units to allow a high level of labor efficiency. Further, the management ability of the Operators was assumed to be well above average. The 1980 hypothetical units could be thought Of as "target" combinations of resources for the Specific sizes and types Of farming Operations considered . The numerous coefficients estimated in this study were develOped for one purpose—to provide realistic reference units to be used in analyzing certain characteristics of financing specialized types of farm firms in 1980. The analysis was conducted along the lines of the familiar 'Ihree R's of Credit—returns, repayment capacity, and risk-bearing ability. Each size and type of farm analyzed had unique characteristics regarding such items as flow of funds, collateral, and need for land, buildings , equipment, livestock, and machinery . These varying characteristics created fimdamental differences in the absolute amount of financing needed, the length Of amortization periods required , and the access to, as well as the alternative methods of external financ- ing. All of these characteristics, in turn, significantly affected the returns , repayment capacity , and risk—bearing ability of farming Operations . By using this framework to analyze target 1980 units, it was eXpected that this would suggest implications for farmers and lenders as they formulated plans for operating and financing farming units in the future . All of the 1980 dairy Operations analyzed appeared to have strong profit potential. With reasonable lengths of repayment on machinery Richard Arthur Benson than 2-nan Operations for dairy, cash gain, and feeder cattle. The farming units employed the most advanced technology projected for 1980, provided the given technolog' was economically feasible for the unit being considered. Capital was substituted for labor on the synthesized farming units to allow a high level Of labor efficiency. Further, the management ability of the Operators was assumed to be well above average. The 1980 hypothetical units could be thought of as "target" combinatiom of resources for the specific sizes and types of famxing Operations considered. The rumerous coefficients estimated in this study were develOped for one purpose—to provide realistic reference units to be used in analyzing certain characteristics of financing specialized types of farm firms in 1980. The analysis was conducted along the lines of the familiar Three R's Of Credit—returm, repayment capacity, and risk-bearing ability. Each size and type of farm analyzed had unique characteristics regarding such items as flow of funds, collateral, and need for land, buildings, equipment, livestock, and machinery. These varying characteristics created fundamental differences in the absolute amount of financing needed, the length of amortization periods required, and the access to, as well as the alternative methods of external financ- ing. All of these characteristics, in turn, significantly affected the returns , repayment capacity , and risk-bearing ability of farming Operations . By using this framework to analyze target 1980 units, it was expected that this would suggest implications for farmers and lenders as they formflated plans for Operating and financing farming units in the mture . All of the 1980 dairy operations analyzed appeared to have strong profit potential . With reasonable lengths of repayment on machinery Richard Arthur Benson and dairy facilities , these units had the potential to support heavy debt loads on a low-equity basis and, at the same time, generated a high return on investment for the farm Operators . A potential problem area on large-scale dairy farms by 1980 may be the tremendous investments required for highly specialized dairy facilities . Obtaining sufficient amounts of intermediate-term financing without having it fall under the umbrella of long-term land financing may be the most difficult financial problem facing dairy farmers by 1980. . Because costs are expected to increase at a more rapid rate than yields and prices, cash grain farms by 1980 could be the epitome of farming units affected by the price-cost squeeze. Cash gain farmers may be faced with a serious dilenma by l980-srrall profit margins may force them to expand. on the one hand but limit their expansion on the other. To Obtain units large enough to provide an adequate level of family living, cash gain farmers may be forced to expand. But expan— sion nay require a heavy debt load, and repayment capacity may not be sufficient to meet the animal repayment Obligtions implied by large amounts of external financing. large-scale expansion via the ownership route may not be possible for cash gain farmers by 1980 because all payments on land must come from net income, and if net income is low, land will not generate its own repayment . Limited repayment capacity coupled with high price and biological risks made it difficult to build a strong argument for more liberal financing terms for cash grain farmers in 1980 . The biggest barrier to operating and financing large beef feeding operations in 1980 may be price risk. The 6000-head unit considered, for instance , had strong repayment capacity and could support a heavy Richard Arthur Benson debt load when cattle prices were $30 per hundredweight. At $35 per hundredweight , the Operation generated a before tax return on investment of 63.8 percent. But with cattle prices at $25 per hundredweight, the Operation fell $163 ,000 short of covering variable costs . The highly efficient , high investment , controlled environment units con- sidered in this study appeared to have more potential for older , es- tablished Operators who wanted to add to the size of their present setups and increase labor efficiency rather than for young Operators who wanted to get more volume from their limited equity. In sunnary, many of the units considered in this study will require more financing, more services, and more liberal credit terms by 1980 than most farm lenders are currently offering. And the reSponses of credit institutions to the changing needs of farm Operators may have a very profound effect on the structure of farm firms in the Eastern Corn Belt in 1980. A CCMPARATIVE ANALYSIS OF FINANCING REQUEWTS OF SEIECI‘ED TYPES OF FARM OPERATIONS IN THE EASTERN CORN BELT FOR 1980 by Richard Arthur Benson A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the deg'ee of DOCTOR OF PHIIDSOPHY Department of Agicultural Economics 1970 Q- @5059 /- a7- 7/ ACIQ‘IOWIEDGMENTS The author wishes to express sincere appreciation to his maJor professor and thesis advisor, Dr. John Brake. Dr. Brake's guidance, encouragement, mental stimulation, and friendship played an integral part in making the author's stay in East Lansing so enjoyable and rewarding. A thank you is extended to Dr. Larry Connor, Dr. Ralph Hepp, and mary other members of the Department of Ag'icultural Economics for their helpful assistance during the preparation of this thesis. The author wishes to thank many of his colleagues in the Economic Research Service fOr their contributions to this manuscript. Drs. Richard Duvick, George Irwin, Ronald Krenz, andiJohn,Lee all provided helpful and constructive criticism. Also, the author is gateful to the Economic Research Service for their financial support. I am indebted to my secretary, Mrs. Barbara Gibson, who spent innu- merable hours working on.this manuscript. Thank:you, Barb. The author wishes to express a very special thanks to his parents, Mr. and Mrs . Arthur Benson. Without their unselfish sacrifices and warm encouragement at various phases Of’my education, this moment would never have been possible. Last, but certainly not least, I want to eXpress my heartfelt appre— ciation to:my wife, Joan, and boys, Richie and Brad, fOr their cheerful and unselfish COOperation throughout the course Omey graduate study. In short, without them.in my corner, this degree would not have been possible. Section CHAPTER 1.1 . 1.2 . 1.3 . 1.4 . CHAPTER 2.1 O 2.1. 2.1. 2.1. 2.2 . 2.3 . 2.3. 2.3. I . II 1.. 2. 3. l O 2 . 2.3.3 . 2.3. 2.14 . 2.5 . 4.. O 0 CHAPTER III TABLE OF CONTENTS Title Eggs INTRODUCTION 0 O O O O O O O 0 I O O O O 0 I O 0 O 1 rI'heProblemSituation.............. 1 Inje Obj ectives O O O O C O O O O O O O I O O O O O 3 PreviousResearch................ ’4 methw Of PI’OC edl‘re O O O O O O O O O O O 0 O O O 5 STRUCTURAL CHANGES OCCURRING IN THE AGRICUL'I‘IJRAIJ $0POR O O O O O O O O O O O O O O O 8 Basic Forces Catalyzing Structural Changg . . . . 8 Changesintechnology.............. 9 Changesinmarkets............... 10 Changesininstitutions. . . . . . . . . . . . .12 Irmlications for Synthesized 1980 Farm Firms . . 16 Possible Organization Paths . . . . . . . . . . . 16 Family farm-open market agriculture . . . . . . . 18 Family farm-collective bargaining agriculture . . l8 Corporate-integatee agriculture . . . . . . . . 19 . Corporate-farmland agriculture . . . . . . . . . 21 Relative Importance of Larger Operations in 1980 . 22 OverviewofChapter...............26 ASSUMPTIONS AND INFORMATION USED IN CONSTRUCTINGBUDGE'I‘S.............. 27 iii ll Section 301... 3.2 . . 3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.2.6 3.3 . . 3.3.1 3.3.2 3.3.3 3.4 . . CHAPI‘ERIV 4.1. . . . 4.2 . . 4.2.1 4.2.2 4.3 . . 4.3.1 . 4.3.2 4.4 . . 4.4.1 4.4.2 iv Title Synthetically Constructed Operations . Assumptions Used That Affect Profitability OfBudgetedFarms........... Assumptions concerning farm product prices . . . 29 29 Assumptions concerning input prices . . . . . 31 Adoptionofnewtechnology...........32 Crop yields, milk production, and beefproduction................33 Machine, labor, and feed efficiency . . . . . . 34 Size and investments . . ...... . . . . . . 36 Analysis: The‘IhreeCreditR's........ 40 Returns 41 Repaymentcapacity........... . .41 Risk-bearingability.......... .. 43 Growth Vs. Static Analysis . . . . . . ..... 44 'I‘HEl980DAIRYFARMS..............47 Introduction.................47 80-CowDairyOperation.............48 Probablegrowthpaths........... 48 200-CowDairLOperation........... 55 Possibleg-owthpaths........... 56 Financingneeds................57 1000-Cow Dairy (peration . . . . ....... . 61 Possible g'owth paths . ...... . . . . . . 61 Financingneeds................63 m CHAPTER V . 5.1 . . . 5.2 . . . 5.2.1 . 5.2.2 . 5.3 . . . 5.3.1 . 5.3.2 . 5.4.... 5.4.1 . 5.4.2 . CHAPTER VI 6.1.... 6.2... 6.2.1 . . 6.2.2 . 6.3 . . . 6.3.1 0 6.3.2 . . 6.4 . . . 6.4.1 . 6.4.2 . CHAPTER VII 7.1... 7020.. V Title .THE198OCASHGRAINFARMS. . . . Introduction . . 640-AcreCashGrainFarm. . . . . . Possible g-owth paths . . . . . . Financingneeds......... 1680-Acre Cash Grain Farms . . . . Possible gowth paths . . . . . . Financingneeds......... . 4160-Acre Cash Grain Farm . . . . Possible g'owth paths . . . . . . Financingneeds.......... 1980 BEEF FEEDING OPERATIONS . . . Introduction............ 37 S-Head Beef Feeding Operation . Possible g-owth paths . . . . . . . Financingneeds......... 900-Head Beef Feeding Operation . Possible g'owth paths . . . . . . Financing needs . . 600 0—Head Beef Feeding Operation . Possible g'owth paths . . . . . . Financingneeds........... IMPLICATIONS OF SYNTHESIZED 1980 UNITS FORFAHWERSAADIE‘IDERS......... l980DairyFarms............... 19800ashGrainFarms. .. Eggs 68 68 70 7O 71 .75 75 76 78 79 81 84 84 86 88 88 90 91 92 93 94 96 102 102 ..........107 vi Section 11.17.12. Egg 7.3.....lQBOBeefFeedirgOperations......... 111 7.4.....GeneralImpj.ications.............115 CHAPTERVIII . SUMMARYANDCONCLUSIONS . . . . . . . . . . . . 120 8.1.....ReviewofMethodandProcedure........ 120 8.2.....SmearyofPrimagyResu1ts.......... 122 8.3 . . . . . Suggestions for Further Research . . . . . . . 126 BIBLIOGRAH‘IY.........................129 APPENDH A . . Price and Feed Input Assumptions . . . . . . . 134 APPENDIXB..BasicCropBudgets..............137 APPENDIXC..LaborRequirements..............148 APPENDIXD. . InvestmentsandAnnualCosts . . . . . . . . . 164 APPENDIX E . . Income and Expense Statements for Synthesized Units . . ..... . . . . . . 186 Number 2.1 O O 3.1.. 4.1.. 4.2.. 4.3.. 4.4.. 6.1.. A01 0 0 LIST OF TABLES Title Pagg . A comparative balance sheet for U. S . agiculture , 1968 and projected 1980 . . . . . . . . . . . . . . . . 24 Summary of some important characteristics of selected 1980 farm Operations . . . . . . . . . . . . . 37 . Analysis of annual repayment requirements for 80—cow dairy Operation assuming various combinations of down payment and amortization periods . ..... . 52 Analysis Of annual repayment requirements for 200-cow dairy Operation assuming various combinations of down payment and amortization periods . . . . . . . 59 Analysis of annual repayment requirements for lOOO-head dairy Operation assuming various combinations of down payment and amortization periods . . . . . . . 64 Amlysis of returns for lOOO-cow dairy Operation assuming two equity positions and two milk price-production combinations . . . . . . . . . . . . . 66 Analysis of annual repayment requirements for 6000-head beef feeding operation assuming various combinations of down payment and amortization periods . . . . . . . .99 Price assumptions used in budgeting 1980 rm omrations 0 O O O O O O O O O O O O O O O O O 0 13 1‘ vii Ntmber A02 0 O B.1.. B02 0 O 8.3.. 3.4.. BOSOO B.6.. B.7.. B.8.. B.9.. viii are: . Daily and annual feed inputs/cow and replacement assuming 15,000 pounds milk sales/cow using corn silage inwinterandhaylageinsummer . . . . . . . . Feed input for choice steers using corn silage, shelled corn, and 64% protein supplement (starting with 450 1b. feeder and selling 1000 lb. choice steer) . Variable cost (excluding labor and interest) of producing corn using 4-row equipment . . . . . . . . . Variable cost (excluding labor and interest) of producing corn using 6-row equipment . . . . . . . . . Variable cost (excluding labor and interest) of producing corn using 8-row equipment . . . . . . . . . Variable cost (excluding labor and interest) of producing corn using l2-row equipment . . . . . . . . . Variable cost (excluding labor and interest) of producing corn silage with 4-row equipment . . . . . . Variable cost (excluding labor and interest) of producing corn silage with 6-row equipment . . . . . . Variable cost (excluding labor and interest) of producing corn silage with 8-row equipment . . . . . . Variable cost (excluding labor and interest) of producing soybeans with 6-row equipment . . . . . . . . Variable cost (excluding labor and interest) of producing soybeans with 8—row equipment . . . . . . . 135 136 137 138 139 140 141 142 143 144 145 ix m $221.9. Ree B.10 . . Variable cost (excluding labor and interest) of producing soybeans with l2-row equipment . . . . . . 146 B.11 . . variable cost (excluding labor and interest) of producing haylage . . . . . . . . . . . . . . . . . . 147 0.1 . . . EBtimated 1980 labor requirements per acre per month for specified crops using various sizes of equipment . . . . . . . . . . . . . . . . . . . . 148 0.2 . . . Labor requirements and costs for 80-cow dairy qemflkm. ... ........ ... .... ... .F@ 0.3 . . . Labor requirements and costs for 200—cow dairy Operation . . . . . . . . . . . . . . . . . . . . . . 151 0.4 . . . Labor’requirements and costs for 1000-cow dairy herd . . . . . . . . . . . . . . . . . . . . . . . . 153 0.5 . . . Labor requirements and costs for 640-acre cash grain farm . . . . . . . . . . . . . . . . . . . . . 156 0.6 . . . Labor requirements and costs for 1600-acre cash gainfarm 157 0.7 . . . labor requirements and costs for 4000-acre cash gr‘aii’lfar'm.....................158 C.8 . . . Labor requirements and costs for 375-head beef feeding Operation . . . . . . . . . . . . . . . . . . 160 0.9 . . . Labor requirements and costs for 900-head beef feeding Operation . . . . . . . . . . . . . . . . . . 161 0.10 . . Labor requirements and costs for 6000~head beef feeding Operation . . . . . . . . . . . . . . . . . . 162 Number D01 0 0 D02 0 O D.3 . . D.4 . . D.5 . . D.6 . . D.7 . . D.8 . . D.9 . . E.l . . E02 0 O E.3 . . x an: as: Investments and annual costs for synthesized 80-cow dairy Operation . . . . . . . . . . . . . . . 164 Inwestment and annual costs for synthesized 200-cowdairyOperation...............167 Investment and annual costs fOr synthesized 1000-cow dairy Operation . . . . . . . . . . . . . . 170 Investment and annual costs for synthesized 640-acrecashgainoperation. . . . . . . . . . . .173 Investment and annual costs fOr synthesized 1680-acre caSh grain Operation . . . . . . . . . . . 175 Investment and annual costs for synthesized 4160-acre cash grain operation . . . . . . . . . . . 177 Investment and annual costs for synthesized 375éhead/yr beef feeding Operation . . . . . . . . . 179 Investment and annual costs fOr synthesized 900-head/yr beef feeding Operation . . . . . . . . . 181 Investment and annual costs fOr synthesized 6000-head/yr beef feeding Operation . . . . . . . . . 184 Income and expense statements fOr synthesized dairy Operations . . . . . . . . . . . . . . . . . . 186 Income and expense statements for synthesized cash grain Operations . . . . . . . . . . . . . . . . 189 Income and expense statements for synthesized beef feeding Operations . . . . . . . . . . . . . . . 191 LIST OF FIGURES W are 6.1 . . . lTrade-off between length of repayment and equity with respect to annual repayment Ob ligation on 6000-head beef feeding operation . . . . . . . . . . 100 CHAPTER I INTRODUCTION 1 . l The Problem Situation The characteristics of 20th Century ag-iculture can be epitomized by one phrase—trememious structural change . The small , diversified , self-suffic ient , and labor intensive farming Operations are giving way to large, specialized, highly integ'ated, and capital-intensive farming units . These structural changes have geatly altered the cap- ital and credit needs of mary U.S. farmers. With many Class I farms requiring multimillion dollar investments in 1980, legitimate loan requests of one quarter to one half million dollars or more may be common. Most farm lenders are presently not geared for making loans of this magnitude . As one author put it , these units may be "too small to go directly to financial markets with cor— porate stocks and too large for the traditional refinancing each gener— ation by existing credit institutions" [26, p. 812]. _1_/ There is evidence, however, that some lenders recognize the rapidly increasing demand for large loans as a potential problem and are initiating projects to study this area. For example, the Federal Intermediate Credit Bank (FICB) executive committee recently assigned a project team to a study of the problems surrounding large and giant loans . _2_/ The feeling among FICB _1/ Bracketed numbers refer to items listed in the bibliogaphy. _2_/ A largg loan is defined as a loan with a peak amount outstanding (or anticipated) equal to or exceeding 35 percent of the PCA' 3 net worth, whichever is less . A giant loan is defined as a loan with a peak amount outstanding (or anticipated) equal to one million dollars or 50 percent of the PCA' 3 net worth , whichever is less . 1 It! 2 leaders was that present loan analysis and servicing procedures were ill-equipped for handling the problems and challenges presented by the ever-increasing number of requests for large loans . The prOJ ect team recommended ten procedures that were later adOpted by the FICB loan committee. Among these were requirements that all large or giant loan requests be accompanied by a minimum of three years financial and Operating statements , and that the PCA involved in a giant loan submit written plans for loan servicing and control and also monthly or quarterly field reports to the FICB loan committee. These and other procedures recommended by the project team reflect the feeling that because of the high concentration of risk, loan analysis and servicing must necessarily be more thorough for large and giant loans if risk is to be minimized [51, p. 4-5]. Commercial banks , insurance companies , and other agicultural lenders are also concerned with the potential problems presented by large loans. Some of these lenders can and do make large loans. But few, if any , have sufficient practical experience with large loans to handle an agicultural loan portfolio dominated by one quarter of a million dollar or larger loans to farm Operators . In the past, large ag'icultural loans have been the exception rather than the rule, so in general, there has been little incentive for lenders to gear their loan policies and procedures to the financing need of this small minority. However, as large ag'icultural loan requests become increasingly common, there is an urgent need for research dealing with the financing needs of these larger units. By 1980, large farming units (and large loan requests) may actually be the rule rather than the exception. The current study is aimed at 3 providing answers for some commonly asked questions: (1) What size and type of farming units may be important by 1980? (2) What might be the magnitudes of the investments involved? (3) What will be the probable income generating ability of these units? (4) What size loan requests might reasonably be expected? (5) Will these units have suf- ficient repayment capacity if various sizes and types of loam are extended? (6) What are the risks involved? These and similar questions are being asked with increasing frequency, but as yet little research has been done at the micro or firm level. From a financing point of view, this proJ ect can be thought of as a micro-derani study with implications for micro-supply . In other words , by doing a detailed study of certain sizes and types of farms that may be increasingly important by 1980, it is anticipated that this will suggest implications for lenders as they plan their lending strategies for the '703 . 1. 2 “me Oh; ectives The basic objectives of this study are as follows: 1 . Determine the probable financial and production structure of selected types of farm firms in 1980, and estimate their ability to generate income . 2. Estimate the financing needs and repayment capacity of these synthesized units assuming various resource control arrange- ments , various equity positions , various down payment require- ments , and various amortization periods . 3 . Suggest implications of the results for let‘ding institutions as they plan their lending strategies for the '70s . The accomplishment of these objectives would enhance our understarding of the types of financing problems U.S. farmers in general, and Eastern Corn Belt farmers in particular, may be experiencing in the next decade. Further, the analysis should provide insight for lenders as they adjust and alter their policies and procedures in an attempt to adequately service the rapidly increasing demand for large loans . 1. 3 Previous Research Only a small percentage of the research in agicultural finance has addressed itself to the problems of financing individual farm firms. 3/ In a 1960 study, Nelson [44] synthetically constructed a representative 1975 40—cow dairy farm to study the future repayment capacity and risk-bearing ability of the individual firm. He concluded that credit probably will be used to a relatively g'eater extent in 1975 than in 1960 due to farms being larger and having the repayment capacity and risk-bearing ability to safely use more credit. A study by Baker and Irwin [3] in 1961 estimated the Optimum com- biration of resources on two Specific farms—one in a gain area and one in a livestock area of Illirois. They then obtained estimates of tte amount Of money that could be borrowed for resources on each farm, and compared this estimate with the most profitable amount for the farms . They found that the amount of money that could be borrowed varied widely among purposes, and that in many cases , lender behavior had a significant effect on farm organization. A similar study by Irwin and Baker [37] constructed hypothetical farm firms to study the effects of lender decisions on farm financial planning. They found that Optimal planning by a farmer as well as his level of income were affected by lender limits. Arother area of research closely related to this study is firm growth. Numerous projects have been initiated recently employing 3/ The author wishes to express an intellectual debt to Professor Brake who, in a series of speeches over the last two years , has iden- tified numerous financial problems individual farm Operators have experienced, or will likely be experiencing in the next few years. It was these initial probings , coupled with personal interactions with Professor Rake, that led to the selection Of the current topic . 5 techniques such as simulation, recursive progamming , and polyperiod progamming to study the processes and pains of gowth [36]. A 1970 thesis by Dmvick [27], for instance, employed polyperiod progamming to study how such factors as down payment requirements on loans , length of amortization periods , goals of farm Operators , minimum and marginal rates of consumption, appreciation in land values , interest rates , and initial cash positions affected such items as net worth, consump- tion, farm organization, and the level and structure of debt assumed. In arother less technical study, the author [4] studied a g'oup of expanding dairy farmers for a 6-year period to identify and analyze some of the financial problems of expanding to large-scale dairy farmirg. 1.4 Method Of Procedur: The analysis of this study is conducted in three steps . First, the basic forces affecting the structure of farm firms are discussed and evaluated. This information is used along with Proj ect ' 80 esti- mates _4_/ , farm account data from Operators using advanced technology , and information from personal interviews with specialists to synthet- ically core truct representative 1980 farm Operations . These include 1- , 2-, and geater than 2-man operations for dairy, cash gain, and feeder cattle. Three types of farms are analyzed because it is diffi- cult to generalize when discussing the problems of financing agiculture 4_/ Prolject '80 is a study launched in 1964 by the College of Agriculture of Michigan State University to encourage and assist the peOple of rural Michigan in long-range planning. The study , culminated with the publication of 16 reports , provides answers to the important question of "What will rural Michigan be like in 1980, in the natural course of events?" 6 in 1980. Specific types of farms vary sigdficantly concerning the problems facing them. Each type of farming Operation has unique characteristics regarding its flow of funds which affect both the capital needs and access to external capital sources. A dairy farmer, for instance, has a monthly stream of income which can provide capital interrelly and also provide a basis for servicing debt. A cattle feeder, on the other hand, may have receipts only once or twice a year. Similarly, a cash gain farmer receives income at a limited number of times a year. These differences in flows of funds produce different needs for external capital and require different debt repayment plains . Differences by types of farms also exist regarding collateral. Cash gain farms depend heavily on irputs such as fertilizer and chemicals which are used up in the production process and , hence, cannot serve as collateral. A cattle feeder, on the other hand, has collateral in the form of livestock that generally increases in value during the production process and serves as good loan collateral. Dairy cows can also serve as collateral but generally depreciate in value over time. Similarly, each type of farming Operation differs in its need for land, building, equipment, livestock, and machinery; hence, differences in length of terms needed in financing and in alternative methods of financing. Land is more commonly available for lease than are buildings or livestock. Similarly , machine services can be more readily Obtained from custom operators than the other categories of inputs . Second, using appropriate budgeting techniques , the ability of these specific types of 1980 farm firms to service debt is estimated. Various combinations of equity levels and amortization periods for 7 machinery , buildings (includes buildings , livestock equipment , and feed storage), and land are analyzed to determine their effect on repayment capacity. This section also provides a comparative analysis of how down payment schedules affect net worth requirerents on each type of farm. Further, insight is provided into the absolute amount of net worth required to assemble the combinations of resources repre- sented by the synthetically constructed firms , given the various down payment requirements and resource control arrangexents . Also , the short-term debt load (debt for Operating capital) represented by the individual firms is estimated and analyzed. Finally, the question of "What are the implications of this study for farm Operators and lenders as they plan their strategies for the '703?" is explicitly treated. Will young farmers be able to gain con- trol of efficient sized ag‘dcultmal production units by 1980? Are current policies and procedures of lending institutions suitable in an agricultural enviroment typified by relatively large-scale units similar to the ones considered in this study? Are there realistic changes in policies that lenders could initiate that would alleviate some of the problems of financing large farm Operations? This study is aimed at providing insight into answers for these and similar questions . l-\. \.-J. CHAPTER II STRUCTURAL CHANGES OCCURRING IN THE AGRICULTURAL SECTOR Tremendous changes have occurred in the ag-icultural sector of the U.S. economy in the last few years . All indications are that the transformation processes working on the structure Of farm firms are only in the embryonic stages Of development . Therefore , to synthet- ically construct realistic 1980 farm Operations which can be used as reference units when studying future financing needs, it is necessary that the forces working to alter the basic structure of farm firms be considered in detail. 2. 1 Basic Forces Catalyzing Structural Change The changing structure of ag'iculture has played an integal part in altering the financing needs of U.S. farmers in the last few years. Immense amounts of finance capital are row required to assemble effi- cient , viable operations . At least three major forces have contributed to the structural change [5]. 1. Changes in technology 2 . Changes in markets 3. Changes in institutions These categories are by necessity extremely broad. But they do provide a basic organizational framework for studying the factors influencing structural change in the agicultural sector of the United States economy . They also provide insight into the types of farm Operations that will be important in 1980. 2.1. 1 Changes in technology Cochrare [21] has referred to techrological advance as the "engine of the farm economy. " In other words , it is the driving force behind the tremendous changes that have occurred in the agicultural sector of the economy . New techrologies may appear in numerous forms . A new or improved machine may lower the price of capital relative to labor and encourage capital-labor substitution. A new irput such as an herbicide may eliminate mechanical weeding of field crops, or a new crop variety may be developed that thrives in dense population and virtually smothers out weeds . New techrologies are usually output increasing at least in the short run. This is true because the new developments push average and marginal cost curves downward and to the right . Since the short- run supply curve of farmers is the marginal cost curve above the average variable cost curve, the supply curve would be pushed to the right by the new techrolog' . Given the relatively inelastic demand for farm products , the prices farmers receive would decrease in the short run, ceteris paribus . In the long run, the prices of farm products are held down because of the ubiquitous incentive to adapt new techrologies . But while farm product prices are decreasing or retaining constant, input prices are constantly increasing. This leads to what is often referred to as the price-cost squeeze and forces farmers to expand the size of their operatiore in order to maintain an adequate level of family income . New techrologies may also appear in the form of improvements in human capital . Improved management potential on today 's farms has 10 made it possible for numerous structural changes to occur. Prudent businessmen, well-educated in the science of technical agiculture, have demonstrated the ability to handle highly complex, sophisticated farming Operations . Without this skilled leadership, farming units could never have reached the scale and efficiency that currently exists on an ever-increasing number of U.S. farms. All indications are that farms of tororrow will put an even larger premium on manage- ment ability, so farmers are faced with the never-ending struggle to improve their management potential at a rate that is at least as rapid as the rate of improvement in nonhuman capital . The erormous effect a new techrolog' could have on the structure of agriculture can be illustrated by an example [5]. Consider the impact of a rew variety of corn (1) with varying length maturities (2) which could be broadcast seeded by helicoptor on minimally tilled land and (3) with plants structured so that it could be combined by machines with 20-foot heads . This develOpment would clearly alter the organizational pattern of Corn Belt agiculture as we know it today . In general, similar techrological breakthroughs have had and will con- tinue to have very substantial effects on the structure of U.S. agri- culture . 2.1.2 Changes in markets The significant modifications that have taken place in the markets for farm products have contributed geatly to the changing structure of agriculture. As a result of new techrological developments , there have been some very profound changes occurring in the production and processing sectors of our economy. In many reSpects, conventional mar- kets ro longer meet the needs and requirements of these sectors . 11 Both farmers and processors have found that, in many cases, the per- formance Of a vertically coordinated and integrated system is superior to the performance of conventional markets . A vertically coordinated system usually ties the producer and processors together with some type of contract that sets forth such things as product specifications , time Of delivery , and price determination clause . The contract may also include provisions calling for the processor to provide technical advice or specific inputs such as feed. Vertical integration, on the other hand, implies that two or more stages Of production are Joined together under one ownership. A beef packing company that owns a cattle feeding setup is an example of vertical integration. Farmers may favor vertical coordination for at least four reasons . First, they want to reduce the risk and uncertainty facing them. With the high stakes involved, farmers cannot afford to Operate in an economic environment characterized by price risk, biological risk, and the risk of technical obsolescence. Second, for similar reasons, a farmer must be certain that he has a market for his products. In one county in Michigan, for instance , farmers could only find buyers for about 20 percent of their 1969 cling peach crop. The remaining 80 per- cent fell to the ground and rotted. For an Operator with a large in- vestment and a large volume, this could be disastrous from a financial standpoint. 'Ihird, to obtain a farming unit large enough to be effi- cient , it often requires tremendous amounts of capital. Farmers may not be able to accumulate sufficient owned, borrowed, or rented capital to reach an efficient scale without the help of the firm that processes their products . Firally , farmers may favor a vertically coordinated system because it may provide them with increased bargaining power and 12 an improved market position. Since farmers generally Operate in an environment of atomistic competition where they are "price takers," improving their relative power in the market place is very important . Processors also stand to gain from vertical coordination or inte- . gration. Plants cannot Operate at peak efficiency unless they have a flow of raw materials from the production sector that is free of fluc— tuation in both quantity and quality . The plants are set up to handle a certain daily volume, and significant deviation from this amount may substantially increase per unit costs . Also, the costs of selling and distribution may be reduced if processing plants have an even flow of a. uniform quality product from the farming sector. Finally, it may be profitable for processing firms to integrate backwards to take advantage of complementary or supplementary stages of production. In conclusion, there are numerous economic forces at work at both the production and processing levels, and these forces are causing a threat to conventioral markets . The changes trat are taking place in conventional markets are substantially affecting the present production structure of certain commodities, and in the future, the impacts of changing markets on the structure of agriculture may be even more noticeable. 2.1.3 Changes in institutions Institutions , broadly defined as social controls over individual action, may include such conventional items as taxation, credit , or- ganizational forms (leases, partnerships , corporations, etc. ), and government programs . Also , they may include such unconventional things as family living styles , labor preferences , and pollution controls [5] . The dynamic social, political, and economic elements in our complex l3 society leave our laws , customs , and standard operating procedures , etc. (i.e. our institutions) in a constant state of flux. Shaffer [52, p. 2H6] has argued "...that changes in technology, extent of the market, Operating procedures, etc . create rew patterns of external effects requiring constant institutional adjustment to direct indi- vidual efforts to socially desirable ends. " But the notion that societies' major problems are the result of institutioral lag to tech- nological possibilities is somewhat misleading. Institutions are not always a passive element in the retwork of interacting forces . For instance, technology is Just as much a product Of institutional or- ganization as institutional organization is a product of technology [52, p. 2147]. The point to be made is that institutions are Often a leading element in our dynamic system, and changing institutions have had and will continue to have a rather pervasive effect on the struc- ture of U.S. agriculture. Two examples are helpful in illustrating the extensive effects institutions , and changes in institutions, can have on the basic struc- ture of agriculture . First , consider the agricultural corporation. A 1968 farm survey identified six reasons (listed in order of decreasing importance) why farmers incorporate [39]. 1. Ease of transfer 2. Perpetual life of business 3 . Tax savings 14 . Limited liability 5 . Capital procurement 6 . Prestige Assiduous study of these points leads to a significant conclusion-- 1L} the corporate form of organization was institutiorally created, and further, corporations are being perpetuated by existing institutions . More specifically, the first four points are advantages for corpora- tions 9_n_l_y_ because of currently prevailing laws (i.e. institutions). It is not difficult to imagine how laws could be changed to strangle the corporate form of organization, should society decide corporations are undesirable. Even advantages 5 and 6 can be traced to institutions. If existing financial institutions were capable of completely handling the financing requirements of sole proprietorships and partnerships , there would be re advantages in capital procurements for a corporation. Similarly, under prevailing social institutions , the word corporation connotes glamour and prestige. But these institutions could change and the connotation Of the word corporation could be quite different . Consider for instance , the evolution Of the connotation of another orgnizational form—the syndicate . Another example deronstrates the effects a change in institutions could have on the structure of agriculture. Assume that because of pollution considerations, all inorganic fertilizer, all herbicides , and all insecticides were banned from the market. Numerous volumes could be written on the changes that would take place in the agricul- tural production sector of the U.S. economy. For a specialized cash crop farmer, for instance, most parameters of an Optimizing model would be altered. CrOp rotations would once again be pOpular. General crOp- livestock farms would replace many highly specialized farming units. Price relationships would change. Land prices would fall. In general, this profound institutional change would throw the structure of 15 agriculture into a state of complete chaos. From a purely financial point of view, suppose financial insti- tutions failed to adjust their policies and procedures to meet the constantly changing financing needs of farm Operators. would this necessarily mean that progress in agriculture would be curtailed? Probably not, because in all probability , farm Operators would find new ways to finance their Operations. But the family farm type, Open market structure that dominates agricultural production in the Eastern Corn Belt today may be substantially altered. There would be a greater separation.of ownership and control of resources. Absentee ownership, renting, leasing, etc. would become increasingly important. Capital acquisition prOblems may be alleviated by a shift to highly integrated, corporate type systems. In essence, what this means is that the responsiveness of credit institutions to the changing financing needs of agriculture will have very profbund effects on the future structure of the agricultural production sector of the U.S. economy. Some policy makers have argued that a substantial deviation (e.g. the domination of agricultural production.by highly integrated, corporate units) from.the "family farm" structure of agriculture would be detrimental to society. Others have argued that society would gain.from an evolution.away from the "family farmu" This is a serious question and now is the time when.public decision makers should be coming to grips with the problem. Future use of’potentially powerful institutional tools, both legal and financial, 'will be instrumental in determining the future structure Of agricultural production‘units. In conclusion, institutions and changes in institutions significantly l6 affect the structure of agriculture. Further, they must be considered in any futuristic study dealing with agricultural structure, and changes in that structure. 2. 2 Implications for §ynthesized 1980 Farm Firms How do the basic forces catalyzing structural change relate to the 1980 farm firms synthesized in this study? Of primary conceptual importance to this study is the idea Of enterprise specificity. Careful analysis of the network of interacting forces working to change the structure of agriculture indicates that these forces have quite diverse effects on different types of farm firms . In other words , they are enterprise Specific [5, p. 3]. For example, the forces that have con— verted broiler production from an Open market system to an integrated system have not had the same effect on corn production—and chances are they never will. It may be necessary to take a macro-oriented approach when studying the basic forces affecting the structure of the agricul- ture industry. However, when attempting to analyze the effects these forces have on the production and financial structure of specialized types Of individual farm firms , these global generalizations are no longer sufficient . One must address himself to individual commodities and enterprises. As Blase puts it, "To talk about it in general is an exercise in futility" [5, p. 3]. 2. 3 Possible Organization Paths Economists seldom agree on the most important factors influencing structural change in agriculture. Even if they do agree, they often interpret the end result of these influencing factors quite differently . For instance, Breimyer [19, p. 938] has argued as follows: l7 'Ihere are three possible directions of change in the organi- zation and control of farm production and marketing. One is to multiple units or super farms, probably accomplished by ronfarm capital and under nonfarm control . Amther is to establish integrated relationship between farms and their markets. Finally the traditional system might be retained but modified. In essence, this view paints a rather dismal picture for the future of the family farm. A substantially different view is expressed by Nikolitch [46, p. 88] when he argues as follows: The immense economic and technological progress in recent years has not changed two basic structural characteristics of American agriculture . Contrary to what ras happened in other industries, farms continue to be relatively small businesses. And second, the traditioral dominance Of family farms continues to be as notable as ever. Adequate family farms were, and still are, the mainstay of the American farm economy . Moreover, the evidence indicates that this dominance of family farms is increasing. It also shows that farm production is rapidly concentrating on ade- quate family farms . This paper, unlike Breimyer" s , makes a rather convincing argument that family farms have a bright future in the U.S. Rhodes has presented another interpretation of the direction that agriculture is tending. His approach is somewhat in between the pre- viously cited views . This view closely parallels the philosophy em- ployed in the current study in that combinations of family farms , integrated units , and corporations are envisioned. The relative impor- tance of each depends on the size and type of farming Operation being comidered. Rhodes [50] sugests four possible organization paths that agriculture may follow. 1 . Family farm-Open market agriculture 2. Family farm-collective bargaining agriculture 18 3 . Corporate-integratee agriculture is . Corporate-farmland agriculture 2.3.1 Family farm—Open market agriculture Family farm-Open market agriculture would be very similar to the type of organization that exists on the majority Of U.S. farms today. The independent farmer would continue to choose among competitive sellers of inputs and among competing buyers for his products . Also, the farmer and his family would provide the land, capital, managerent , and the majority of the labor. The maj or nonmarket force would be government , or more specifically, a package of farm programs aimed at adding stability to farm product prices. The 1980 typothetical cash— grain farms constructed in this study are examples of this type of organization. 2. 3. 2 Family farm-collective bargaining agriculture The characteristics of production units organized along the family farm-collective bargaining lines would be quite similar in many respects to the farms discussed in the previous section. The major difference Of this organization would be the presence of strong bargaining groups organized to combat power with power in the major markets for agricul- tural products. Dairy farms, for instance, seem to be following this path. Several requirements must be met before bargaining groups can be effective. The bargaining organization must accomplish the following [6]. l . Represent sufficient volume of a commodity 2. Have disciplirary power over its members and cohesion among them 19 3. Obtain recognition by processors of its ability to inflict losses 4. Have a membership willing and able to bear the cost of withholding if necessary 5. Be able to tailor marketings to derands at desired prices on a continuing basis Usually, to meet these requirements, a bargaining group must be organ- ized on a farm-by-farm, territory-by-territory , or comodity-by-commodity basis [20]. The most successful bargaining groups of the past have consisted of producer members who are highly specialized and who have quite localized production. Therefore , the bargaining approach is probably rot the answer to the problera of the Midwest corn producer or the wheat farmers of the Great Plains . But for the Michigan dairy farmer, the bargaining approach may be quite effective . With the help of state and federal marketing orders and agreements , a Natioral Farm Bargaining Board, etc. , certain commodity groups may be able to reap substantial benefits from collective bargaining. If an increasing rumber of groups are successful in improving their posi- tions in the market place , this would greatly reduce risk and uncer- tainty and could significantly alter the future production structure of many agricultural firms . 2. 3 . 3 Corporate—integratee agriculture Perhaps the most far-reaching and dramatic changes that will occur in the agricultural sector in the next few years will be the result of the corporate-integratee type of organization. As was mentioned earlier , there are numerous economic incentives for both farmers and processors to push toward a system of coordinated and integrated mar- kets . As the economic pressures increase, the resulting reorgnization 20 could have a significant effect on the structure of U.S. agriculture. In this system, the farmer could evolve as one of many specialists in the corporate heirarchy. He may own some land, physical facilities, and equipment, but in all probability, other stages Of the system would provide and own the variable inputs. All production would be planned and coordinated by a computer to take advantage of all economies to be gined from the system. Trere are various degrees Of coordination, ranging all the way from informal contracts to a totally integrated system. The degree of future coordination depends , to a large extent , on the particular type of farm being considered. Broiler production, for instance, has al- ready been vertically integrated to the point that an Open market for broilers ro longer exists. It is doubtful that cash grain fanms will ever be integrated to this degree . Beef feeding Operations , however, are already responding to pres- sures Of vertical coordination. And by 1980, many beef feeding units will be highly integrated. It is possible that beef feeding could follow an evolutionary path similar to the one followed in the poultry industry . If this happens , a BOO-head per year independent beef feeder could be eliminated simply because an Open market for his product does not exist . It is doubtful , however, that vertical coordiration will completely dominate beef production by 1980 . Numerous independent producers will still be important. But in all probability, they will reduce price risk via a forward contract or the futures market. The beef feeding Operations in this study were purposely constructed to represent pro- duction units without vertical ties . But the analysis of the capital 21 requirements, repayment capacity, and risk-bearing ability of these Operations may suggest implications for future develOpments along the line of vertical integration. 2.3.“ Corporate-farmhand agriculture The fOurth.possible organizational form.suggested by Rhodes is not explicitly apparent in the structure of the hypothetical 1980 Operations used fOr analysis in this study. In this system, a huge corporation would be the sole provider of land, capital, and management. Also the corporation would hire labor to perfOrm the physical tasks of producing fOOd and fiber Just as General Mbtors hires labor to produce and assemble automobiles. Although it is difficult to envision such dramatic changes in the Eastern Corn Belt in 10 short years, the direc- tion suggested by this path.deserves consideration. As farms become larger, an increasing prOportion of the farm.labor fOrce may have to be hired. This trend has some serious implications. To Obtain sufficient quantities of qualified labor, more attractive wage-fringe benefit packages will have to be worked out. Bonus payments or other types of incentives to encourage laborers to take pride in their work:may have to be developed. Also, for a production system dominated by hired labor to be efficient, it may require that labor's functions be spe- cialized Just as labor's functions are specialized on an automObile assembly line. In general, this type of organization would put a premium.on the ownerhmanager who has insight and.imagination.in the area of labor'management. The success or failure of many of the hypothetical 1980 farms considered in the current study will be depene dent on the manager's ability to secure and manage qualified hired labor. 22 2.4 Relative Importance of Larger Operations in 1980 Although it is apparent from the previous discussion that students of structural change in agriculture Often disagree, they are unanimous on.one point-farm 'will continue to increase in size. The three basic categories of farces influencing structural change suggested by Blase [5] are, in almost all cases, working to increase the size of farm production.units.l/ Further, the net pressure fOr expansion is quite different depending on the size and type of farm.being considered. With these considerations in.mind, various projections concerning the expected sizes of 1980 farming Operations are presented. Daly [25, p. “20] has estimated that by 1980, farms with over $h0,000 gross sales (Class I farms) will account fbr about 23 percent of all commercial farms (over $2500 gross sales) in the United States. Further, he proJects that the average gross income per farm.on these larger units will be approximately $110,000, and that farms with over $h0,000 gross sales will account fbr almost 65 percent of the gross income from.all commercial farms. In another study, Mayer and Heady [#0, p. 412] have estimated that total capital per farm will average $122,576 in the United States by 1980. This compares with a proJected average capitalization of $90,822 per farm in the Lake states, $10M,hhu per farm in the NOrth- east, and $123,7uu per fanm in the Corn Belt. In all cases, this is almost double the 1965 average investments. Another study by Brake [12, p. 1536] has proJected a balance sheet 1/ There are some examples where institutional factors would tend to suppress expansion. Fbr instance, pollution laws may be a deterent to massive livestock Operations. 23 for agriculture in 1980 (Table 2.1). Brake estimates that an average farm in the U.S. in 1980 will have assets totaling $168,800, an increase of over $75,000 from 1968. Also, Brake estimates trat average debt per farm will be $48,000 in 1980, an increase Of 190 percent over 1968. Brake ' s proJ ections indicate a substantial increase in the average farm size in the U.S. by 1980. But these averages are pulled downward considerably because they include noncommercial farms (i.e . those farms with gross sales Of under $2500) . These roncommercial farms accounted for about 142 percent of all farms in 1968. By combining information from numerous sources , these noncommercial fame were eliminated from the balance sheet figures for 1968, and also from the proJected balance sheet for 1980. The results show that the value of assets on an average commercial farm in 1968 was about $1142,000 and would increase to nearly $227,000 by 1980. Similarly, average debt per commercial farm was approximately $214,500 in 1968 and is expected to increase to almost $611,500 by 1980. Michigan trends are similar to those proJ ected for the total United States. Wright [61] has estimated that by 1980, 41.6 perCent of total farm sales in Michigan will come from farms with over $40,000 sales. Professor Wright suspects that if data from 1969 Census Of Agriculture were available to update this proJ ection, it would show Class I farms accounting for close to 50 percent of total sales by 1980. Rapid changes are taking place on dairy farms in Michigan. The 1961! Census of Agriculture showed 33,176 dairy herds in Michigan in 1961!. It is estimated that by 1980, there will be only about 8000 dairy farms in the state. Herds of over 50 cows (average of 101% cows) are expected to contribute more than 55 percent of tlre total milk 24 Table 2.1 A comparative balance sheet fOr U.S. agriculture, 1968 and proJected 1980 Tbtal L Average farm? ProjectedU ProJected 1968a 1980 1968 1980 Assets -Billions of dollars- -Dollars- Real estate 193.7 249 63,529 119,400 NOnreal estate Livestock 18.7 23 6,133 11,000 Machinery and.motor vehicles 31.0 36 10,167 17,300 Crops, stored 9.5 11 3,116 5,300 Household furniture and equipment 8.5 9 2,788 4,300 Financial assets 22.1 24 7,248 11,500 Tbtal 283.5 352 92,981 168,800 Claims Real estate debt 25.5 59 8,363 28,300 NOnreal estate debt 24.9 41 8,167 19,700 Total 50.4 100 16,530 u8,ooo Proprietor's equities 233.1 252 76,451 120,800 Total 283.5 352 92,981 168,800 a' The Balance Sheet of Agriculture, 1968, USDA, ERS, Ag. Info. Bul. 334, January 1969, p. l. b Estimated by Brake [12, p. 1541]. c Obtained by dividing the total by an estimated 3,0u9,ooo farms in 1968 and by an estimated 2,085,000 farms in 1980. 25 produced by 1980 [42]. Pressures to increase size may be more intensive for cattle feeders in the next ten years than for any other commodity or enter- prise goup. In 1965 the average size of beef Operations in Michigan was 60 head per feeder. But by 1980 the average feeder is expected to average 300 head. Further, it is expected that over 100 Operations in Michigan will be feeding in excess of 1000 head by 1980 [28 , p. 41]. Although PrOJect '80 proJections did not explicitly deal with the size of cash gain farms in 1980, all indications are that these Operations will continue to expand. Since profit margins per acre and per bushel are expected to decrease by 1980, cash gain farmers will be forced to expand in order to maintain even the same level of living they enjoy today. Numerous otter ecoromic forces point to a continuing pressure to expand. It has been estimated [49, p. 3] that even in the late '605, if a farmer could make full use of all scientific knowledge and had unlimited access to capital, he could Operate 620 acres by himself using 6-row equipment . Similarly , a 2—man operation could handle 1470 crOp acres using 8-row equipment. Pro,Lect '80 estimates suggest that by 1980 there will be about 300 farms in Michigan over 1000 acres. Similarly, there will be about 4100 farms between 500 and 1000 acres in 1980 [61, p. 24]. In all probability , a high percentage of these farms with large acreage will be cash gain farms . Although the proJections cited deal with the U.S. in general, and Michigan in particular, similar trends will be realized in the Eastern Corn Belt . All indications are that the movement toward the larger 26 units is proceeding at a rate much more rapid than most experts anti- cipated. 2.5 Overview of Chapter TWO points in this chapter are fundamental to the development of the remainder of the thesis. First, the fOrces affecting the structure of agriculture generally assert pressures to increase farm size. By 1980 these pressures will greatly increase the amount of capital and credit needed to assemble an efficient, Viable farming unit. All indications are that adJustments in basic lending policies and proce— dures will be needed if the demand fOr borrowed capital of this ever- increased number Of larger units is to be met. A closely related second point is that fOrces affecting structural change are enterprise specific and.have quite diverse effects on dif- ferent enterprise and commodity groups. This, coupled with the fact that different types of farms vary substantially concerning their flow Of'funds, collateral, etc., dictates that a study of the future financing needs of farmers must be micro in nature and concentrate on individual sizes and types of farm firms. It is anticipated that studying the individual types of farm firms that may be important in 19 80 , provided ‘they can Obtain adequate financing, will suggest implications for farm lenders and farm Operators as they plan their strategies fOr the '705. CHAPTER III ASSUMPTIONS AND INFORMATION USED IN CON SI'RUCTING BUDGETS 3. 1 Synthetically Constructed Operations It is impossible to explicitly identify all of the influences that led to the final selection of the sizes and types of farm Opera- tions that are used for analysis in this study. The impressions that led to the selection Of these specific farms were develOped over a three—year period. They came from reading voluminous accounts of what the agicultural production sector will look like in 1980. They came from conversations with extension and research peOple in universities . They came from numerous informal interviews with research and sales peOple from agricultural input supply industries . And finally, the impressions came from visits in Michigan and other adjoining states to farms now in Operation that are using the latest in advanced tech— nologies. After assimilating the information gained from the numerous sources mentioned above, hypothetical farming units were constructed that are believed to represent sizes and types of farming Operations that will be important by 1980. These units erploy the most advanced technology proJected for 1980, provided the given technology is eco— nomically feasible for the farming unit being considered. Capital is substituted for labor on the hypothetical farms to allow a high level of labor efficiency. Further, the management ability of the Operators on the synthesized units is assumed to be well above average. The 1980 hypothetical units could be thought of as "target" combirations of resources for the specific sizes and types of farming Operations 27 28 being considered. Finally, it is assumed that the livestock farms specialized in producing livestock and livestock products. Therefore, on the synthesized livestock units that produce their own feed, the size of the various crOp acreages is determined exclusively by the livestock progam. It is extremely important that the reader keep in.mind that any conclusions drawn from the analysis of the synthesized 1980 units can only be interpreted in light of the assumptions used. Relatively small deviations from the assumed prices, yields, etc. could substane tially alter the basic conclusions concerning profitability and the ability of various farming units to service debt. Finally, an overriding impression gained by the author when study— ing possible future developments in the agricultural sector will be apparent in all of the proJections that are made and used in this study-changes occurring in agricultural production in the next ten years will be evolutionary rather than revolutionary. Everyone at all interested in the future production structure of agriculture has seen pictures and heard accounts of the farmer in his white shirt and tie sitting at the console Of his computer'milking his cows or planting his corn. And by the 2lst Century, these seemingly far-out proJections will no doubt be realized and probably surpassed. But that doesn't :mean this type of technology will be the dominant force in 1980. Farms similar to the ones proJected in this study can be observed in Operation today. The:machines they are using may not be quite as efficient as the ones proJected fOr 1980, but the basic appearance of the operation .may be very much like some of the most advanced operations Of 1970. 29 3.2 Assumptions Used That Affect Profitability of Budgeted Farms The relative profitability of the synthetically constructed farms depends on numerous factors , the most important of which are the following. 1 Product prices 2. Prices paid for irputs 3. level of technology 4 Yield per acre on crops, milk production per cow, and rate of gain on feeder steers 5. lachine, labor, and feed efficiency 6. Size and investments of the various operations 3 . 2. 1 Assumptions concerning farm product prices Researchers seldom agee on the level of farm product prices one year in the future, let alone ten years in the future. There are so many interacting forces involved that price proJ ections are, at best , educated guesses. The prices assumed in this study will be explicitly stated, and the results must be interpreted in light of these price assumptions . It is assumed that dairymen in the Eastern Corn Belt will be receiving an average blend price of $6 . 00 per hundredweight for milk in 1980. If ore looks at price increases in the last ten years and proJ ects this same trend to the next ten years, $6.00 per hundredweight would seem low. But the '60s were a decade when strong bargaining cooperatives such as Michigan Milk Producer's Association and Great Lakes Federation made substantial gains . With per capita consumption of milk decreasing at an average rate Of 10 pounds per year and with the threat of nondairy substitutes lingering on the horizon, it seems 30 unlikely that farm.c00peratives can increase milk price by $1.30 per hundredweight in the '70s, the price increase realized in the '605. It is my Opinion that $6.00 per hundredweight, a modest increase of less than.$.50 per hundredweight, is all that the "traffic will bear." Corn and soybean prices may be even more difficult to project than milk prices. Fbr instance, a study conducted by Mayer and Heady [40] in 1969 projected the 1980 price of corn and soybeans assuming alternative farm.programs and various levels of export demand in 1980. The results showed the average projected price of corn in the Lake States varied between $.57 per bushel and $2.42 per bushel depending on the assumptions used. Similarly, the average proJected price fOr soybeans varied from $.93 per bushel to $6.02 per bushel depending on assumptions. The assumed.prices for this study are $1.00 per bushel fer corn and $2.25 per bushel fOr soybeans. This assumes a continuation of price support programs not substantially different from present pro- grams. Given the wide variety of possible alternative programs, this assumption seems as tenable as any. Faumipmices for choice steers in the '60s showed substantial short-run.price fluctuations, but a long-run trend is not apparent [30]. For instance, the average Chicago price Of choice 900-1100 pound steers was $29.74 per hundredweight in November of 1962, but it was 1969 before prices reached this level again. In the interim, the average ‘price was as low as $20.67 per hundredweight which occurred in May of 1964. The highest average price was $34.07 per hundredweight in.June of 1969. There will continue to be short-run.fluctuations in the '708, but with per capita consumption of beef on the uptrend, average annual -A 31 prices should average higher than in the '603. As a result, an.average annual price of $30.00 per hundredweight is assumed in this study. 3.2.2 Assumptions concerning input prices The budgets contained in the appendix identify the prices of ins puts assumed in this study. In general, the basic inputs were assumed to increase in price at a compounded rate of 3 percent per year, but there are exceptions to this rule. Fer instance, the recent trend in fertilizer prices has been downward, so a quite different price pro— jection technique was employed to arrive at a 1980 price for the various fertilizer nutrients. A recent study by Kyle [38, p. 34] has shown that large farmers often receive quantity discounts on.many of the inputs they purchase. To reflect this, it was assumed that farms large enough to Justify 8-row equipment received a 10 percent discount on seed, fertilizer, herbicides, insecticides, and custom.rates for applying fertilizer. Similarly, farms large enough to justify l2-row equipment were assumed to receive 20 percent discounts on these items. The maJor inputs of land, buildings, and machinery were all in- flated at a.compounded rate of 3 percent per year. If only information from the last two years were used, this rate would seem low fOr build- ings and machinery, and high fOr land. But most economists would argue that the last two years have been far.fnmm'uxumaflu" They suggest that our economy is geared fOr a "normal" rate of inflation Of around 1-1 1/2 percent per'year. HOwever, with labor unions and other elements applying constant upward pressures on the price level, all indications are that government will be unable and perhaps even.unwilling to hold inflation at this level. Given these factors, a 3 percent average 32 rate of inflation for machinery, land, and buildings over the next 10 years seems quite tenable. 1980 prices for labor are difficult to project for two reasons. First, few people agree on what the average price for farmilabor is in 1970. Second, with labor unions becoming increasingly strong and negotiating for very substantial hourly increases, one can't help but wonder how far these increases can go. The latest USDA report on fanm labor shows that the average hourly wage for farmlworkers in the East North Central region for 1969 was $1.62. This compares with $1.65 per hour in Michigan. Many farmers and extension people say this figure is low given the skills required on many technically advanced farming units of today. There- fore, a base hourly rate Of $2.50 per hour was assumed for 1970 and then inflated at 3 percent per year to get a 1980 rate of $3.35 per hour. Also, it was assumed that large units requiring substantial amounts of hourly labor from one area would need to pay a premium. This rate was assumed to be $4.00 per hour. The $4.00 per hour rate was also used for full—time hired men. More highly skilled laborers such as milkers were assumed to be paid $5.00 per hour. Similarly, it was assumed that the managers of the units in 1980 are paid $11,000 per year for their labor contributions. This corresponds to a withdrawal for family living. Finally, it was assumed that secretarial help could be hired for $6600 per year in 1980. 3.2.3 AdOption of new technology This study assumes the adoption of the most advanced technologies in 1980, provided they are economically feasible. For instance, the 80—cow dairy operation will employ an advanced milking system to enable 34 3.2.5 Machine, labor, and feed efficiency Machine efficiency has been increasing rot only because of changes in machine size, but also because of improverents in the quality Of given sizes of machinery . A compounded rate of 1 percent per year increase in efficiency resulting from quality improvements was assumed. In other words , if a certain field Operation with a given size machine required 5.0 hours in 1970, it would require 4.53 hours in 1980. The labor requirements , including both direct and indirect labor, Of producing various crOps using various sizes of equipment are pre- sented in Appendix Table C.l. Similarly, the estimated variable costs (excluding labor and interest) of producing various crOps in 1980 are also presented in Appendix B. Two studies, one by Connor [24] and one by VanArsdall [59], were- used extensively as guides when making these estimates. Also, the author participated in the preparation of crOp budgets for the 1970 National Economic Model _1_/, and some of the es- timates made in these budgets were also used. Finally, information Obtained from interviews with researchers , engineers , and sales peOple of a major supplier of farm machinery were used when develOping these estimates . Before arriving at labor coefficients for selected dairy and beef Operations , interviews were conducted with industry people in- volved in producing labor—saving equipment for livestock farms . These included interviews with researchers and engineers from a major l/ The National Economic Model was developed by the Farm Produc- tion Economics Division, Ecoromic Research Service to provide short- term quantitative estimates of aggegate production and resource ad— Justments under alterrative prices , costs, technologies, resource sup- plies, and Government progams . 34 3.2.5 Machine, labor, and feed efficiency Machine efficiency has been increasing rot only because Of changes in machine size, but also because Of improvements in the quality of given sizes of machinery . A compounded rate Of 1 percent per year increase in efficiency resulting from quality improvements was assumed . In other words , if a certain field operation with a given size machine required 5.0 hours in 1970, it would require 4.53 hours in 1980. The labor requirements, including both direct and indirect labor, of producing various crops using various sizes of equipment are pre- sented in Appendix Table C.1. Similarly, the estimated variable costs (excluding labor and interest) of producing various crops in 1980 are also presented in Appendix B. Two studies, one by Connor [24] and one by VanArsdall [59], were used extensively as guides when making these estimates. Also, the author participated in the preparation of crOp budgets for the 1970 Natioral Economic Model _1/, and sore of the es- timates made in these budgets were also used. Finally, information Obtained from interviews with researchers , engineers , and sales peOple of a major supplier of farm machinery were used when develOping these estimates . Before arriving at labor coefficients for selected dairy and beef Operations , interviews were conducted with industry peOple in— volved in producing labor-saving equipment for livestock farms . These included interviews with researchers and engineers from a major _1_._/ The National Economic Model was developed by the Farm Produc- tion Ecoromics Division, Economic Research Service to provide short- term quantitative estimates of aggegate production and resource ad- justments under alternative prices , costs , technologies , resource sup- plies , and Government progams . H 35 manufacturer of milking equipment and parlors , and also interviews with engineering and sales peOple from a major supplier of automated feeding systems . Benchmark labor figures for dairy were Obtained from work done by Speicher and others [53], [34]. Similarly, labor coefficients developed by VanArsdall [58] were used as a guide for beef feeding. Based on the above information, it was assumed that the total annual labor requirerents for a cow and replacement in 1980 will be 34.2 hours, 32.4 hours, and 30.0 hours for an 80-cow operation, a 200— cow Operation, and a 1000-cow Operation respectively. Similarly, it was assumed that a beef steer in 1980 will require 2.5 hours per year in the specified 375-head total confinement unit, 2.75 hours per year in the 900-head Operation, and 2.0 hours per year in the 6000-head unit . It should be roted that the 900-head operation has slightly poorer labor efficiency than the 375-head unit because the former is a combination of Open lot, total confinement while the latter is com- pletely mechanized with total confinement. The basic feed ration used for dairy was develOped from work done by Hoglund [32] (Appendix Table A.2). It includes corn silage in the winter and haylage in the summer. The roughage is supplerented with shelled corn, soybean oil meal, and urea. For beef, a ration develOped by Henderson [31] was used as a guide (Appendix Table A.3). It includes corn silage, shelled corn, and a 64 percent protein supplerent. Telfarm records were used as a guide when the various variable costs (e.g. veterinary medicine, utilities, etc.) associated with pro— ducing beef and milk in 1980 were estimated. Also Henderson's study [31] and work done by VanArsdall [60] were used for beef. 36 3.2.6 Size and investments Table 3.1 summarizes some Of the important characteristics Of the selected types of farming Operations used in this study. The l- and 2-man units represent what are expected to be target combinations of resources for these sizes of Operations by 1980. The geater than 2-man units represent what is expected to be a 1980 target combiration of resources for the particular sizes selected. The sizes of these larger units were selected because they represent a size category that is expected to be important in 1980. But they should not be thought of as size units that hit the minimum point on the long-run average total cost curve. In other words, there may be larger units that are just as efficient, or perhaps even more efficient, than the geater than 2-man units selected for this study. Investment figures for this study were obtained from numerous sources . For machinery , interviews with machinery dealers and a price guidebook [47] provided the bulk of the information used. The cost of drying and storage equipment for cash gain farms was obtained from a local dealer. The previously mentioned study conducted by Kyle [38] revealed that most farmers receive a discount of approximately 10 percent Off list price when they buy machinery. Therefore, the estimated 1970 investments for machinery on the synthetically constructed farms reflect this discount. The survey also showed that large farmers often receive discounts substantially higher than 10 percent. To reflect this , the larger operations were assumed to receive either 15 or 20 percent depending on the amount they purchased. The percentage discount assumed for each farm is explicitly stated on the budgets in the appendix . 37 mme.eama aes.mee.ms smm.moa.aa smo.asms sensomoesa owes .pOHnmo moonwoaaaoe zimaosoo .mOHHm pogo» .mcaooom capmsoosm .oassms oasaaa .wcanson III Iii III awoaooooop ooao>ooloaoo accumo>fiq ucmaoflzoo ucmeafiooo pcoaafisoo pomsdeoo hwoaooooop soon: soalma sonim zonim mono npcmEoomHooa ill III Iii omeaonouco moan nzoo ow xOOpmo>aHmmo onem mannaaau odomaaeu oHomHHHp oaomaaap mason mmm meson ooo: motes coma meson com mnemonoucm .noaom onm .moaom owe: .moaom owed .monom one wcaooono mo ouflm aafimo spend :Hmnw ammo sperm camaw ammo swarm camnw ammo opera moapmfiaopomnmnu one» anemone megaphone Sm omma oooooaom .Ho moaomanopomhmoo pqmpaog moon ...8 gm H.m 03mm. 8 3 dismal i333 mmmfisms Sesame $183 sausages 8% .moaam ooze» .wfioooo capesousm one oceaioocmu mo .maoanmo coapmcaneoo ocoowoaanoo .mnscme wioaoooo .aoanoo Hmcoapcm>coo N .mOHHm escapeespoo .noaan amazon one ofizoaa mo .moaan Anson noxczo wioaosoo .wcfloomm coapmcaoeoo .wcaooop .wcfiooom .noaam pogo» oceanoocmm .wcansoo capmsouso coaaloocmu .wcfioomm «masons woe some one .masoms ofizoaa .mnsome cameOpom Hmcoepoo>coo pomsoofimcoo .woamooe Hmcoauoo>coo .onocms oesofia .woamsoo Hmpou mo pomeoofihcoo .wCHmson .mcensoo mwoaocooop uoa cooo coaumcaneoo Hence boa some omam>ooioaoo xooumo>aq pomeoeooo pomsoflnoo ucmsdfiaoo pomeoflsoo awoaocnoop III zoaim goon: 3094mm sonic mono use» coo use» moo asap coo on one: on once on once coo: .9» com .aa omm .aa mucoaoomaoon mucoewomflomn \ooooxpms \oopoxame \oouogame nude nude mnemonouoo one: 0000 once com one: mum mzoo coca mzoo oom xoOpmo>aH no beam oHomHHap oaomaaap odomaafiu oaomaaau pooh meson Hm: moses mma notes mpum noses :mm omaaohouco Ham mom .moaom om: .moaom oom .mmaom ooom .nonoo oom wsaooono uo anew moon ooslm moon GSTN moon, cause 33 QSTN g :QTN nowpmouopogmoo one» awesome coop gouache A.o.pcoov H.m magma I Va _.,,,_,’ 39 Costs of buildings, equipment, and feed storage for dairy farms were Obtained from the Michiggg Farm Management Handbook [41] and from research conducted by Hoglund and others [33], [34]. For beef, this irubrmation was Obtained from the Michiggg Farm Managepent Handbook [41], from records Of a fanm operator who recently erected a new sys— tem, and from work done by VanArsdall [60], [57]. Land constitutes an important part of the investments on the synthetically constructed farm Operations in this study. The land used for growing feed on the dairy operations was valued at $350 per acre in 1970. Compounded at 3 percent per year for ten years, this means an investment Of approximately $470 per acre in 1980. It should be noted that the buildings on these farms are listed separately, so the cost per acre of purchasing the entire units would be considerably higher than the price quoted for land alone. For beef, since the ra— tion used requires more row—crops, the value per acre was assumed to be $450 per acre, or approximately $605 per acre in 1980. Since the cash grain farms in this study require all row-crops and are assumed to produce higher yields, the land on these fanms was valued at $550 per acre, or approximately $740 per acre in 1980. For purposes of computing investment, a cow and her replacement are valued at $500 in both 1970 and 1980. This assumes a cow is worth $400 and her average replacement is worth $100. Finally, to compute 1980 income taxes for the synthesized units, a program developed by extension personnel in the Department of Agri- cultural Economics at Michigan State University was used. The program simultaneously computes the total income taxes a fanmer would pay if he were taxed under nine different arrangements. The arrangements 40 include a wide variety of alternatives such as partnership, tenant corporation taxed as a partnership, two corporations with and without dividends, and so on. Tax rates in 1980 are assumed to be the same as in 1970. It is assumed that dependency exerptions will be $750 per person in 1980, and that the standard deduction will be raised to 15 percent with a maximum of $2000. Further, it is assumed that social security will be paid on the first $9600 at a rate of 7.8 per- cent for self-exployed and 5. 8 percent for employers . Workmen' s compensation, franchise fees, etc. are assumed to be the same as in 1970. 3.3 Analysis: The Three Credit R's The numerous coefficients estimated in this study were develOped for one purpose—to provide realistic reference units that can be used in aralyzing certain characteristics of financing specialized types of farm firms in 1980. The analysis is conducted along the lines of the familiar Three R's of Credit—returns, repayment capacity, and risk-bearing ability [43]. Each size and type of farm analyzed has unique characteristics regarding such items as flow of funds, collateral, and need for land, buildings , equipment , livestock, and machinery . These varying characteristics create fundamental differences in the absolute amount Of firancing needed, the length of amortization periods required, and the access to, as well as the alternative methods of exterral financing. All of these characteristics, in turn, signifi— cantly affect the returns, repayment capacity, and risk—bearing ability of farming Operations. By using this framework to analyze target 1980 units, it is eXpected that this will suggest implications for farmers and lenders as they formulate plans for Operating and financing farming units of the future. 41 3 . 3 . 1 Returns The returns for (e.g. Will it pay to borrow the money?) the syn- thesized 1980 units are analyzed using total rather than partial bud- geting. In other words, attention is focused on the returns realized by the total operation and no attempt is made to isolate the return from individual investments. The income and expense statements for the synthesized units are presented in Appendix E. The expenses include an $11,000 deduction for each partner for family living, and even after deducting this item the synthesized 1980 farming units show a profit. It should be kept in mind, however, that the returns presented in Appendix E assume complete owrership of all resources and no allowance has been made for opportunity cost on investment . 3 . 3 . 2 Repayment capacity Repayment capacity (Will the farm Operator have sufficient funds to meet payment obligations, given the terms of his loan(s)?) is ana- lyzed in detail because it appears to be one of the most important financial constraints for large—scale Operations of the future. As was mentioned before, the commercial units considered are generally quite profitable. But profitability is often misconstrued to mean that no difficulty will be experienced in repaying a loan. Contrary to this belief, profitability is a necessary, but not a sufficient condition to assure adequate repayment capacity. A simplified example will help to clarify this point. Suppose a farmer purchases a tractor solely for the purpose Of doing custom work. He pays $10,000 for the tractor with $1000 down payment and the remainder amortized over a three-year period. At 8 percent interest, the annual payment is $3492. 142 Assume that the tractor produces a gross return of $5000 and that expenses, including labor, are $2000. Further, assume the tractor will last eight years and has a $2000 salvage value at the end of this time period. This means an annual depreciation of $1000. In this situation, gross return minus experees minus depreciation equals $2000 or a return of 20 percent. Even though this investment is highly profitable , it does not generate its own repayment . Two thousand dol— lars profit plus $1000 depreciation is available to repay the loan, but this is $192 less than the annual amount required. Situations similar to the one presented in this example are often a problem in large Operations that require tremendous investments in (and financing for) machinery, equipment, and buildings. Loan terms often require repayment at a rate substantially more rapid than the rate at which the capital items are "used up" in the production process. This leads to a repayment problem that is often the limiting factor in financing large Operations , even though the units are highly profitable . An even more critical situation from a repayment standpoint occurs when farming units require large investments in (and large loans for) land. Since land is not "used up" (i.e. depreciated or completely comumed) in the production process , all principal payments must come out of net income. ‘Ihis is quite different from operating expenses which , if they are profitable, are self-liquidating since repayment comes out of gross income. At an extreme, a profitable Operation that has all self-liquidating loans (1 .e. could be completely repaid from gross income) would never experience repayment problems . Unfortunately , this is seldom the situation, so repayment capacity is of primary im— portance to a farm Operator and his lender, especially when the farmer 43 is carrying a heavy debt load. The repayment capacity of a farm firmmis significantly influenced by two other factors--the Operator's equity position, and the repay- ment schedules set up by lenders. Given two equally profitable firms, one with #0 percent equity and the other with 90 percent equity, the latter would in all likelihood experience the least difficulty repay- ing loans. As farmIOperations become larger, however, it may be unr realistic to expect farmers to own.outright 90 or even 50 percent of all the assets required fOr an efficient, viable Operation. There- fOre, even though equity is not a variable fOr individual farmers, by studying various equity levels and the corresponding repayment capacity on the 9 synthesized farms, it is expected that this will provide insight into the feasibility of loweequity financing in the future. FUrther, the analysis may suggest ways of stretching existing equity as far as possible to obtain efficient combinations of resources. Amortization.periods set up by lenders also affect the repayment capacity of farmers. As was demonstrated by the example used earlier, if lenders require that a fanmer pay fOr a tractor in 3 years, even though it lasts fOr 8 years, such an arrangement can severely tax the repayment capacity of the farm.Operator. By analyzing various lengths of repayment periods in combination with equity requirements on the synthesized farm Operations, this may provide insight into the strength of lengthened amortization.periods as a tool fOr alleviating some of the financial problems of large-scale operations. 3.3.3 Risk-bearing ability Although the static analysis used in this study treats prices and yields as certain, this is certainly not the situation in the real A“ world. The price of choice steers, fOr instance, may vary $10 per hundredweight in any given year. Similarly, lack of moisture, hail, insects, disease, or other natural fOrces may reduce yields substanr tially in any given year. These and similar situations can'be disas- trous fer a low-equity farmer who has used up all Of his excess bor- rowing capacity. Therefbre, when analyzing 1980 operations, risk- bearing ability must be considered. Ebr large, heavily financed Oper- ations, the cost of a "bad" year may be so great that certain financial and production structures will not be feasible without various cone tracts and insurance agreements to reduce price and biological risks. 3.“ Growth vs. Static Analysis Either a growth or static model can be used as a tool for study- ing farm finance. A growth model would start with a 1970 farming operation and study in detail the factors that influence the ability of the fanm Operator to gain control of resources through time. A 1970 thesis by Duvick [27], fOr instance, used polyperiod programming to analyze hOw financial factors such as beginning equity, down pay- :ment requirements, and length of repayment terms affected the ability of a dairy farm.to grow. By running the model for ten years, this would give insight into how the farmer moved from.his 1970 organization to his 1980 organization. This is a very useful approach in that by ‘varying the assumptions and restraints of the model, one can study how these factors affect the growth of a firm through time. There is a prOblem.with this approach, however, when emphasis is focused on 1980 farming Operations. The model uses the 1970 rather than the 1980 or- ganization as a base. As a result, the coefficients used throughout the ten years are developed for 1970, not 1980 firms. Also, there are “5 almost an infinite number of starting positions and paths that could be followed, so the results are more useful as a guide to the impor- tance of factors that affect growth than as an indication of what farms will look like in 1980. Another approach, and the one employed in this study, is to cone struct target farm Operations for 1980 based on the best information available concerning the changes that will occur in agricultural production in the next ten.years. This analysis is static in that it treats growth as an implicit assumption rather than an eXplicit variable. In other words, the assumptions made concerning the financial positions of the 1980 Operations imply a growth path, but the growth path is not considered in detail. Justification fOr this approach is as fellows. From the point of view of financing a dairy farm.Operator in 1980 who has 200 cows and an investment of $680,000 with 40 percent equity, it makes little difference what his farm.Organization looked like in 1970 or the growth path he fellowed. He could have fellowed almost an infinite number Of paths to get to the organization specified. The important question is whether a sufficient number Of farm.Opera— tors can get to the resource organizations Specified to merit studying these types of farming units. Based on Project '80 work and other projections cited earlier, the answer to this question appears to be yes. TherefOre, even though it is recognized that an analysis of pos- sible growth paths is very important, the old adage that "you can't have your cake and eat it too" becomes relevant in this study. In order to allow sufficient time and space to fecus on and analyze tar- get 1980 units, it is necessary to abstract from a detailed analysis of'growth and concentrate on the particular units specified. 46 One problem that occurs when timing of investments is not con- sidered is that there is no easy method to take account of the fact that some items in the resource package will be partially depreciated. The current study values all assets at new price to arrive at 1980 investments, equity positions, and repayment schedules. This approach is not as critical as it first appears because, in effect, the main thing it does is to overestimate the owner's equity position. The Older, partially depreciated items are included in the farmer's equity, but they are included at new rather than.depreciated value. The stage has now been set for the analysis of the synthesized 1980 units. It should be kept in mind that it was necessary to em- ploy numerous assumptions when constructing the 1980 units, and the results of the fOrthcoming analysis can only be interpreted in light of the assumptions made. CHAPI‘ERIV THE 1980 DAIRY FARJVB ll . 1 Introduction Dairy farms in general have many unique characteristics that either add to or alleviate financial problems. On the positive side, dairy farmers have a somewhat constant flow of income throughout the year which keeps short term credit needs at a minimum. Second, rela- tively stable milk prices make it easier to estimate the expected income stream. Third, dairy Operations are not heavily land intensive. For instance , an adequate one-man dairy Operation may require only one third as much land as a one-man cash grain Operation. This is important because of the large investments required for land, and also because all funds for land repayment must come from net income. On the negative side , dairy Operations require large investments in buildings and equipment. Since these items are specialized and somewhat stationary, they provide poor loan collateral unless they are financed with the land. Farm Operators , however, often require more financing for buildings and equipment than long-term lenders will pro— vide. Further , since intermediate-team credit often requires repayment in 5-7 years, an operator's repayment capacity may be taxed to the point where it would not be feasible for him to use this type of credit even if security were no problem. Another problem with dairy Operations is that they are quite labor intensive. By 1980, dairy farms will require larger labor expenditures for three reasons . First , wages for qualified labor are expected to increase about 35 percent in the next 10 years. Second, dairy farmers are becoming increasingly unwilling 147 A8 to put in 12 hours 365 days of the year. Therefore, a larger propor- tion of the labor will be hired. Finally, as dairy farms become lar- ger, the trend is in the direction of hiring larger proportions of the total labor required on dairy farms, even if owners continue to work long hours. These increasing eXpenditures fOr labor can cause finan- cial problems because they put a substantial drain on cash flows. These are but a few of the important characteristics that will become apparent as the individual Operations are analyzed. 4.2 80-Cow Dairy Operation The 80-cow dairy Operation synthesized fOr 1980 assumes cold- covered housing, double—H herringbone parlor, liquid manure, tower silo feed storage, and mechanized feeding. Further, it is assumed that the Operator produces all grain and roughage for the dairy herd. Detailed budgets including labor requirements, investments, and annual incomes and eXpenses are contained in Appendix Tables C.2, D.l, and E.l respectively. The unit requires a total 1980 investment of $3lfl,752 or over $3900 per cow. Almost two thirds of this investment is in dairy facil- ities, machinery, and cows. The after tax income is $11,709. This is over and above the $11,000 deducted for family living but assumes com— plete ownership of all assets in the Operation. A.2.l Probable growth paths It is very unlikely that farmers who are milking 10-20 cows today will be milking 80 cows in 1980. If they havenflt moved by now, chances are that their income and security goals prohibit expansion. There- fore, they have but one way to go-out of dairying. It is also unlikely h- 49 that older farmers with 140-50 cows today will expand unless they have family help. They often own a large prOportion of the assets and can make a comfortable living without expanding. They would Just as soon avoid having to hire full-time labor arfi don't care to rave more to do than they already have. The logical source of 80-cow dairy operations in 1980 is young farmers presently milking around A0 cows , who have the management ability and aspiration to modernize and expand. This group may also include older Operators who are row milking around 110 cows , but who have a son that will be taking over the Operation. The 80-cow unit will probably rot be large erough to support two families by 1980, but father-son partnerships may be important as a transitional device . The father may want to retire and the son may be pressing to expand the Operation to an adequate sized unit . 14 . 2. 2 Financing needs The financing needs Of ary operation depend, of course, on the financial position of the particular operator in question. Since no two Operators would likely have the same financial positions , various possibilities and combirations Of possibilities will be examined. As was mentioned earlier, dairy farms seldom require large amounts of operating capital during normal years . This assumes that items such as machinery and cows are financed by intermediate credit as they should be in most cases . The 80-cow unit would use approximately $7000 for crop expenses and the credit would be outstanding for a period of about 6 months . These eXpenses would generate their own repayment through the sale of milk, and since the Operation is prof- itable, repayment of short-term credit is not expected to be a problem. 50 Intermediate—term credit is a potential problem area on this farm for three reasons . First, a large prOportion of the investments on the 80-cow dairy Operation are of tie intermediate-term variety . Seoorxl, given present lending policies , intermediate term usually means 3-7 years , which is often rot long enough for low-equity opera- tors. Third, it would be reasorable to set new dairy facilities up on a 15-year repayment plan, but loans of this duration are often only available on land. If an Operator has substantial equity built up in land, he may be able to refinance to include new dairy facilities. Even then, however, financing may be a problem. Consider, for instance, an Operator who has built up 80 percent equity in the 2110 acres but has an obsolete dairy facility that would be useful only for calf and dry cow housing with a modern system. If he were to build and finance the entire new dairy facility, it would cost $97,555 and reduce his equity position on the land mortgge to 1&3 percent. From the farmer's point of view, the value of his land and improvements have increased from $470 per acre to over $875 per acre. But a lender such as the Federal Land Bank that specializes in long-term land mortgages would probably rot appraise the land including the new facility at amwhere near $875 per acre. If this were the case, financing could still be a problem even though the operator started with substantial equity in his land. Before proceeding further, the question of the ability of this dairy unit to generate repayment should be treated. There has been considerable discussion recently concerning low-equity financing. Will it be feasible on an 80-cow dairy Operation in 1980? A total of $31,294 of net income and depreciation is available every year to repay interest 51 and principal on debt. Table A.l presents the annual repayment requirements, given various combinations of down payment requirements and amortization periods on machinery, buildings, and land. An 8 per- cent interest rate is assumed fOr machinery and buildings and a 7 per— cent rate for land. The results indicate that low-equity financing is quite feasible on this unit. In the situation being analyzed, a fannem’with only $65,234 equity plus livestock (38 percent equity including $40,000 for livestock) could.meet the repayment requirements ‘with realistic amortization.periods of 5, 15, and 30 years respectively on machinery, buildings, and land. This means that if a farmer come pletely owned his own cows, he could finance 90 percent of the machinery, 75 percent of the buildings, and 90 percent of the land and still meet the annual payments of $31,232. This is somewhat unrealistic since perfect certainty is assumed, but it does illustrate that what is often considered extremely low equity today is actually feasible from a re- payment standpoint. This analysis also illustrates how down payment requirements and length of amortization affect annual repayment obligations. TWelve of sixteen combinations presented in Table “.1 are feasible from a repay- lment standpoint in this perfect certainty situation. There is some degree of trade-off between.down.payment and amortization period from a repayment standpoint. For instance, the annual.payment is approximately the same fOr an Operator who has 10, 25, and 10 percent down payment and 7, 15, and infinity years repayment period on machinery, buildings, and land respectively as fOr an Operator with 50, 50, and 50 percent down payment and 3, 7, and 20 years amortization periods. It is inter- esting to note, however, that once amortization.periods get sufficiently .maofioooomop ago» one enema .mwcfioago .Eochme on some.» 9 one .A .m a: mooeomgoooom one .m ..Hoooo been. 5 Eng one. 8333mm Ewe . anagram: no 355533 page 88o owmuoooooo on some.“ mane» m5 mo moan eeds Puma woo woo? moocmsoom Loose: one .m .eeeno use» sH essH use ncHeHHHoee suHee .semsHsoes so pomezoown no.“ memo» mo 9025c or» on home 033 on» .Ho o8. on» phonon moocoooom Among 05. .H ”mouoz .xOOpmofiH @3305 uoz \m. 52 emw.mH wmo.mH HOMJmH seHmem mem.emH mem.eMH a Hmm.m msm.a memam, mmm m sas.em ass.em q omuomuom mme.m mmm.a semen mom. a eee.ma eee.me m eans eeHne‘ mac.» ee=.mH smH.mm emH.mm z HmH.Hm mmH.om mamasm shalom memamm OH» we: a emH m eHm.m sHm.m mmm.e HHm mm mam me a mmimmuom mo: a mme.m as: e omH.mH mmH am eHs mm m seems eases ‘mew. HH, see.ee, {NewmeH eHo.ms 2 one mm mom.mm mmm Hm HOHaea emmammi mse.mmm a NHH.e mmH .w mmH m omm.a HHmHmm ooe.HOH a OHumN-OH wam.w mas. e mam m mmo.aH mam. mH eeH.me m mHH.HH eHH HH em: eH mm:.mm Hmsme eew.em z Hmeeem, eHH om Noe em yese.sm, o mmeieem a mom.e macaw mmo.m eme.OH o mmm.mHH q o u o a o emm.HH eee.m emm.HH eme.wH o mmm.em m mmm.mH mmm.mH NOH.eH mmm.em o mom.ae 2 \H eeHsae wchseeHm ooumHne omsomuex omlmewm omlenm Hence Hence sneezed seam common 3 made» nooruoo degassing o5 pooeemo 86o mo mooaomfibeoo 903g game ooflmmooo go 38:8 no.“ mango.“ unceremog 3588 go new? H. a flame 53 long, little is gained by lengthening them further. For instance, with zero down payment, going from 30 years to infinity (pay only in- terest) on land makes only $1195 difference in annual payment , while going from 20 to 30 years makes $1416 difference. To further analyze the expected repayment potential of an 80-cow dairy Operation in 19 80 , consider the situation presented earlier where an Operator had built up 80 percent equity in 2140 acres of land. To modernize and expand his NO—cow Operation, he needs a completely new dairy facility costing $97,555. Also, he needs to purchase new machinery equal to 50 percent of the machinery complement presented in Appendix Table D.l. This means another $32,151l. Also, since he wants to expand in one step, he reeds to purchase A0 cows at $lI00 per head or $16,000. Finally, he will still have 20 percent of land to finance or $22,578. Assume the Operator can obtain financing for all of the items mentioned above . He pays 7 percent interest for land and 8 percent on all other loans . Further, assume he finances the items with realistic amortization periods as follows: dairy facility for 15 years, machinery for 7 years, land for 30 years, and cows for it years . Would the above situation be feasible from a repayment point of view? To begin with, aggregating the sum of the repayments indicates that total annual repayment of principal and interest would be $213 ,224 . There is $11,709 net incore and $19 ,51l5 of depreciation to be used for repayment purposes . Further, since the Operator will be in about the 30 percent tax bracket and interest is tax deductible, he will reduce 54 his tax bill by 30 percent of $837“ or by $2512.l/ This is also available for repayment purposes. The sum Of net income, depreciation, and tax savings equals $33,766. This is $9542 more than the annual payments required. Is $9552 a sufficient positive margin to cover risk? If produc— tion of the principle salable ccmmodity-milk——fell 20 percent below expectations, gross income would be reduced by $lA,A00. Net income would fall only about $11,000 because of reduced income taxes. But the operator would still be about $1500 short in terms of meeting fixed repayment Obligation. If he could cut family living from $11,000 to $9500, this would allow him to make his payments. Therefore, in terms of risk, this particular arrangement has considerable strength. What are the implications Of the above analysis for lenders who might be financing similar operations in 1980? The total amount of debt outstanding is $168,287, which may seem large for a one-man operation by today's standards. This represents less than 39 percent equity in the total business, assuming new prices for everything. In reality, the equity position would be considerably lower than this because of partially depreciated items. Yet with reasonable amortiza— tion periods, the operator would be able to meet his annual repayment obligations. If terms of 3, 7, and 20 years on machinery, dairy fa- cilities, and land respectively would have been required, there is no way an operator with this kind of financial position could have met annual payments. 1/ This assumes an average annual interest payment. In early years-bf the amortization period, interest will be considerably higher than $2512. But in later years, it will be lower. The annual payment, of course, will be constant throughout the amortization period. 55 This analysis is particularly relevant for young farm Operators who have deronstrated outstanding management ability but who lack the financial muscle to assemble an efficient unit without considerable outside financing. Once an operator attains an efficient unit , each ensuing year will be easier from a financial point of view. Within a few years, the operator could be on his feet financially, and in may cases, would be ready to begin the expansion process all over again to provide a unit sufficiently large to include his son in the operation. 14.3 .200-Cow Dairy Operation The 200-cow dairy Operation is similar in mam respects to the 80-cow unit . An important difference is that the former is well suited for a two-man partnership in 1980 , while the latter will prob- ably not be large erough for a partnership arrangerent. This is im- portant because by 1980 there will likely be fewer farmers who will be willing to "marry" themselves to a dairy herd. With a partnership, ore partner can get away every now and then without disrupting the Operation. From a financial standpoint , the synthesized ZOO-cow Operation produces substantially more volume per Operator with only a slightly higher investment per partner. Also, crOp acreage is large enough on the ZOO-cow unit to Justify larger, more efficient machinery. The 200-cow unit synthesized for 1980 assumes cold-covered housing, liquid manure, a double-8 herringbone parlor, tower silos , and auto- mated feeding. All feed for the cows and their replacements is grown on 600 acres of land using 6-row equipment. Detailed figures on labor requirements, investments, and annual incomes and expenses are contained in Appendix Tables C.3, D.2, and E.l respectively. 56 All Of the impressions gained by the author in studying this area in the last two years have led to the following conclusion—24mm dairy farce similar to the above unit , having approximately 100 cows per man, will be a mainstay in milk production for Michigan and other major milk producing states in the Eastern Corn Belt by 1980. This unit will be large enough to take advantage of the latest techrologies , yet small erough that the farm Operators do rot have to be millionaires to assem— ble this combination of resources. Further, the unit is capable of producing a high level of income for two partners and their families . D.3.l Possible growth paths The most logical source of two—man, 200-cow dairy Operations in 1980 will be dairy farmers currently milking 140 or more cows. Many younger dairy farmers may have a son they would like to include in the business, but to have an adequate unit for two families, they may be forced to eXpand and modernize . Other older farmers currently milking 140 or more cows may have two sons who would like to form a partnership and gradually take over the business. Also, there may be an increase in the number of nonfamily partnerships by 1980 . Two neighbors may decide that a merger arrangement could be worked out that would be mutually beneficial to both concerns. Finally, there will be a sub- stantial mmber of farm Operations that are currently milking 150-200 cows that may be modernizing but will not be eXpanded substantially between now and 1980. The mmber of 200-cow units that are in operation by 1980 will depend on numerous factors . Two particularly important determining elerents will be the 1980 price of milk and the types of financing arrangements that will be available to Operators in the next ten years. 57 The latter, of course, is of primary concern in the current study. As Duvick's growth study [27] so vividly demonstrated, beginning equity is not a variable to an individual farmer, but in.many respects, liberal down payment requirements and lengthened amortization periods are good substitutes for beginning equity for an expanding farm operator. In other words, the policies and procedures of the lending institutions “servicing farmers in the next ten years will be instrumental in deter- :mining who can expand to 200 cows by 1980 and who can't. 4.3.2 Financing needs Tb avoid redundancy, points that were illustrated in one example will not be dwelled upon in the next example except when they are absolutely essential fOr an understanding of possible financing prob- lems. Therefbre, the analysis of the possible financing needs of the 200—cow unit will not be as thorough as it was fOr the 80-cow unit. There will be carryover from one Operating unit to the next and only the characteristics that make one farm.Operation.different from the ones previously analyzed will be treated in detail. Short-term.0perating credit should not be a problem on the 200-cow unit but intermediate-term credit could again be a real problem.area, especially fOr loweequity operators. Investments in dairy facilities 'and machinery are $297,931 or about 106 percent of the investment in land. The dairy facility alone requires almost $200,000. When financing an.investment of this magnitude fOr relatively low—equity farm Operators, neither of the two often used approaches Of setting the loan up on a 58 seven-year basis or of attaching it to a real estate loan on a 25-30- year repayment may be acceptable. In the first case, the partners may be hard pressed to meet the amual obligations because the amortization period is unrealistically short. In the second case, the repayment period is too long in that the facility may be worn out or obsolete in 15-20 years. The point is that when improvements such as a new dairy facility account for a large percentage of the total assets of a farm Operation, there is need for a set of lending policies and procedures that are tailor-made to meet the "long—intemediate—term" or the "short- long-term" financing needs of farm Operators . It may be acceptable in mary cases to tie an improvement loan in with land financing, but there are many cases when this practice would be imprudent or impossible . More dairy operations by 1980 will specialize in producing milk, letting other farmers produce the concentrates and perhaps even the roughage for the dairy herd . Also, as dairy farms get larger, farm Operators may find it necessary to rent a large prOportion of the land needed for feed productiOn. In either case, attaching intermediate-term loans to long-term real estate loans may not be possible. Table ’4. 2 shows annual repayment requirements for the 200-cow unit assming various combinations of length of repayment and down payment requirerents. Depreciation on this unit is $38 ,1314 annually and $37,153 of net income is generated. This means $75,287 is available for re- - payment before accounting for income tax savings from interest deduc- tions. As the aralysis shows, this unit has very strong repayment potential. All but two of the various corbinations considered in Table A . 2 are feasible from a repayment standpoint. An interesting example of the repayment potential of the 200-cow unit is provided by 59 .eHeeancaanee Hence are seeH .nwseeHHse .sneercnsfloe swoon 9 use .4 .m .z_nsoHeea>menne are .m .pmopo escapee coma one anoHAHomm apflmo .aomofinome so nonmemoasoma unmeamo egos mwmocmonmo Op momma magma me» no mean one: pmma mop wcon mmocmsomm popes: one .m .omono page 2H need new mmepaaaomu zofimo .eumeaeome no oomeemomn mom momma no amass: on» on momma magma mop mo no» one mwonom mmocmsomm popes: one .H "mmpoz .xooomm>HH wCHUSHoofi uoz \m ooo.Hm co . . . . 0. mm a wem.m _ mem HH mem HH mHm MH HHH HeH HHH HeH a omuomuom Hme.HH mem.m Hme.HH HNH.mH Hmm.mm Hmm.ma m .Hee.m Has.m ‘mem.mH seH.mH, sHs.me, sHe.ma z .eaqua eem.mm Hmm.es eHeame MHHeemH Heoswmm e Hem.mH eme.sH eme.=H mHm.eH mee.mm mea.mmH a mmummuom omH.mH ema.HH omH.mH emm.sm www.me eHa.mmH m ,emm.MH. esN.MH, emm.eH easeem eee.mm emH.me z on.mm mHs.om mquoe oeHuem Hssqem mem.mme e ome.eH oes.om oeaiom memamm mmm.wm Hoo.emm a OHumm-OH ees.eH mem.mH eee.eH Hwe.mm eee.ae emm.maH m emo.eH ewo.eH eem.mm sHm.sm mes.m sea.mm, s amm.He «Hawam, sme.oe omm.mOH o sMHmomm e eme.mH sae.mm see.mm ameqem o mmm.mmm q o u o u o Hem.mm ewe.eH Hem.mm mam.wm o NOH.amH m mmm.wH mwm.wH mme.em mam.mm o mmm.wm 2 \H suHsem wsaesssHe omuomue omumHnm omuenm Hence Hence acessed_esoo ooumHue _ .aoome on momma moOfinmo :Ofipmufipnoem new ucmeewo czoo mo m:oaumceoeoo nsoanmevwqaeemmm.GOHumpmoo erase zoonoom pom mucmemnasemn oemezmomn amazes no mamzdmc< m.: mHomB 60 the hypothetical situation where the Operators had zero down payment . With amortization periods of 5, 15, and 30 years on machinery, dairy facilities , and land respectively, the partners could meet annual repayment requirements with almost $5000 to spare. This means that if the Operators completely owned the 200 cows and their replacements , they could finance the entire rerainder of $580,154 and still meet annual payments. That's an example of only 15 percent equity and il- lustrates that even when sufficient margins for risk are required, low-equity financing is indeed feasible on this type of unit . The potential for substantially decreasing total investment by renting ratrer than owning land is not as great for this unit as it will be for sore of the farming Operations to be analyzed later. This is generally true for highly specialized livestock operations because they are not heavily land intensive. For instance, by renting 400 of the 600 acres required by the 200-cow unit for feed production, total investment would be decreased by $188,000. But this still leaves almost a one-half million dollar investment. Further, it would mean that if financing for the dairy facility was tied in with land financing, a lencler would be faced with an investment in land and improverents of $1166 per acre corpared with about $800 per acre if 600 acres were owned. From a financing point of view, this may be significant. In summary, the ZOO-cow unit synthesized for 1980 is a prime example Of a highly efficient and profitable farming unit organized on a family farm type basis. It is the author's Opinion that units organized in a similar fashion can compete with any size or type of farming unit in 1980. The important question is whether they can get to this par- ticular type of organization. This depends on numerous factors such as 61 goals of farm Operators, their attitudes concerning risk, the management ability as demonstrated by their ability to generate internal earnings, and finally, the type of financing available. The analysis has shown that once an individual farm operator or two partners reach 200 cows, this unit has extremely strong repayment capacity. But repayment capae city is irrelevant if an Operation never reaches a resource organization similar to the one demonstrated by the synthesized unit. A.“ 1000-Cow Dairy Operation The 1000-cow dairy Operation synthesized for 1980 is assumed to be operated as a threeeman.partnership. It is organized as a tenant corporation with regular taxation because this is the organization that minimizes taxes. Detailed budgets including labor requirements, investments, and annual incomes and expenses are presented in Appendix Tables C.u, D.3, and E.l respectively. A total investment of’almost 2.6 million dollars is involved, with.gross sales approaching l million.dollars. The dairy facility consists of Open lot housing with fence-line feeding. The milking parlor is equipped with two double-8 herringbones. Roughage is stored in horizontal silos while high.moisture corn is stored in upright silos. Feed fOr the herd is produced on 3000 acres of land using 8-row equipment. A.A.l Pessible growth paths One of the most difficult questions to deal with in this entire study is what will be the source Of the very large units such as the 1000-cow dairy Operation, HOw many dairy farmers have a set of goals and values that would motivate them to strive fOr a 1000-cow operation? 61 goals of farm Operators, their attitudes concerning risk, the management ability as demonstrated by their ability to generate internal earnings, and finally, the type of financing available. The analysis has shown that once an individual farm Operator or two partners reach 200 cows, this unit has extremely strong repayment capacity. But repayment capae city is irrelevant if an Operation never reaches a resource organization similar to the one demonstrated by the synthesized unit. u.u 1000-Cow Dairy Operation The 1000-cow dairy operation synthesized for 1980 is assumed to be Operated as a three—man.partnership. It is organized as a tenant corporation.with regular taxation because this is the organization that minimizes taxes. Detailed budgets including labor requirements, investments, and annual incomes and expenses are presented in Appendix Tables 0.“, D.3, and E.l respectively. A total investment of almost 2.6 million.dollars is involved, with gross sales approaching 1 million dollars. The dairy facility consists of Open lot housing with fence-line feeding. The milking parlor is equipped with two double-8 herringbones. Roughage is stored in horizontal silos while high moisture corn is stored in upright silos. Feed fOr the herd is produced on 3000 acres of land using 8-row equipment. 4.A.l Possible growth paths One of the most difficult questions to deal with in this entire study is what will be the source of the very large units such as the 1000-cow dairy operation. HOw many dairy farmers have a set of goals and values that would motivate them to strive for a 1000-cow Operation? 62 How many dairy farmers (or groups Of dairy farmers) would have the management ability to handle such a unit if it were assembled? How will the expansion be financed? Or will these types of units be built in one step rather than evolving from a smaller Operation? The answers to these and similar questions are far from obvious . 'I‘o tre author' 5 krowledge , there are presently only two dairy operations of 1000 cows or more in the entire Midwest . One is Green Meadow Farms at Elsie, Michigan. This is a three—man operation—a father and two sons . The Operation started in 1922 with 250 acres of land. Now there are 2700 acres in the Operation. Until 1960, the Green's milked about 200 cows. Now they have around 1100 and are conterplating further expansion. This is a prime example of an Operation that was grown, not built. The other lOOO-cow-plus operation in the Midwest is lampkinland Farm located at Watson, Illinois. This unit was built, rot grown. The owner is a wealthy individual who had made his money by selling a patent on a coupler for railroad cars and then invested the morey in the stock market. He built the Operation about two years ago and purchased first calf heifers to get the unit Operating. This unit, unlike Green's, is run by hired management. A third unit, although not in the Midwest, has implications when considering possible growth paths. It is located at Conway, Arkansas, and has the capacity for 5000 cows. The important point is that it is a joint venture between Ralston-Purina and the Dean Milk Company. In other words, it is integrated both backward and forward in the production process . In all probability, all three Of these paths will lead to 1000-cow dairy operations by 1980. But only the first will have implications 63 for financial institutions as they prepare to finance these types of units in 1980. The other two units discussed have built-in financing and will require very little or no external financing. 11 . ll. 2 Financing needs It would be an under-staterent to say that this unit has repayment capacity . Assuming various combinations of down payment requirements as was done for the Operations analyzed previously , the 100 O-cow unit can meet anmal payment requirements under 11 of the 12 combinations specified in Table 14 . 3 . Repayment capacity, however, may not be the limiting factor for this size of Operation. The real problem may be the sheer magnitude of the investment involved. Suppose the three partners each had one quarter of a million dollar net worths . This would account for only about 29 percent of the total investment required for the 1000-cow unit. Even if the three farmers were quite wealthy (i.e. individual net worths of $250,000), establishing the unit would still require low—equity financing. To illustrate the strengths and weaknesses of the 1000-cow dairy operation, consider a situation where three enterprising dairymen pool their assets to erable tlem to provide 25 percent of the total assets required for the 1000-cow Operation. Further, assume they are able to obtain financing for the rerainder from a group Of individuals, in- surance company, commercial bank or some other source. land is financed for 30 years , the dairy facility for 10 years , and the machinery for 5 years. The interest rate is 7 percent on land and 8 percent on all other inves’orents . Finally , for comparative purposes , assume another Operation identical to the first except that the three partners completely own all assets with no debts outstanding. .eHoeHoooonoe Hence one ocsH .nwsHoHHso .eeosHooss on noose B one .A .mn.z nsoHosHeoeooe are .m ..Hmopo use» 5 egg one $333.8 g .bumcfinome co Baggage enigma goo mwgcmonmo Op momma maps» on» no mean one: Puma mop wooed mmoomsomn noose mom. .m .nooeo hero 5 aaH one noHoHHHoee has .383an so ooosseoon eon homes no shoes: are oo spoon oHoeo one no no» one phonon preseason noses: one .H ”hoooz 614 .xooonoeHH wsHosHoeH ooz \H ”m ... m .... ..HH m. ; .- o. .- ..H e mmm all How pm How mm mom 8 wmm mo» mmm m2. a 8:818 mm».e~ HOH.HN mme.em sme.ma mmm.emm mmm.emm m eme.mH emo.mH www.mm HHe.om[[ Hem.m0H Hem.m0H 2 mo . w . .«. me . m.m .H a mom .6 mHm me mHm me km on How mm: mum Sm .H mmnmmuom eeo.om Hma.em eeo.em HHm.mm eem.eoH ome.mom m a m.e .em mpp.mm emm.mmw moe.Ho nem.msH z «.0 -o «no. an. o «o o. «on 0 do ulfi. .H. com me 0mm NOH omm NOH hem mHH NHH HeH zoo can H a OHummuOH eme.He Hme.Hm eme.Ha ems.me mee.mHH eom.omm m mmm.mm mmm.mm mmH.es Hme.Hew was.om mHm.=wH ea somwmoew omm.mmH, oaewomm opp.mem o mem.ooowm e mee.mm mme«MHH mme.mHH mmH.mmH o eHH.HHa.H a o a o u o mom.mm Hom.ms mom.mm wsm.Hm o eeo.mes m mHm.mm MHm.mm mem.Hm mm:.me o mwo.so~ 2 \H eoHsoe wsHoensHe oo-mHne omuomue, omvmewm omlewm Hence Hence aspeneo_ssoo gong—om.» noogmo 53333.5 98 nominee ozoo mo Engage—80 nsOHom>omefiESnmm coaomnmoo anfimo ommouoooa pom nonmemnasomn pomeemomn finance no nanaamc< m.: magma 65 The results of the aralysis of returns for the two Operations are presented in Table A. 14. First, Observe the situation when milk prices are $6.00 per hundredweight and the cows are producing 15,000 pounds per head annually. Both Operations produce the same goes income and net income before interest is deducted. After deducting interest , the hill-equity operation has a substantially higher net income as would be eXpected. But from tre standpoint of rate of return on owned cap- ital, the highly leveraged operation has a 30.8 percent return to only 13.3 percent for the full-equity situation. Furtrer, after taxes , the low-equity Operation produces a 16 percent return on owned capital compared with only 6.9 percent for the fully owned unit. Moreover, after deducting a 6 percent return for owred capital, returns to man- agement are $6A,81t6 for the highly leveraged unit and only $23,590 for he Operation with no debt . The 25 percent equity Operation appears to be quite profitable. Can it meet annual repayment obligations , given the terms specified? With 25 percent equity in everything and amortization periods of A, 5, 10, and 30 years on cows, machinery, dairy facilities, and land respectively, the Operators could meet all payments and still have $78,291 remaining to plow back in the business. From the standpoint Of profitability and ability to repay, the 1000-cow highly leveraged unit appears to be exceptionally strong. Unfortunately , it is possible that there may be another side to the story. What if the price falls to $10.50 per hundredweight and production per cow falls below expectations by 20 percent or 3000 pounds per cow? In this case, as would be expected, the highly leveraged operation is extrerely vulnerable. The partners would lose almost 66 sooan ooome usaxom.aa soo\oH ooome osoxoo.on HsH.HeHu mme.mmHu oam.mm hem.ee housewares oo neurone mme.mmH mmm.wm mmswme mewwwm HooHooo posse or account eon as no soHoosooo e... mam- mo 06H 33 poems noses HaoHooo posse no cases no hope mmo.mHn mmm.oeHu mso.meH moe.mOH mower norms ooz o o memwmeH mmewmm House swap means 0.: m.:mu m.mH m.om rev hoses escape HeoHaso cause so ensure no home mwoamal mmmaopal Hamaaem Haeamma pmmpmpoa ampHm pmz o oem.esH o seawasH Amparo HHe son as . .ooma mom Rev Hmpaomo omzoonoo co ommpmooH mwm.mHn mme.mHn HHm.eam HHm.:em unopposH oeoeco ooz mee.mHH mee.mHH mee.mHH mee.mHH eoHoeHooeooo mmo.aOH mmo.eOH mmo.eea mmo.sms unopposH one soHosHooeooo phonon ooz eHm.emm eHm.emm eHmwomm eHmwmmm AHnoHano assessor co pmmpmpea wofiooaoxmv mnemoxm maomenm> ooe.ome ooe.ome ooe.omm oom.omm osoosH nacho soHsoo ROOH l aoHsao emm soHsoo.e00H soHseo.amm noOHomoHoeoo seapooooeolmoaao xaae 03» one ncOHpfimoo apfisom 03p wcfiesmnm coepmhmoo guano soOIOOOH mom monsoon mo mfimzamo< :.: magma 67 twenty-five percent of their equity , while in the full-equity case , the operators would lose only . 6 of one percent on their owned capital . Even more important , the Operators for the low-equity unit could not come close to meeting their annual payment obligations and could pos- sibly lose everything. The above example illustrates an important point . Leverage can be a valuable tool to increase an individual's income, but it can also multiply losses in case of bad times. Technically, this situation is known as the principle of increasing risk. Turning to the positive side once again, all indications are that the 1000-cow unit of 1980 will be higlly profitable. With strong bargaining cooperatives, $6.00 milk should be well within reason and with higlly qualified management , 15 ,000 pounds of milk per cow should not be out of line. Therefore, private partnerships that can Obtain adequate financing will be able to reap substantial gains. If tradi- tioral credit sources cannot provide the money , farm Operators may be able to convince a goup of doctors, Mers , etc. of the potential of the operation and then give them a share Of the profits in return for the financing. CHAPTER V THE 1980 CASH GRAIN FARMS 5. 1 Introduction Expensive land, expensive machinery , increased variable input prices , and increased real estate taxes coupled with relatively low product prices could seriously limit profit potential on cash gain farms by 1980. Without profit potential, it is very difficult to make a convincing argument for more liberal financing terms. In contrast to the projected 1980 dairy farms, the synthesized 1980 cash gain farms show possible deficiencies in all of the three financial considerations—returns, repayment capacity, and risk. All synthesized farms show positive ret returns even after deducting $11,000 for family living for each partner. It should be kept in mind, however, that the incomes and expenses presented in Appendix Table E.2 assume complete owrership of all resources. The smallest Operation considered has over one-half million dollars of investments , and if farm Operators borrow for part of these assets , interest deductions alone could rapidly lead to negative net incomes . Repayment capacity is seriously limited mainly because of two factors . First, as was mentioned above, high profit potential is lacking. Second, cash grain farms are very land intensive . In other words , a large percentage of the total investment on these farms is in land. Since good land does rot depreciate, all principal payments must come out of net income. If net income is low, repayment potential can be severely limited. There is considerable risk connected with cash gain farming because 68 69 goss income is very sensitive to two factors—crOp yields and product prices . New techrological developments in fertilizers , pesticides , and drought and disease resistant plant varieties will reduce the probability of having a "bad" year by 1980, but cash gain Operators will continue to experience sore degee of fluctuation in yields because of natural and biological factors . Unless the government completely controls the price Of cash gains by 1980, there will continue to be siglificant price fluctuations . The fluctuation is inevitable because of the relatively inelastic derand for cash gains . Small fluctuations in quantity produced cause relatively large variations in price . Far- mers do rot have perfect knowledge concerning future outputs and prices . Per acre yield variations , coupled with the relative ease with which farmers can switch from the production of one crop to arother, leads to a situation where cash gain prices are in a state of constant disequilibrium. Public policy pressures seem to be in the direction of less , rather than more control over farm output and prices . There- fore, all indications are that cash gain farmers will continue to ex— perience significant year-to—year fluctuations in income in 1980. This fluctuation, in turn, increases the risk connected with financing cash gain Operations . The format for analyzing the financial strengths and weaknesses of future cash gain farms must by necessity be different from the format used for dairy farms. Emphasis must be on row a farmer can accumulate sufficient resources to meet annual repayment obligations , given various financing terms , rather than on how farmers can obtain liberal financing terms , given that they have strong repayment capacity even when a large proportion of their assets is borrowed. Using the 70 same combinations of down.payment requirements and lengths of repay— ment periods that were used on dairy farms, few, if any of the combi- nations were feasible from a repayment standpoint. This is in contrast to the synthesized 1980 dairy farms where most combinations were feasible. 5.2 6h0-Acre Cash Grain.Farmi The synthesized 1980 oneaman cash grain farm assumes 600 tillable acres, three quarters of which are planted to corn and the other one quarter to soybeans. Six-row equipment is assumed. Appendix Tables C.5, D.H, and E.2 contain detailed accounts of labor requirements, investments, and income and expense statements respectively. Land is valued at approximately $740 per acre. Corn is assumed to sell for $1.00 per bushel with production per acre being 125 bushels of number two corn. Similarly, it is assumed that soybeans sell fOr $2.25 per bushel with yields of 40 bushels per acre. The total investment is $56u,096, about 84 percent of which is in land. 5.2.1 Possible growth paths There may be at least three important sources of approximately 6uO-acre cash grain farms in 1980. First, many older farmers who have built up a land base over a number of years will have in the neighbor- hood of 6&0 acres by 1980. They may have been.dairymen or livestock feeders in.the past but will have eliminated these enterprises in favor of cash grain by 1980. This group of farmers may be typical of farmers who "live poor and die rich," as the old adage goes. Land may have been.purchased at a relatively low price, and to pay for the land many farmers were forced to cut family living to a bare minimum. With 71 significant appreciation in land values each year, their net worths could continue to gow even though cash gain farming is not highly profitable. Another source of this size of cash gain farm in 1980 will be younger farmers who may own some land but rent (or operate on a. crop share lease) the majority Of the land they work. Some Of the farmers in this goup will be sons of older farmers who have accumulated large tracts of land over a number of years . Through inheritance , the latter group could also accumulate a substantial net worth even though the profit from farming provides no more than a comfortable living. Finally, there will be an ever-increasing mmber of BOO-lOOO-acre cash gain farms by 1980 that are owred by doctors, lawyers, etc. and are Operated on a custom basis. Nam! professionals with or without previous agarian ties are turning to land as an outlet for excess investment capital . One incentive for this trend revolves around incame tax advantages which are Often difficult to identify . Public policy makers are currently expressing concern over "tax-loss-farming" and legal changes over the next ten years could sigiificantly affect the number of nonfarm interests that are purchasing land. 5. 2. 2 Financing needs To illustrate the possible financial problems of a farming unit similar to the synthesized 1980 one-man cash gain farm, consider an example where an individual has accumulated 320 acres of land debt free over a. number of years . The individual is considering adding another 320 acres using the original land as loan collateral. TO handle the larger Operation, he will need to purchase one half of the machinery complement presented in Appendix Table DJ! at a cost of $33,242. 72 Further, he will need to invest $18,614? in drying and storage equipment to handle the larger volume . If land, drying and storage facilities, and machinery were set up on 30, 15, and 5 years respectively, could the farmer meet annual re- payment Ob ligations? Assuming 7 percent interest on land and 8 percent on all other items, the annual repayment requirement would be $29,567. An Operator with 100 percent equity in this Operation would have $12 , 526 ret income before taxes . But the Operator being considered would not have 100 percent equity . Rather , he would have approximately 50 per- cent equity . Interest payments alone in the first transition year would be $20,708. It should be kept in mind that the $12,526 net in- come mentioned previously does not include the $11,000 allocated to the Operator for family living. Adding full ownership net income and the funds allocated for family living and subtracting interest would leave $2818. Since there would be no income tax on this amount for a family Of ll, there would be $2818 left for family living which will be well below subsistence levels by 1980. One's first impression is that the return from such an Operation does not hold considerable promise for farm Operators in 1980. But upon careful analysis , the picture does not appear quite so dismal . For seven months of the year, the Operator could hold an outside Job to earn money that would bring funds for family living up to a reason- able level. Further, with land values appreciating at 3 percent per year, the operator could increase his net worth by $162,695 over a 10- year period. In essence, what this analysis shows is that if an estab- lished farmer is willing to work Off the farm in slack months and sac- rifice in terms of family living, he can increase his net worth rather 73 substantially over a relatively short period of time. It should be kept in mind , however , that the Operator started with over one quarter of a million dollars in completely owned assets which is a luxury that most young farmers do not have. To illustrate how sensitive the profitability of the 640-acre unit is to yield and price variability, assume that realized yields on corn are actually 150 bushels per acre rather than 125. Gross income would increase by over $11,000 and net income would increase by almost this amount. Of course, if the realized yield was 100 bushels per acre rather than 125 , incomes would decrease by the same amount and the farm Operator in the situation analyzed above would be forced to either seek additional credit or default on payments . Similarly, with 125 bushels per acre yields, a 25 cent rise or decrease in corn prices would either increase or decrease goss income by over $114,000. At an extreme, the annual goss income for the 640-acre Operation would be about $50, 600 higher with yields of 150 bushels per acre and a. price of $1.25 per bushel than it would be with yields of 100 bushels per acre and a price of 75 cents per bushel. Moreover, both Of these extremes are well within the realm Of possibility in any given year. Normally, an Operator who used credit for all Operating expenses on a 640—acre unit would need a short-term line of credit of approxi- mately $25,000 to $30,000. The Operating inputs are used up in the production process so they provide poor security for an Operating loan. But with reasonable prices and yields , they generate their own repay— ment which is a definite positive point from a lender's point of view. It is only when yields and/or prices are unfavorable that repayment of operating credit can be a problem. In unfavorable years, farmers often 71! use short-term credit to meet payment obligations on land, machinery , etc. which can also lead to repayment problems. The Operating credit area is an area where merchant and dealer credit could be extrerely important in the future. If the fertilizer experience of the last few years is any indication of the types Of credit terms available on inputs in the next few years, farmers may be able to purchase seed, fertilizer, pesticides, etc. on terms Of six months, the same as cash. Similar arrangements could spread risk with- out impairing an Operator's repayment capacity . The 6h0—acre units in 1980 that are owned and Operated by older farmers who have a high percentage equity in their businesses will have little need for lending policies and procedures that are substan- tially different from what exists today. Similarly, the 1980 units owred by doctors, lawyers, etc. , who farm then on a custom basis will not tax lending arrangements even if these arrangements do not change substantially over the next ten years . But young, low—equity cash gain Operators could cause serious problems for lenders by 1980 . If young Operators are attempting to purchase most of the land needed for an adequate sized unit, repayment capacity could be limiting. If young Operators attempt to gain a viable unit via cash renting or crOp share leasing, yield and price risk could be a real problem because the operators do not have land to fall back on for security . In summary, repayment capacity and risk could be severely limiting for low-equity Operators of one-man cash gain farms in 1980 . As a result , unless price relationships change or potential yields increase , liberalizing financing arrangements will do little to alleviate the financial problems of one-man cash gain farmers in 1980. 75 5. 3 1680-Acre Cash Grain Farms The synthesized 1980 two-man, 1680-acre cash gain Operation is assumed to be organized as a tenant corporation with regular taxation because this is the organization that minimizes taxes. The unit gows 1200 acres of corn and 1400 acres of soybeans using 8-row equipment. Detailed budgets including labor requirements , investments , and income and expense statements are contained in Appendix Tables 0.6, D.5, and E. 2 respectively. The two-man cash gain farm is somewhat more profitable than the one-man unit because the former can economically employ larger, more efficient machinery . Further, the two—man unit spreads machinery cost over more acres; therefore , machinery costs per acre are less than on the one-man unit. Finally, the 1680-acre unit is sufficiently large to Obtain substantial quantity discounts on such items as machinery and fertilizers. These cost savings may not seem very high when viewed on a per acre basis, but when they are multiplied by 1600 to reflect the number of acres under consideration, the savings can be substantial. 5.3.1 Possible gowth paths Few partnerships will own 1680 acres of land in 1980 that are capable of continually producing high yields with virtually 100 percent row-crops . The investment is simply too high for two men to accumulate unless they either acquired it over a long period of time or inherited it. Therefore, it is eXpected that a large prOportion of the land on 1000-2000-acre cash gain farms in 1980 will be rented. Actually, a large proportion of the high priced land in predominantly cash gain areas such as central Illinois is currently owned by absentee owners . As lard values continue to increase , the trend will be even more skewed 76 in this direction. With absentee ownership predominating, the constraints limiting the amount Of resources that can be controlled (not owned) by one man or one partnership are substantially changed. Many enterprising young farmers may be able to gow from a relatively small unit to a large unit in one season. This assumes, of course, that they can find large quantities of land to rent and, further, that they can obtain sufficient amounts of financing for machinery and Operating expenses . At any rate, the natural barriers to large-scale cash gain farming will not be nearly as limiting as they are for large-scale dairy farming in 1980. The biggest Obstacle to gowth may be finding sufficient quan- tities of land for rent within a reasonably small area. 5. 3. 2 Financing needs The financial problems of attempting to attain an adequate sized cash gain Operation via owrership of all resources was treated when the syntresized one-man cash gain farm was analyzed. The same types Of problems—only larger-mould apply for the two—man unit so the analysis will not be repeated. Rather, a polar situation where all resources are rented will be considered. DevelOping detailed coefficients for such an analysis would be a study in itself, but by using "ball park" figures, some relevant points from a financing point of view can be illustrated. When all investment capital, including machinery , is rented, the sole criterion determining feasibility is profit . All costs are in the form of annual Operating expenses and are self-liquidating if the Oper- ation is profitable . There are no overhead costs or depreciation sched- ules and no land appreciation to fall back on if the Operation is not 77 profitable. As unusual as this Operation may seen, there may be many cash gain Operations by 1980 that are gaining control of resources at least partially via this route. To illustrate, suppose two brothers , both with farm backgounds and 3.8. degees from the College of Ag'iculture at Michigan State University, decide to pool their $50,000 cash in 1980 and go into farming in a big way. They are able to rent 1680 acres, 1600 of which are tillable, for $140 per acre. Further, they have talked to a machinery dealer who is willing to rent them the entire complement Of machinery presented in Appendix Table D. 5. The machinery is rented on a 3-year basis at an annual rate equal to 25 percent of the new cost. Crop and hourly labor expenses are as shown in Appendix Table E.2. Drying costs per bushel Of corn are 10 cents using rented equipment. Storage facil- ities for the gain are available on the farms being rented. FrOIn an income standpoint, assume the land produces 150 bushels of corn and 140 bushels of soybeans per acre. Corn is sold for $1. 00 per bushel and soybeans at $2.25 per bushel. Finally, using their $50,000 cash as a cushion for risk, the partners obtain a short-term line of credit Of approximately $125,000 which is outstanding for about six months on the average. The annual rate of interest on the short-term credit is 8 percent. Using the assumptions develOped above , goss income on this hypo- thetical Operation is $216,000 with expenses of $188,002. This leaves a. net income before taxes Of $27,998 which is a reasonable return for two partners with only a total Of $50,000 invested. The important point of this analysis is not the returns , because they depend to such a large degree on prices and yields assumed. Rather, 78 the analysis illustrates the use of leverage at an extreme. The part— ners were able to control almost 1. 5' million dollars of resources with an investment of only $50,000. As land, machinery, etc. become more expensive , more and more farm Operators will be forced to follow a similar route. To gain control of an adequate sized cash gain unit, assuming capital is limited, ownership goals may have to be abandoned. The example may suggest a possible problem area for lenders in 1980. The unit required $125,000 of Operating credit that was com- pletely used up in the production process . From one standpoint, this loan would be ideal because, given that the inputs are profitable, they would completely generate their own repayment . But if because of natural or market forces the inputs are not profitable , there is ab- solutely nothing for the Operators or the lender to fall back on. Few lenders have had experience with this type of situation when relatively large amounts of credit are involved. Perhaps the develOpment of a more comprehensive federal yield insurance progam coupled with a wider use of hedging in the gain futures markets would elimirate much of the risk involved and make such a venture more feasible from the stand- point of both lenders and farm Operators by 1980 . 5.11 lil60-Acre Cash Grain Farm Detailed budgets for the full owrership , ltl60—acre cash grain Operation including labor requirements , investments , and annual incomes and expenses are included in Appendix Tables C.7, D.6, and E.2 respec- tively . The unit assumes a three-man partnership set up as a tenant corporation with regular taxation. The total investment for this Operation is $3 ,479,77ll and is higher than any other 1980 Operation synthesized. As with the other cash gain farms, the bulk of the 79 investment (88 percent) is in land. The synthesized three—man 1980 cash grain Operation is more profitable than the cash grain Operations analyzed previously. This is in part due to the fact that with over 4000 acres, larger, more efficient machinery is economically Justified. Further, machinery is used on more acres and machinery investment per acre is smaller than for the previously analyzed units with less acreages. Finally, the three—man operations can obtain substantially higher quantity discounts than the smaller units on such items as machinery and fer- tilizer. With smaller profit margins per bushel or per acre expected by 1980, size economies could mean the difference between profit and loss. Even with size economies, however, the return on investment for the fully owned unit is only about M.5 percent before taxes and about 2.5 percent after taxes. Needless to say, this is not a very high return, given the risks involved. 5.M.l Possible growth paths A large percentage of the land in cash grain farms of over 4000 acres by 1980 will be rented. There will undoubtedly be a few indi- viduals or partners who can acquire sufficient assets through inheri- tance or through outside income sources to control the specified com— bination of resources completely via the ownership route by 1980. FUll ownership, however, will be the exception rather than the rule. The range will be from little or no owned land to the complete owner- ship situation mentioned above. Crop share leases will be important in 1980 but many large Operators would prefer to obtain control of the land on a cash rent basis. To find sufficient land available for rent, large Operators will be forced to overcome spacial limitations. 80 Land may be spread over counties or even states which could raise costs substantially unless field Operations are carefully planned. With the norownership route predominating, it is extremely diffi- cult to trace out logical gowth paths Operators could follow as they expand to Operations of over 1#000 acres by 1980. Part Of the problem revolves around a lack Of information concerning economies of size . If the economies are substantial, enterprising partners may be able to Offer premiums to landowners as a means of obtaining control of large quantities Of land in a relatively short period of time. Fol- lowing this path, l4000-acre units could literally spring up overnight. But again, the feasibility Of such a route depends on the profitability of cash gain farming in general, and on the degee of size economies in particular. Although the incentives for integation do not appear as strong for cash gain farms as they do for some other types, there may still be some degee of integation on large cash gain farms by 1980 . For instance, one can envision substantial economies for the lmoo-acre cash gain operator who also owns a machinery dealership and a gain elevator. With large volumes and small profit margins , any arrange- ment that is potentially cost saving will be explored and utilized. Another goup of llOOO—acre-plus cash gain farms in 1980 could stem from custom fanning. Does an individual who Operates over 16000 acres on a custom basis qualify as a HOOD-acre cash gain farmer? Technically, he does not control the resources but he does perform all farming Operations on the land . There may be mmerous custom Operators approaching this size Of Operation or larger by 1980. Even though this type of arrangement may be only "quasi-farming, " custom Operators could 81 become an important element in cash gain farming by 1980 and, there- fore, cannot be ignored. 5.l%.2 Financing needs The problems of financing 1980 cash gain farms were previously analyzed assuming complete ownership, partial ownership, and complete rental Of all resources. The conclusions of these analyses will, in general, still hold for the synthesized Lll60—acre unit. Costs will be lower on the larger units, but not enough lower to substantially alter the basic conclusions. The main contribution of the synthesized llOOO—acre—plus operation is that it illustrates the tremendous invest- ments that will be involved in large-scale cash gain farming by 1980. Further, it illustrates that except in rare circumstances, there must be separation of ownership and control if farm operations are to gow to 13000 acres or more by 1980. large-scale farming on a custom basis may be quite popular by 1980. There are indications that land holdings that are small enough to be owred by one individual by 1980 may not be large enough to jus- tify large, efficient machinery. Therefore, more "farmers" may be content to have a full-time nonfarm Job and leave the manual field Operations to custom Operators. The owner would still be the manager and make the major production decisions so, in many respects, he would continue to' maintain his ties with farming. From the custom operator's standpoint, his decision to custom farm on a large-scale basis may in part revolve around quantity dis- counts on machinery. For instance, he may be able to purchase four $20,000 machines at a price that is substantially less per machine than it would be if he purchased only one. Also, the custom Operator may 82 be able to extend his services one step further than is normally the case today. By serving as purchasing and distributing agent for such items as seed, fertilizer, and pesticides, the custom Operator could gain substantial quantity discounts that could, in turn, be passed on to landowners as a further incentive to erploy his services . A trend toward cash gain farming on a custom basis could affect the firancing needs of the farming sector by 1980. Rather than financing small complements Of machinery for a large number of marginal farmers in a community, lenders may be asked to participate in the financing of much larger custom operators . The machinery complement on the syn- tl'esized lll60—acre unit, for instance, requires an investment of almost one quarter Of a million dollars . Repayment should not be a problem for a custom Operator , however, provided he has firm contracts on the land he will custom farm. In essence, what the custom trend could accomplish is the transfer of machinery financing from small marginal Operators to large operators who can use the financing on a profitable basis . Further, following this route could free many smaller farm Operators for full—time off farm employment and strengthen their overall financial positions . In summary, all indications are that the price-cost squeeze will have a very detrimental effect on the profitability Of all sizes of cash gain farms by 1980. With small margins and the possibility of substantial size economies, cash gain farmers will be forced to ex- pand by 1980. Analysis of the synthesized 1980 farming units, however, has suggested that the possibility of expansion via the ownership route is extremely limited. Repayment capacity will simply not be adequate to support a heavy debt load on land. The lack Of repayment capacity 83 coupled with the risks involved in cash grain farming makes it diffi- cult to argue for more liberal financing arrangements for cash grain farmers in 1980. Again, however, it should be stressed that develop- ments such as yield breakthroughs, higher product prices, lower land prices, etc. could substantially alter these basic conclusions. CHAPTER VI 1980 BEEF FEEDING OPERATIONS 6.1 Introduction The beef feeding Operations synthesized for 1980 range from a 375-head per year Operation that grows all feed to a 6000-head per year unit that buys all feed. Like the dairy Operations analyzed previously, the beef farms require large investments in livestock housing and feeding equipment. The timing of cash flows on beef feed- ing units, however, resembles cash grain rather than dairy farms. Also, because of the large investments required fOr feeder livestock, short-term credit needs are considerably larger than those required on the dairy and cash grain units previously analyzed. In terms of expected profitability, the synthesized 1980 beef farms fall in between the dairy and the cash grain farms. Profitability on beef feeding operations, however, is very sensitive to changes in both feeder and fat cattle prices. If prices were $25 and $27 per hundredweight on fat cattle and feeders respectively rather than $30 and $32 as was assumed in this study, the results with respect to profitability would be quite different. The synthesized beef farms, like the dairy farms, are not heavily land intensive. As was demonstrated in the analysis of the cash grain farms, this characteristic is extremely important from the standpoint of repayment capacity. The synthesized dairy and cash grain units analyzed far 1980 reflected change which in some cases was quite substantial. In beef feeding, however, because of two potentially strong forces lingering 8N 85 on the horizon, the change in the next ten years could possibly be revolutionary rather than evolutionary. The two forces in question are (1) competition from huge feedlots in the Southwest and West, and (2) forces at work that could push beef feeding in the direction of a corpletely integ-ated system. Can Operators in the Midwest who are feeding 300 w of cattle per year compete with Operators in the Southwest who are feeding 300 2219.91 of cattle per year? Can Operators in the Midwest who have a $200 or more capital investment per head corpete with operators in the Southwest who have a capital investment Of only $330-$110 per head? These and similar questions have not been corpletely answered even though a considerable research effort has been directed at then in the last few years. Most studies, however, have concluded that those who are ready to write the epitaph for Midwest beef feeders are too hasty in their Judgement. One study, for instance, concludes that, "Con- cerning the ability Of existing feedlots to compete, the results indicate that top level farm feeders in the Corn Belt can withstand as much or more of a price squeeze than can their corpetitors further south before leaving a feedlot stand erpty because of failure to cover variable costs" [29]. The current study, of course, assumes that there will still be large numbers of cattle fed in the Eastern Corn Belt by 1980. Nevertheless, the competitive pressures from the South should be kept in mind when interpreting the results of the synthesized 1980 beef feeding units. The second force mentioned above concerns integation. Many individuals have Observed poultry production progess from a back yard sideline enterprise to a completely integated system in a few 86 short years and are predicting a similar path for beef. If in the next ten years beef feeding does , in fact , evolve to a completely integated system, it would make little sense to think of a noninte— grated one-man unit in 1980 because a market for the output of the Operation would not exist . After considerable study , however, it is the author's conclusion that integation in beef feeding will be im- portant in the Eastern Corn Belt by 1980, but a considerable amount Of the beef will continue to be produced by individual farm Operators . They may have forward contracts and, also, a portion Of the irputs they employ may be owned by feed companies or packers , but for the most part, management of the firms will still be in the hands Of the farmer. More light will be shed on this area as the synthesized 1980 beef feeding Operations are aralyzed. 6 . 2 37 5—Head Beef Feedirg Operation The synthesized one-man beef Operation is an example of what could be the ultimate in the substitution of capital for labor in the produc- tion of beef by 1980 . Cattle are fed in a controlled environment building that includes. a highly sophisticated ventilation system and liquid manure with slatted floors. Feeding is all automatic and silage and concentrates are stored in upright silos . All feed is gown using li-row equipment . Detailed budgets including labor requirements , in- vestments, and annual incomes and expenses are presented in Appendix Tables C.8, D.7, and E.3 respectively. The unit involves an expected 1980 investment of over $275,000. Advocates of this type of system suggest that higher rates Of gain and higher feed efficiency , coupled with lower labor requirements , will more than Offset the tremendous investment involved in this type Of an 87 Operation. As yet, there are too few total confinement beef feeding units in Operation to either prove or disprove these claims. The cure rent study assumes equal rates Of gain and feed efficiency on all Operations considered, so if, in fact, there are advantages of total confinement in these areas, they will not be reflected in the budgets in.the appendix Of this study. It is not the intent of this study to present a detailed compare? tive analysis of the economic advantages and disadvantages Of various types Of beef feeding systems. But in all fairness to advocates of controlled environment buildings , an example may illustrate how the increased investment could be Justified. The investment on,a 375-head per year controlled environment building with slatted floors and liquid manure would be about $150 per head capacity (not per head per year) higher than an Open lot system with conventional manure . On an annual basis, with interest at 8 percent and depreciation over 15 years, the costs would be $23 per head higher on the controlled environment setup than on conventional building. Suppose average gains in the controlled system were .25 pounds per head per day higher and that every hundred pounds of gain required .5 bushel less corn than.in a conventional systemol/ At $30 per hundredweight cattle and $1 per bushel corn, the savings per head per year would be over $31, which more than covers the $23 added costs. If the controlled environment system also requires less labor, the argument in favor of this type of a setup would be even stronger. ‘1] These figures correspond to what sales peOple for controlled environment systems suggest are conservative estimates of increased efficiency sterming from a controlled environment. 88 6.2.1 Possible gowth paths With margins getting smaller , farm Operators who depend on beef feeding for their living will be forced to expand by 1980. It is un— likely , however, that fanm Operators who are feeding 50 head Of steers at the present time have aspirations to expand to a 375-head per year unit . If they were thinking of expanding, chances are that they would have already taken the first step. Their logical next step is out Of beef feeding. Many farmers who are currently feeding over 100 head will be feeding 375 head or more by 1980. This may be the minimum sized unit if beef feeding is the primary, rather than a supplemental source Of income for farmers in 1980. All indications are that the biggest gowth will be in units of 500 head or more, but well maraged, highly efficient units of less than 500 will still be important. 6. 2. 2 Firancing needs The financing required on a 375-head one-man unit in 1980 will depend to a large extent on the type of technologi being employed. If cattle are being fed on a dirt lot with no housing and self-feeding bunker silos , the bulk Of the financing reeds of an operator with limited equity would be for cattle. However, if cattle are being fed in completely autoiated , controlled environment buildings such as the one being analyzed in this study, Operators could require large amounts of intermediate-term financing. Given a total environment system with no better than average ex- pected rates of gain and feed efficiency, the profit potential of 375-head units in 1980 could be seriously limiting. After deducting $11,000 for family living and $268” for income taxes, only $302 is left as a return to capital and management. Needless to say, this amount 89 will support little payment of principal and interest. The bulk of the load for repaying any debt would have to come from depreciation. Based on these calculations, feeding 375 head of cattle per year in a controlled environment system in 1980 would almost have to be clas- sified as "hobby farming." Suppose , however , that controlled environment systems do , in fact , have advantages-" in rate of gain and feed efficiency . Assume all other things retain the same, except that average daily rate of gain is 2. 5 pounds rather than 2.25 pounds and that one hundred pounds Of gain requires “.5 rather than 5 bushels of corn gain. The conclusions Of the analysis are now completely different. Net income before taxes would increase by about $11, 800 . If an individual farm operator had 50 percent equity in his land and machinery (i.e. net worth of $811,171), he could borrow another $106,950 for the new beef feeding system and still meet annual repayment obligations . This assumes an interest rate of 8 percent on machinery and buildings and 7 percent on land . Furtrer, it assumes amortization periods of 5, 15, and 30 years on machinery, buildings , and land respectively. From a lender ' s standpoint , this relatively small Operation would have debt outstanding on capital items of over $191,000. Further, the Operation could require a short-term line of credit of over $50 ,000 for feeders and crop and livestock expenses . This is an extreme in debt carrying capacity and has not taken risk into account. But it does illustrate that reasorable loan requests of over $200,000 can be expected from "small" beef feeders by 1980, assuming the high invest- ment type systems prove to be profitable. 90 6. 3 900-Head Beef Feeding Operation The synthesized 900-head per year, two-man beef feeding Operation represents a combination of Open lot and total confinement housing. Calves are fed in an Open lot system for approximately the first 120 days Of the feeding period and are then transferred to a controlled emironment building for finishing. This arrangement reduces investment per head from what it would be if a completely controlled environment system were employed. Further, it has the advantage of having cattle in a controlled environment during the stage of their gowth cycle when environment may be most crucial to performance. The investment per head in buildings and feed storage on this unit is about $225 per head fed per year. This is still high by today's standards , but to construct a highly efficient beef feeding unit by 1980 will require this size Of investment. The total investment on the two-man unit is almost $600,000. This includes 1480 acres Of land to produce feed for the 900 head, and also a full complement of 6—row equipment . Complete budgets including labor requirements , investments , and income and expense statements are included in Appendix Tables C.9, D.8, and E.3 respectively. Assuming no gain or. feed efficiency advantages for the controlled environment unit, return on investment for the full ownership situation is only a little over 1 percent. If controlled environment systems do prove to substantially increase rates Of gain and feed efficiency by 1980, the expected return on investment could be much more in line with the risks involved. 91 6.3.1 Possible gowth paths A logical source Of approximately 900-head beef units in 1980 will be operations currently feeding 250 or more head. Older Operators may have sons who have a desire to join the business . To provide an Operation large enough to support two families , they may be forced to modernize and expand. The highly efficient 900-head unit may be ideal for a father-son partnership arrangement because the son could handle over three-quarters of the work load except in peak lab or months . Other types of family and nonfamily partnerships will also be important . If individuals can obtain sufficient funds to assemble a 900-head capital intensive unit in 1980, many will be Operated as sole prOprietor- ships. By hiring ore full—time man plus some part-time labor, a farmer may still have sufficient time to perform the managerent functions . By 1980, however, management tasks such as buying and selling will be so important to the success or failure of the business that more time will have to be spent in this capacity. Firally, many ronfarm individuals will likely assemble 500-1500— head beef feeding Operations by 1980. Labor and management will all be hired. It's difficult to analyze the motives of ronfarm individuals who enter into farming—often in an ultramodern fashion. Beef feeding may be the easiest livestock enterprise in 1980 to Operate completely with hired labor and management. Also, high capital investments in depreciable items that can be written off rather rapidly for tax purposes , coupled with other more subtle tax advantages , may explain in part why mary wealthy businessmen may choose beef feeding as an outlet for their excess funds . Mary wealthy nonfarm people feel that an investment port— folio is not corplete unless it includes land, and having a modern beef 92 feeding setup on the land makes the investment even more intriguing and satisfying. 6 . 3 . 2 Financing needs Building a case for extending liberal financing terms to an Operator with demonstrated management ability but limited equity is difficult on the synthesized 900-head unit, Just as it was on the 375-head unit. The profit potential is simply too limiting. The risks involved in (1) beef feeding and (2) an Operation of any type with a highly leveraged firancial structure are prohibitive unless the Operations demors trate a well above average profit potential. In all probability, tOp manage- ment of nary large ronfarm businesses would reJ ect an investment proposal with similar risks unless the expected returns from the investment were at least 20 percent. Net return before income taxes would have to in- crease about $117 per head fed per year to provide a before tax return on investment Of 20 percent for the full—equity unit. Needless to say , such an increase in net return under ary circumstances appears impossible for beef feeders in 1980. The point to be made is that there appears to be no place in high investment beef feeding for low-equity Operators in 19 80. Trat doesn' t mean, however, that few farmers will be feeding cattle in systems similar in size and structure to the 900-head beef Operation synthesized in this study. On the contrary, many established beef feeders will con- tinue to eXpand and modernize even though expected returns may sometimes appear quite low. They may have considerable assets that are fixed in the sense that the return from these assets in the business is higher than their salvage value. By expanding and modernizing, farm Operators may increase the return to these fixed assets and at the same time increase net income to a level that will provide sufficient income 93 for family living. Therefore, the marginal decision to expand may be a prudent one for many farm Operators . From a lender's point of view, modernization and expansion by established beef feeders could amount to loan requests of substantial magiitude by 1980. Suppose, for instance, that a corpletely debt free Operator has been feeding “50 head per year in an open lot system. He owns 500 acres Of land and all the machinery to work it . To provide a unit large enougl so that his son can Join the business, he builds a new controlled environment setup that will tie in with his old unit and allow him to feed 900 head per year. For additioral feed storage, he also builds two new 30-foot by 70-foot silos . The total new invest- ment would be over $125,000 . Further, if the Operator used short-term credit for feeders and other Operating expenses , he would need almost $150,000 on a short-term basis alone. In conclusion, even though this operator has substantial firancial muscle and should not have difficulty repaying the loan, the sheer magiitude Of the financing required could create problems for some lenders. By 1980, situations similar to the one described above will be common. They will not require liberal credit terms. They will not be high risk loans. They will simply be loans in excess of one quarter of a million dollars to one individual which, by itself, could cause serious problems for lenders in 1980. 6 . ll 6000—Head Beef Feeding Operation The real expansion in beef feeding in the next ten years may come from units organized in a similar fashion to the 6000-head operation synthesized in this study. The future units may be 1000, 10,000, or even 100,000 or more head. They may be aptly classified as beef fac- tories that specialize in producing beef and leave the production of 9“ feed to other members of the farm economy. The 1980 synthesized 6000—head unit has a total investment Of about $730,000 which is less than 20 percent higher than the 900—head Operation discussed previously. All feed, including corn silage, is purchased. The Operation has the capacity to produce a high sales volume in relation to the investment involved. Fer instance, the 6000—head unit has ad- Justed gross sales (gross sales minus purchased feeders) Of over one and one quarter times the total investment. This is in contrast to the 375+head analyzed previously where annual adjusted gross sales were only about 20 percent of the total investment involved. The 6000-head Operation is an Open lot Operation with fence-line feeding. Roughage is stored in horizontal silos and concentrates are purchased on.a weekly basis and stored in bins in a feed distribution center. The machinery complement consists Of only feeding, manure handling, and forage harvesting equipment. Detailed budgets including labor requirements, investments, and income and expense statements are included in Appendix Tables C.10, D.9, and E.3 respectively. 6.4.1 Possible growth paths There may be at least fOur sources Of 6000-head or larger beef feeding Operations in 1980. First, many individual farmers or partner- ships that have fed cattle on a smaller scale for years may be building these types of units by 1980. The importance of this group will depend on many factors, the most important of which is the availability Of satisfactory forward contracts. As will be demonstrated in the analysis, the risk involved in feeding cattle in a system similar to the synthe- sized 1980 6000-head Operation is simply too great for individual Operators unless a market and a price can be assured in advance. 95 A second source Of this type of Operation may be nonfarm business— men Or goups Of businessmen who enjoy being connected in some way with a farming enterprise . This goup could be substantially more important by 1980 , especially if the profit potential of large-scale beef feeding appears to be promising. Ownership will be on an absentee basis with all maragement and labor being hired. A slight deviation from this arrangement could involve farm Operators who have included ronfarm businessmen in their beef feeding Operations as a source of firancial backing. A third source of 6000-head or larger beef feeding Operations in 1980 will be feedlots that feed cattle almost exclusively on a custom basis . Custom feeding has been important in the Southwest for some time, but as yet, it has not been develOped on a large-scale basis in the Midwest . With effective promotion, this type of arrangement could become important by 1980 . It could provide more peOple , both farm and nonfarm, with a "piece of the action, " thereby spreading the risks involved in cattle feeding. last, but certainly not least, many beef feeding Operations of 6000 or more head by 1980 will be owned and Operated by feed and packing companies that have integated either forward or backward (or both) in the production process . It is almost certain that this goup will be an important source of fed cattle in the Midwest by 1980—the biggest unanswered question concerns Just how important . If independent beef feeders fail to find effective means short of integation for combating the risk involved in large-scale , high investment beef feeding, a large share of the cattle in the Eastern Corn Belt could be fed by large, integated companies by 1980. 96 6 . 14 . 2 Financing needs When discussing the possible financing needs of 6000-head beef feeding units in 1980, it will be assumed that the unit is owred and operated by three partners who led been previously feeding cattle on a small-scale basis. They are forced to expand, and rather than in- creasing the size Of their existing independent Operations , they have ageed to sell out, pool their assets, and build a modern 6000-head feedlot . Further, assume they have negotiated a contract with a. large packer that specifies that the Operators will supply the packer with 500 head per month of medium choice steers averaging approximately 1000 pounds per head. NO less than 100 head, but no more than 125 head will ‘ be delivered to the packer every Friday morning before 8 :00 a.m. Penalties are established for not fulfilling the terms of the contract . Finally , the contract specifies that the packer must quote a monthly price nine months in advance which the feeder can either accept or reject. Since the feeder would know the price he would receive for each lot of cattle before he put them on feed, he could avoid situ- ations where the return from the cattle would rot be sufficient to cover variable costs. The variable costs in the situation budgeted are $2ll.22 per hundredweight which includes an allowance for death loss . This figure does rot , however, take into account the fact that the price of feeder cattle may be higher than the price of fed steers . A $2 negative margin would add another $9 to the variable cost per head if ABC—pound calves are being fed. With an average annual price for 1000-pound steers of $30 per hun- dredweight , the 6000-head Operation has good profit potential . At this price, the before tax return on investment is about 11.8 percent. Net 97 income and, therefore, return on investment is very sensitive to changes in the price of beef. Every $1 deviation from the $30 average price means $60,000 to the Operation. For instance, if fat cattle were $35 per hundredweight, and everything else remained constant, the return on investment would be 63.8 percent. Likewise, if fat cattle were $25 per hundredweight , the Operation would fall over $163 , 000 short of covering variable costs . When the profits are this sensitive to rela- tively small changes in beef prices, some method of assuring a price in advance must be employed if a substantial number of individual farm Operators are to feed cattle on this type of a unit in 1980. This beef feeding Operation would have a need for a short-term line of credit approaching one million dollars . About $650 ,000 of feeders would be in the lot at all times . From a lender's point of view, finan— cing the feeder livestock on this Operat ion would be quite different from financing cattle for farm Operators who gow their own feed . In the latter case, because of weight gain, the cattle increase in value even though the price may decrease substantially . But when large amounts of financing are needed for feed also, the risk involved in the short- term credit is much higher. If lenders were to require that the Opera— tors have sufficient cash to cover expenses other than cattle, this could require up to one quarter of a million in cash which few partner- ships could handle . With forward contracts , however, lenders could krow in advance whether receipts would cover variable costs, and could reduce risk by having contract payments assigned directly to them. What size of intermediate-term financing requirements might a 6000-head beef feeding Operation have in 1980? This, Of course, de- pends on the financial positions of the individuals who own the operation. 98 In general, the unit has good repayment capacity as long as cattle prices stay around $30 per hundredweight. Table 6.1 shows an analysis of annual repayment requirements assuming various combinations of down payment and amortization periods . With lengths Of repayment of 7 years on machinery and 15 years on the feeding facility (including land on which it was built), the partners could meet annual repayment require- ments even if they financed the entire investment of $730,12Ll. With the same lengths of repayment , depreciation alone would cover the annual payment if the Operators had a 50 percent down payment . Annual repayment obligations , assuming various financing arrange— ments , have been plotted in Figure 6.1. This illustrates the rela— tionships and trade-offs between length of repayment and equity from the standpoint of annual repayment on the 6000-head unit. First, the g-aph shows that as equity increases , liberalizing lengths of repayment has a smaller and smaller effect on the absolute anrmal payment. For instance, with 50 percent equity, going from a 3- and 7-year to a 10- and 20-year repayment schedule for machinery and feeding facilities respectively, decreases the annual payment by less than $110,000. In the same situation, only with zero percent equity , liberalizing the repayment terms means almost $80,000. The trade-offs are also illus— trated by the fact that partners with no equity, but terms of 10 and 20 years on machinery and feeding facilities respectively , would have almost the same annual payment ob ligation as a situation with 50 per- cent equity but only 3 and 7 years respectively on machinery and feeding facilities . The point to be made here is that, if price risks can be controlled within reasonable limits by 1980 , many independent farm Operators and 99 .zao>aoomammp Havoc new mmapaaaomu wcaammm ammn .anmcanoms on gamma 9 new .m .zmmcoapmfi>mpnna one .m (820 pan» 3 $3333 window moon 98 3820.9: :0 Baggage 95:53 :38 emancoohma on momma 0.3.3 on» no mam can: Puma m5 wcodm moocmsgm moans: can. . m .pmago pmnu_ca mmfipaaaoau maanmmm come now apocanqme co unashamn go.“ who?» no .895: on» on .8me manna on» no no» on» mmonom mmocogom access one .H "mmpoz .xooumm>aa wcaosauca poz \H Hmmamm who.oay mmo.mm map.me mmo.mmm moo.mom a mam mm mmmqem macaw: cam Hm aam mam pamwmam a omuom wma.e Xmae.m eo:.HH mao.ea mam.m: mam.ma, z oma.am oommmm . mm «won m m.mm H J«,e a momwma mmmdmz mom Hm owe me New mum mam ma: m mmnmm lame «a.m.: mgr: Rama Swarm} mama. z mme.o . q 0H . mac. NHH. m 9 Km mm m3 S N: mm mm: 03 mom mm HQ mam m 073 mam.ma onewma mmm.om Ham.am moa,m Hmmtaw 2 Hae.me sma.mm mso.maa mmo.mma o amawoma a omo.mo wmm.ae mmm.mm mme.mmfl o :mommmm a o n o mam.ma mma.ea :Hm.mm m:m.mm o omo.am 2 \H apfisum wcaoqmcam om u OH ma um» OH u m a r.m Hmuoe Hanna pausema_czoa moofinma coaumuflhogm paw pagan EEO no 23 ugbsoo gonna.» magmas :ofimnmao magma.“ noon 33:88 no.“ maggot.“ ”Egon dag mo flag H6 3nt lOO .mao>fiuomammp mOfipHHHomm wcamomm moon new mLOCHnomE co pcoeemamp pom madam mo nonezc on momma mommnpcmnmo CH mucoszz “Opoz Aoooawv coHpmeHOo pcosemamm dmzcc< omH omH 03H OMH omH . _ h - 1 - OHH OOH om om ON 00 cm on om ON CA b h b b - d 4 d 1‘ r fin cl 0 :0: ibm Amanwv Aomloav zpfisvo unmopmm c2358 magma.“ moon came so coaummfiano pcoazMQop Hansen on poogmmn spa: mpfisvm cam pcoezmqop mo camcoa :mmzpmo gmwmwwmpm. H.m mnsmfim 101 partnerships could establish Operations similar to the 6000—head unit analyzed above. The equity requirements will not be prohibitive if lenders will allow Operators to repay loans over a period that is at least close to the eXpected life of the item being financed. Further, it may be mutually beneficial to both the lenders and farm Operators if a repayment arrangement could be worked out that was based on average cattle prices in a given year. In years when cattle prices averaged $35 per hundredweight , the arrangement could call for an annual payment of 200 percent of normal established amount. Similarly, with prices below $30 per hundredweight , farmers would pay somewhat less than. 100 percent of the normal annual payment . This type of arrangement could become much more feasible by 1980 if, through forward contracts, wide fluctuations in cattle prices can be eliminated. In summary , the profit potential for a highly leveraged Operator on a 6000-head beef Operation could be tremendous by 1980. Moreover, with $30 per hundredweight cattle and reasonable repayment terms , the unit can generate sufficient repayment capacity to handle a very low- equity situation. But the big question still rexnains--can risks be controlled sufficiently well by 1980 to make such an Operation feasible? Given conditions in cattle feeding today, one bad year could bankrupt a cattle feeder on a 6000-head unit that purchases all feed, even though he may have substantial equity in his business. If this en- vironment is not changed by 1980, large-scale cattle feeding in the Midwest will shift from individual operators to large integrated firms that have a more effective means of cOping with risk. CHAPTER VII IMPLICATIONS OF SYNI'HESIZED 1980 UNITS FOR FARMERS AND LENDERS 7 . l 1980 Dairy Farms The analysis of the synthesized 1980 dairy operations leads to one conclusion—prOperly organized 1980 dairy units have trelendous profit potential . A priori , economic reasoning would lead one to conclude that with this kind of profit potential, more units will enter dairying by 1980 and drive milk prices downward. To a certain degree, such a conclusion may be valid. But there are at least two reasons why it was assumed in this study that milk prices will show a modest increase rather than a decrease between 1970 and 1980. First, dairy farmer cooperatives such as Michigan Milk Producers have gained considerable bargaining power in the last few years and all indications are that they will be even stronger by 1980. Should it became necessary, these organizations may have the power to initiate production controls or use other means to assure that milk prices remain favorable. Second, and perhaps more fundamental, there are many natural barriers to entering the dairy business. How marw farmers aspire to enter dairying in a big way even if it is profitable? How many individuals have the ability to manage a highly complex 1000- or even an 80-cow dairy Operation? How many individuals interested in dairying have tre financial resources to establish a large, highly efficient dairy Operation even if low-equity financing is available? On the negative side, dairy products will face increased competition from nondairy substitutes by 1980. The competitive pressures from synthetic substitutes , however, appear to serve more as a deterrent to substantial price increases than as a force that will 102 103 lower future milk prices . New techrologies have probably decreased supply response or, in other words , decreased the elasticity of the supply curve for milk. In the past, it was not a major decision for a dairymen to keep or cull 1| or 5 extra cows , depending on whether the price looked favorable or unfavorable. Modern, highly specialized units, however, are not conducive to expanding or contracting a few cows at a time. ‘Ihe alter- natives facing an operator contemplating expansion may consist of either expanding by 50 cows or not expanding at all. This is no longer a minor decision; therefore, the "in" and "out" aspect of dairying is rapidly becoming a thing of the past. The fact that a modern dairy Operation requires expansion in lumps rather than a few cows at a time has implications for lenders in 1970 and may have even more serious implications for lenders in the future . At present, there are nary dairy systems where it would be uneconomical to add facilities for less than 50 cows at a time. In the twenty-first century (or before, according to some individuals) when computers are milking cows, the 50-cow munimum expansion may have increased to 500. This is important because expansion in large Jumps requires substantially more external financing than growing a few cows at a time. For an Operator who now has 100 cows but who wants to be milking 1000 cows in 1980, is expanding in 50-cow units an optimal expansion path? An argument could be made that there are substantial economies to be gained from expanding all in one step. Financial constraints, however , often prohibit such a path even if there are substantial econo- mies to be gained from such a move. Could the financial constraints be loosened? 'Ihe financial analysis of 1980 dairy farms has shown that 1014 a low-equity dairy Operation is feasible if lenders will only provide financing with realistic repayment periods . This means setting up amortization periods that correspond more closely with the expected life of the capital item being financed. Further, the notion that farm operators should follow a path that will make them debt free at some point in their lives may have to be abandoned. Many large manu— facturing concerns use perpetual debt, why shouldn't farmers? When firancing rapidly expanding dairy farms in 1980, two problems may be particularly crucial to lenders. First, a lender observes an individual or partners doing an excellent Job of managing a 200-cow dairy Operation. Does this mean they will do an equally commendable Job of maraging a 1000-cow herd? The Peter Principle [1&8], which sug— gests that every manager ultimately rises to his level of incompetence, may apply here . Operators are often expanding to units that are larger than they have ever maraged before . Given the high cost of a mistake for large , highly leveraged dairy operations , evaluating an Operator's managerent ability before a unit is in operation can be a real problem for lenders . A second problem for lenders contemplating firancing large dairy operations in the future is the problem of large investments in highly specialized intermediate-term capital. A dairy facility may account for one third of the total investment on a specialized dairy farm when an Operator owns sufficient land to produce all of the feed for his herd. If a large proportion of the land is rented, the dairy facility may account for an even larger proportion of the total investment . The problem arises because the facility assumed on the 200-cow dairy Opera- tion, for instance, may be worth $200,000 to the partners building it. 105 But what is the facility worth if the partners were to default? With land, if an individual defaults, there is seldom a problem of selling the land to salvage the full amount of the loan. A highly specialized dairy facility, however, may have few buyers and as a result , salvage value in case of difficulty may be only a fraction of the origiral cost . As was mentioned earlier, lenders currently prefer to tie the financing for dairy facilities in with long-term land firancing. This may be an acceptable arrangerent if an Operator has substantial equity built up in land. In 1980, however, firancing for dairy facilities may have to stand on its own. To attain an efficient sized dairy unit with limited equity, farmers may be forced to purchase more of their land on contract . Further, they may rent large proportions of their land or even buy all feed rather than use their limited equity on land and machinery. These alternatives would be more feasible if arrange- ments could be worked out so that dairy facility financing would not have to come under the umbrella of land financing. Lenders canrot be criticized for not providing 90 percent firancing on a facility that could possibly be salvaged for only 50 percent of new cost one week after it' 3 built. Would some sort of federal mortgage insurance similar to trat provided by the Federal Housing Administration be feasible for highly specialized capital investments? Given the profit potential of 1980 dairy Operations , the incidence of failure would probably be small so the cost of such a program could be mpt at a minimum. From a lender' s standpoint, risk is concentrated when large loans are involved, so even though the probability of failure is low, the cost of one mistake may be too high to take the chance. A federally administered insurance program would have the potential to 106 spread risk at a cost that would not be prohibitive to farm Operators . A source of financing for large dairy Operations that was not con- sidered in the previous aralysis is merchant and dealer credit . Risk could be spread by having the silo dealer finance the silos , the con- struction company finance the dairy housing, the local dealer finance the milldng equipment, and so on. Some companies are convinced that to sell their products to farmers in the future, they may be forced to provide large amounts of financing. This approach has nary advan- tages , but it also has one large disadvantage. Who will coordinate the efforts of each of these sources of credit? If each acted indi- vidually , the end result on a low-equity Operation would be a hodge- podge of credit terms that no one , including the farm Operator , could live with. But if a banker, for instance , were given authority to ad- minister and coordirate the terms provided by the various sources , per- haps a package could be worked out that would spread risk and still be within the limits of a farmer' s repayment capacity . Without such a coordination effort, a "split-line—of-credit" holds little promise as a tool to allow a farm Operator to take full advantage of his limited equity. The analysis of the synthesized 1980 dairy units also has implica- tions for farm Operators . The investments involved in even the 80—cow herd are larger than the average investment of most individually owned nonfarm businesses. Dairying in 1980 will be big business, and it must be Operated accordingly. To obtain financing similar to the liberal arrangements analyzed on the synthesized units , farm Operators will be forced to relinquish part of their independence and accept closer supervision. Detailed records are a necessity , and further, monthly 107 progress reports may be essential on some highly leveraged Operations . The days of "I'm too busy in the field to bother with records this mont " will definitely be a thing of the past by 1980. Farm Operators must realize and be willing to accept the risks involved in a large, highly leveraged dairy operation. Not all farm Operators are equipped to handle the pressures of a heavy debt load. EXpanding to a modern 1000-, 200-, or even 80-cow dairy operation is a big and somewhat irreversible step. It is imperative that farmers recognize the implications of such a move before taking action. Finally , an exogerous factor—namely pollution control—could seriously affect large dairy farmers by 1980. What if laws are enacted in the rext ten years requiring all dairy operations of over 200 head to have manure drying facilities? Such an event could raise costs considerably and serve as an important deterrent to large-scale dairy farming by 1980. In short, as dairy farmers plan their expansion strat- egies for the '703 , they must be aware of possible exogenous factors that could seriously affect the profitability of their businesses . 7.2 1980 Cash Grain Farms The aralysis of the synthesized 1980 cash grain farms presents a rather dismal outlook for cash grain farmers of the future. Because costs are expected to increase at a more rapid rate than yields and prices, cash grain farming by 1980 could be the epitome of farming units affected by the price-cost squeeze. It should be kept in mind, however, that the conclusions of this analysis are very sensitive to the assumptions employed. The assumptions concerning 1980 prices , 108 yields, etc. are based on the best information available at the present time. But ten years is a long time in the future, and mary unantici- pated events could substantially alter the situation by 1980. If, for instance, top-notch cash gain farmers in 1980 can average 150 bushels of corn per acre rather than the 125 bushels assumed in this study, the conclusions would be quite different. Similarly , $1. 25 per bushel rather than $1. 00 per bushel corn or $500 per acre rather than $7ll0 per acre land could also alter the conclusions. Cash gain farmers may be faced with a serious dilemma by 1980— small profit margins may force them to expand on the one hand but limit their expansion on the other. To obtain a unit large enough to provide an adequate level of family living, cash gain farmers may be forced to eXpand. But eXpansion may require a heavy debt load , and the repayment capacity of cash gain farrms may not be sufficient to meet the annual repayment obligations implied by large amounts of external firancing. One conclusion of this analysis is that most cash gain farmers of the future will not be able to expand on a large-scale basis via the ownership route . Given the economic relationships assumed , the cash g-ain farmers are simply not able to generate sufficient repayment to service large debt loads on a low-equity basis . One of the reasons for poor repayment capacity is a low return on investment. The second reason revolves around the fact that a large proportion of total in- vestment on cash gain farms is in land. All payments on land must come from net income, and if net income is low, land will not generate its own repayment . An example will illustrate the problems involved in repaying large loans on land. Suppose a 1980 farm Operator is able to borrow money 109 to buy 320 acres of good cash grain land at WHO per acre. At 7 per- cent interest and a 30-year amortization period, the annual payment would amount to $19,084 . Real estate taxes would run another $9.25 per acre or $2960 per year. To repay taxes, principal, and interest without using outside income, an Operator would have to net almost $69 per acre which will be almost impossible, given the prices and yields proJected for 1980. Taking the aralysis one step further, suppose cash gain farming could be expected to net only $25 per acre after all taxes in 1980. Further, suppose the above Operator needs $11,000 for family living, and flat all other loans he has outstanding are self—liquidating. In this case, Just to repay principal and interest on the 320 acres and provide for family living, he would need a total of over 1200 acres . In other words , the operator would need to own 880 acres of land free and clear. His equity in land alone would amount to over $650,000. This example is an oversimplification because it ignores the fact that there are more ways to supplement income than Just owning land. But it does illustrate the type of problems facing farm operators who atterpt to buy land in 1980. An outside source of income may be essential in order to meet annual principal and interest payments if (1) land is purchased on a low-equity basis and (2) land prices continue to appreciate. The aralysis of the synthesized 1980 cash gain farms indicates that, in all probability, absentee ownership will be the domirant tenure arrangement on cash gain fame in the future. Most farm Opera- tors cannot possibly own all of the land needed for an efficient sized Operation. This brings up a serious question: who will own land by 1980? The bulk of the land in 1980 will be owned by older farmers who 110 have accumulated it through time or by younger farmers who have in? herited it. Also, some land will be owned by nonfarm peOple who have either inherited it or purchased it using nonfarm income. There may be some problems inwolved in transferring control of the land resource from.those who can affOrd it to those who can operate it efficiently by 1980. Custom farming, crOp share leasing, and caSh renting will all be important tools in this transfer process. From.a lender's standpoint, considerably more financing will be needed by operators who own little or no land by 1980. Requests fOr Operating loans of $100,000 and larger may be common by 1980. There may also be many machinery loans of up to one-quarter million dollars . The important point is that many of these large loan requests will not be backed by large equities in land. The argument that long-term lenders such as Federal Land Banks could help farmers by offering 90 rather than 60 percent loans on land is not borne out by analysis of the synthesized 1980 cash grain farms. Rather, the analysis has shown.that, in many cases, even a 60 percent loan may tax an Operator's repayment capacity. Changes such as higher product prices, higher yields, lower land prices, or lower interest rates could substantially alter this conclusion, however. One canft help but wonder about the macro adjustment implications of the synthesized 1980 cash grain farms. Given the low returns realized on these synthesized units, will land prices continue to increase at 3 percent or more per year? Farmers often think of return on investment in terms of what they paid fOr the land rather than what it is worth. USing this somewhat misleading approach, returns can appear reasonable. But as land is transferred at a higher price, the return a buyer can 11.1 expect from an investment in land may be very low. Perhaps the recent slackening of land prices is more than a short-term response to high interest rates . If appreciation in land values were to cease , there would be even less incentive to own land. Farmers would no longer "live poor and die ric "--rather they world "live poor and die poor." Most people have come to the point of accepting appreciation in land values as a fact of life. If this trend were to cease or be reversed, it could have serious implications for farming in 1980. Some policy makers are talking in term of 65 cent corn by 1980. Based on the results of the synthesized farms of this study , cash gain farmers could simply not make a living at this price. Even at $1.00 per bushel, expected returns are relatively lov. From the standpoint of a young Operator who is considering entering cash gain farming in the rext ten years , do the eXpected returns Justify the risks involved? Using financial leverage in land as a means of rapid gowth does rot appear to be feasible for cash gain farmers. Repayment capacity will likely be limiting. The best strategy for young farmers may be to use their limited equity to purchase machinery and forget about owning land. Then they can either rent large quantities of land or farm completely on a custom basis . 7.3 1980 Beef Feeding Operations Three interdependent uncertainties make it extremely difficult to analyze the possible financial strengths and weaknesses of beef feeding Operations in the Eastern Corn Belt by 1980. They are (l) corpetition, (2) integation, and (3) risk. Will Midwest feeders in general, and Eastern Corn Belt feeders in particular, be able to compete 112 with the huge feedlots in the Southwest by 19 80? Will large packing, feed, or retailing firms integrate into the production stage on a large— scale basis in the Eastern Corn Belt by 1980? Will independent beef feeders in 1980 be able to eliminate or at least control price risk via forward contracts? Any _ conclusions arrived at concerning the financing of 1980 beef feeding Operations must be tempered by these three considerations . Most studies have shown that Midwest beef feeders will be able to compete with their cousins from the Southwest. One can't help but wonder, hovever, how Operations feeding 300 head of cattle can Compete with Operations feeding 300 acres of cattle. Similarly, the $200 per head versus the $110 per head capital investment raises serious questions . No matter what the studies show, the competition from the Southwest and West will have a noticeable effect on beef feeding in the Corn Belt in the next ten years. Mary farmers may follow the old adage that "if you can't beat them, Join them." This may lead to many units of 1000 or 5000 or more head fed per year. Investments in housing and feeding equipment per head may be considerably lower than the $200 mentioned above . Further, to lover total investments requirement , feed may be purchased rather than gown. There are definite ecoromic incentives for market coordination in cattle feeding which were discussed in: an earlier chapter of this study . As yet, however, it has not been determined whether forward contracts that specify such things as timing, quantity, quality, and price repre- sent sufficient market coordiration to capture most of the ecoromic advantages stemming from coordination. If forward contracts are suf~ ficient, independent cattle feeders will be an important source of beef 113 in the Midwest for some time to come. If not, integation may prevail in cattle feeding with the production, processing, distribution, and perhaps retailing stages all under the ownership and control of one maragement. At an extreme, the beef feeding industry could become integated to the point that no open market for live beef would exist . If this happens, the problem of financing cattle feeding will be han— dled on Wall Street, not at the local bank, PCA, FLB, or insurance company. Finally , independent beef feeders in the Corn Belt must find effective ways of cOping with price risk if they are to feed cattle on a large-scale basis in 1980. When a price drop of $5 per hundred can make a $300,000 difference ininet income as it does on the 6000-head unit synthesized in this study, risk must be the primary consideration. Farmers may be faced with a dilemma in the next ten years . They need to expand in order to provide a satisfactory income for their families . Yet, to expand may mean exposing themselves to a situation where a $5 per mndredweight drop in cattle prices could wipe them out financially . This type of dilemma could force many independent operators out of cattle feeding and many integated units into cattle feeding in the next ten years . The high investment, highly efficient 375— and 900-head per year Operations do rot appear to be the answer for young, low-equity beef feeders in 1980. The investment in relation to sales volume is simply too limiting. These units will have to show substantial advantages in rate of gain, feed efficiency , and labor requirements if they are to become important by 1980. Even established Operators who build these highly capital—intensive '2 11A beef feeding units in 1980 could cause problems from a lender's stand- point. Lines of credit, including short term, ranging from $100,000 to $300,000 could be common. Loans of this magnitude, even though they may be relatively secure, must necessarily be treated different 1y from an equally secure $20,000 loan. Provided price risks can be controlled, the real expansion in cattle feeding in the Eastern Corn Belt in the next ten years could come from units organized in a similar fashion to the 6000-head opera— tion analyzed in this study. This unit has tremendous profit potential and repayment capacity with favorable cattle prices . Further, the unit has a considerably smaller investment per head and a much more rapid turn over than the smaller units previously analyzed. On the negative side, however, changes in pollution control laws could ad- versely affect the trend toward large cattle feeding Operations . From a lender' s standpoint, the trend toward these types of units could have serious implications . How nary Corn Belt lenders have had experience with feeder cattle loans of over one million dollars? How mary have financed large rmmbers of cattle when the feed is purchased rather than raised? Analyzing a loan request for a 6000-head operation may require a team of experts all trained in different aspects of establishing a beef feeding firm. Few, if ary, lenders in the Corn Belt currently have access to such a team of experts . In short, if the risks of cattle feeding can be reduced by ary means short of complete integation, independent farm operators could be feeding cattle in a big way in the Eastern Corn Belt in 1980. They would require substantial firancing, different in both type and volume from what is common today. However, if price risk cannot be reduced, 115 independent farm Operators will likely be unable to expand to large— scale beef feedlots by 1980. Numerous smaller operators may continue to feed cattle but the problems of building and financing large-scale feedlots may fall on Wall Street . 7. ll General Implications The analysis of individual sizes and types of farming Operations that may be important by 1980 has some general implications for farm lenders as they plan their strategies for the '70s . First, the "broad brush" approach to establishing lending policies and procedures will not work on 1980 farms. Each size and type of farming unit will have characteristics that are unique from a financing point of view. A comon policy, for instance, of 50 percent down on land may be too lib— eral for some cash gain farms in 1980 but too restrictive on many dairy farms . The sheer magnitude of expected loan requests may substantially alter the traditional financing picture by 1980. For instance, it may be ridiculous to study how country banks will alter their policies and procedures to finance low-equity 1000-cow dairy or l1000-acre cash gain Operations in 1980. Even if there were no legal barriers , the first obligation of these banks is to the safety of their depositors' money. To engage in a loan that could close the bank's doors in case of default would not be prudent . This does not mean that large—scale farm Operators will not be able to obtain firancing from commercial banks in 1980. Rather, a small number of large banks—perhaps only 10 or 15 in the entire state of Michigan—will engage in large, low-equity agicultural loans. These banks will employ highly trained specialists who are qualified not only 116 to aralyze large loan requests , but also to advise and supervise farmers who have large loans outstanding. Further, these Specialists may pro- vide technical and financial counseling to farmers who are contemplating large-scale expansion. Where do country banks fit into the financing picture in 1980? Actually , country banks can continue to provide a useful and worthwhile service to farming communities without becoming involved in huge loans . Firancing modern and highly efficient units such as the one- and two- man units considered in this study could be a highly profitable venture for country banks in 1980. These units , however, will likely require more firancing, more liberal terms , arri more services than most country banks currently offer. For instance, to provide sufficient financing for an Operator who is considering expanding from an 80-cow to a 200- cow operation, country banks may have to seek outside assistance. One possibility is to solicit participation by a city correspondent. Another may be for country banks to work out arrangements among themselves to pool risks when relatively large loans are involved. Country banks will also need to reconsider their policies and pro- cedures concerning equity requirements and lengths of amortization periods . With nary l- and 2-man Operations requiring investments of around one quarter of a million dollars by 1980, it may be unrealistic for lenders to expect 80 or even 50 percent equity . On Operations with strong repayment capacity, low—equity loans may be quite feasible. When farmers are Operating in a low-equity situation, however , it is very important from a repayment standpoint that amortization periods are based on the eXpected life of the item being financed. Requiring dairy farmers , for instance, to repay machinery loans in 3 years and 117 dairy facility loans in 7 years may be too restrictive. Extending the terms to 7 years and 15 years on machinery and dairy facilities respec— tively may be more realistic. Finally, the days of analyzing, extending, and servicing loans from behind a desk are rapidly passing for country bankers. A team.of experts may be needed to adequately analyze and service relatively large loans on 1- and 2-man operations . Since few country banks can afford to hire such a team.on a full-time basis, perhaps they should consider hiring specialized consultants on a case—by—case basis. By 1980, access to such a.team may be an absolute necessity rather than a luxury. One other area where banks could provide an invaluable service to farmers in the future is firancial consulting. For instance, even though a.country bank may be unable to provide financing for a 1000- cow dairy unit or a 6000-head beef feeding operation, the banker may know of'a.group of enterprising businessmen who would be interested in such a venture. The banker could coordinate the effort fOr a fee and also may be able to profit by providing a source of Operating capi- tal for the Operation. Along this same line, bankers may also know of land fOr sale or rent in a community that farmers are not aware of. In short, country bank administrators have a decision to make in the next ten.years. They can continue to provide financing for highs equity Operators, many of which have marginal sized units, or they can be aggressive and progressive and finance Operators who have all of the prerequisites fOr a highly successful operation except equity. The position taken by the»maJority of country bankers could have a.substanr tial effect on the structure of farming in the Eastern.Coranelt in 1980. The trend toward large, highly specialized farming units also has 118 mary implications for changes in the Farm Credit System in the next ten years. FLBA's, PCA's, etc. will be facing requests for larger loans, more liberal financing terms, and more services than is currently the case. Perhaps as many as one half of the branch offices will be closed by 1980. Mary PCA and FLBA offices may be combined to provide farmers with one step credit. Finally, perhaps the FHA' s policies of liberal firancing terrm with close supervision can be extended to large commercial farming Operations as well as marginal units . The analysis of the synthesized 1980 farming operations has sug- gested that, in nary cases, 1980 farms will be able to support heavy debt loads on a low-equity basis . Lenders, however, cannot be expected to provide liberal terms without some form of colpensation for the additional risks involved . Large , low-equity farm Operators in 1980 will not be getting money for 7 or 8 percent interest if Other large businesses are paying 10 percent. Also, an increasing number of lenders will require compensating balances from farm operators who have large loans outstanding. Further, an increasing number of lenders will be requesting a "share of the action" by 1980 . In other words , lenders may extend low-equity loans if, and only if, they can participate in a share of the profits from the farming operation. This would provide lenders with an additioral return to cover the added risk involved . The size and complexity of anticipated 19 80 farming units suggests another area that will be very important from a financial point of view—estate planning. Lenders of the future will be reluctant to make long-term commitments on large farming Operations unless detailed 119 arrangements have been made to transfer the going concerns from one gereration to the next. Farming units are simply becoming too large for every generation to think of starting over again. Without proper planning, however , inheritance taxes could be so severe that a farming unit would have to be liquidated in order to pay the taxes . Lenders with a large stake in the future of a farming operation will be forced to put increasing erphasis on detailed plans to expedite transfer and insure the farming Operation remains intact from one generation to the next. Finally, the research has deronstrated the importance of controlling risk on large, highly leveraged Operations . If individual farm Opera- tors are to remain as the domirant producers of food and fiber in the United States, new and improved methods of controlling price and bio- logical risks must be erployed. More extensive use of futures markets , forward contracts , and more imagirative formal insurance schemes will all be important tools aimed at alleviating the problems of risk on large farming operations in 1980. CHAPTER VIII SUMMARY AND CONCLUSIONS 8 . 1 Review of Method and Procedure Nine farming operations were synthetically constructed to study the possible financing needs of typical farm operators in 1980. Tre specific operations were selected based on information gained from reading voluminous accounts of what the ag'icultural production sector will look like in 1980, from conversations with extension and research people in universities concerning future changes in the farming sector, from numerous informal interviews with research and sales peOple from ag'icultural input supply industries concerning how they envision ag-i— culture in 1980, and firally, from visiting numerous farm operations in the Corn Belt tl'at are currently using the latest in advanced tech- rolOgy. The hypothetical farming units represent what are believed to be sizes and types of farming Operations that will be important in the Eastern Corn Belt by 1980. They employ the most advanced technology proJ ected for 1980 , provided it is ecoromically feasible. Capital is substituted for labor on the hypothetical farms to allow a high level of labor efficiency. Also, the maragement ability of the Operators on the synthesized units is assumed to be well above average. In essence, the 1980 synthesized units can be thougmt of as "target" com- birations of resources for the sizes and types of farming Operations being considered. To anticipate and study possible firancing problems ani needs of the farming sector in 1980, a micro or firm level approach was erployed. Each size and type of unit constructed had certain characteristics that 120 121 made it somewhat unique from a financing point of view. Some rad even flows of funds throughout the year which lowered their Operating credit needs . Others had income only once a year which led to a situation where tremendous amounts of short-term firancing were needed. Some firms required large investments in intermediate-term item such as livestock handling facilities and machinery , but relatively small in- vestments in land. Others were highly land intensive, but did not re— quire large investments in buildings. Some required large quantities of inputs that were used up in the product ion process and therefore served as poor collateral. Others had collateral in a form that was actually increased in value in the production process . Access to re- sources via renting or leasing was more feasible on some Operations than on others . In short , the multitude of factors unique to each size and type of unit significantly affected their expected financing needs in 1980 . From a financing point of view, this was a micro—demand study with implications for micro-supply . Using realistic assumptions concerning growth paths and Operator equity positions, each 1980 unit was analyzed in term of its returns, repayment capacity, and risk-bearing ability. Emphasis was given to the total investment involved on the various syn- thesized fanning units . The proportion of the investment that could be realistically financed was studied using various combirations of down payment requirerents and lergths of repayment periods . The three fac- tors of returns, repayment capacity, and risk—bearing ability served as constraints to the amount of leverage that could be erployed on each type of Operation. It should be kept in mind that the conclusions of this analysis 122 are only valid in light of the assumptions employed. The assumptions concerning prices, yields, labor coefficients, etc. are based on the best information available at the present time with regard to agricul- ture in the Eastern Corn Belt in 1980. But ten years is a long time into the future, especially with respect to price predictions. There- fore, it is extremely important that the reader be cognizant of the assumptions employed before interpreting the conclusions. 8.2 Summary of Primary Results 1. The synthesized 80—cow dairy operation required an investment of almost $315,000, over two thirds of which was in dairy facilities. The biggest problem that fanm Operators expanding to this type of opera- tion in 1980 may encounter is obtaining large amounts of intermediate— term financing on a length of term that corresponds to a realistic estimate of the life of the capital investment. With reasonable lengths of repayment on machinery and dairy facilities, this unit has the poten- tial to support a heavy debt load and, at the same time, generate a high return on investment for the farm operators. 2. The 200—cow synthesized dairy unit may be ideally suited for partnership arrangements in 1980. The unit produces substantially more volume per operator with only a slightly higher investment per man than the 80-cow unit. Potential repayment capacity is strong even with low equity and a heavy debt load. As a result, this unit could be the epitome of highly efficient and profitable farming units that are or- ganized on a family farm basis by 1980. 3. The 1000-cow dairy operation synthesized in this study requires a 1980 investment of about 2.6 million dollars and generates gross sales approaching 1 million dollars. With $6.00 milk and average production .3 123 of 15,000 pounds per cow, the 1000-cow unit is extremely profitable. It would provide three partners who had only 25 percent equity with $11,000 family living per partner plus a before tax return of 30.8 percent on their owned capital. Further, with realistic amortization periods , repayment capacity would not be a constraint to Operating this unit on a low-equity basis . On the negative side , exogenous factors such as new and improved nondairy substitutes and more restrictive pollution laws could be quite detrimental to this type of Operation in 1980. A. The synthesized one-man cash gain farm has 6A0 acres and in- volves an investment of $561!,096, 814 percent of which is in land. Operators who aspire to go: to this size unit by 1980 via the ownership route would need substantial equity. Low-equity financing on this unit does not appear to be feasible because repayment capacity is limiting. By having off-farm Jobs and by sacrificing in terms of family living, mary operators will accumulate this size of unit by 1980. Because of appreciation in land values , these Operators may be typical of the often referred to farm Operators who "live poor and die rich. " 5. The two—man, 1680-acre synthesized cash gain unit suffers from mary of the same shortcomings as the one-man operation. The in- vestment involved approaches 1 . 5 million dollars and low-equity financing does rot appear to be feasible because of repayment limitations . Young Operators with limited equity will be forced to use renting and leasing extensively if they hope to assemble and control this combination of resources . An example was presented that showed how two enterprising Operators with only $50,000 cash could control 1.5 million dOllars of resources by renting all land and leasing all machinery. 124 6. Assembling a cash gain farm in excess of 14000 acres, such as the one synthesized in this study , will require substantial separation of ownership and control by 1980. The package of resources will require an investment of almost 3.5 million dollars which, in itself, is pro- hibitive for all but a select goup of wealthy individuals . With profit margins narrowing, farm operators may be forced to move toward this size of unit to capture substantial size economies. mantity dis counts and other size economies may mean the difference between profit and loss on cash gain farms by 1980. These large units will involve transferring the land resource from those who can afford it to those who can use it efficiently. By 1980, custom farming, crop stare leasing, and cash renting will all be important tools in this transfer process. These tools, rather than liberal firancing terms, may be the key to farm Operators who are expanding to large-s cale cash gain Operations in the next ten years. 7. The synthesized 375-head beef unit is an example of what could be the ultimate in the substitution of capital for labor in beef feeding by 1980. The unit requires total investment of over $275,000 with about $107,000 in the beef feeding facility alone. With $30 per hundredweight cattle, the facility has very little capacity to service debt . However, if the control led enviroment systems do prove to have substantial advantages in rate of gain, feed efficiency , and labor ef- ficiency , the profit potential on these units could be substantially higher. Even then, however , the investment on this facility appears to be too high to be considered by young farm Operators with limited equity who are trying to expand to an adequate sized beef feeding unit. 8. The 900-head beef feeding Operation synthesized in this study 125 employs a.combination of controlled environment and Open lot housing. The total investment is almost $600,000. Assuming $30 cattle and no advantage from the controlled environment system in terms of rate of gain and feed efficiency, the return on investment is only slightly over one percent. The low profit potential limits repayment capacity and makes it very difficult to build a strong case fOr'more liberal financing terms on this type of an Operation by 1980. As a result, this type of unit may be more important fOr older, established opera- tors who want to add to the size of their present setups and increase labor efficiency rather than for young operators who want to get the most volume from their limited equity. 9. The real expansion in beef feeding in the next ten years may come from units organized in a similar fashion to the 6000-head unit synthesized in this study. The 1980 investment is about $730,000, ‘which is less than 20 percent higher than the 900—head unit discussed previously. With fed cattle selling for $30 per hundredweight, the 6000—head unit has strong profit and repayment potential. In fact, with 7- and lS—year'amortization.periods on.machinery and feeding facilities respectively, Operators could finance the total investment involved and still meet annual payment obligations. The limiting fac- tor on this operation, however, may be risk. If cattle prices drOp to $25 per hundredweight, fer instance, the Operation would fall $163,000 short of covering variable costs and could be bankrupt in one year. On the Other hand, with $35 cattle, befOre tax return on investment would be 63.8 percent and an Operator could pay for the facility in a relatively short period of time. On this type of Operation, as with all large livestock operations, more stringent pollution laws could raise costs by 1980. 126 8.3 Suggestions for Further Research The current study combined nmrerous sources of information to synthetically construct sizes and types of farming units that are ex- pected to be important by 1980. However, the particular routes that operators could follow to reach these target units were not considered in detail . Information could be gained by a study aimed at bridging the gap between where farmers are in 1970 and where they are expected to be in 1980. The study could begin with the resource organizations specified in the current study. Using sore type of firm gowth model, a researcher could analyze in detail the factors that either accelerate or retard the progess of a farm operator atterpting to eXpand to the 1980 opera— tion specified. The study would provide insight into how various types of firancing arrangements affect firm growth, and also would provide additional information concerning the importance of various sizes and types of resource organizations by 1980. A shortcoming of this study revolves around the fact that 1980 prices were proJ ected on an independent rather tl'an a simultaneous basis. Can $1.00 corn, $6.00 milk, and $30 cattle all exist at the same time in 1980? Or will farm operators shift from one enterprise to arother causing price readJustment? There is a need for more fu- turistic research dealing with regioral and ratioral supply response to answer these and similar questions. Several other closely related macro adjustment questions are sug- gested by the current study . Will farm Operators continue to abandon dairy and livestock feeding Operations in favor Of cash gain even though the future expected return from the latter may be extremely low? 127 Can land prices continue to appreciate even if the expected return from land is decreasing? Will there be sufficient economic incentives to transfer control Of the land resource from.those who can afford it to those who can Operate it efficiently by 1980? Similarly, how can this transfer process be facilitated? Another area of research where additional infOrmation is needed concerns quantity discounts. What type of discounts can.large Operators expect to receive on such items as fertilizer and.machinery by 1980? With profit margins narrowing, these types of savings could be the difference between.profit and loss for some types of farms. Therefbre, if the discounts gained by large Operations in.the fUture are substane tial, the trend toward "superfarms" may progress at a much faster rate than most experts have predicted. What are the implications for farm.input suppliers of Operating in an atmosphere dominated by Operations such as the large, specialized units synthesized in this study? Similarly, what are the implications for agicultural marketing firms? Both farm input suppliers and agri— cultural marketing firms will, by necessity, be undergoing change in the next ten years. But the direction of this change is not well understood. Considerable research is needed in the area of new and improved methods of controlling the risks facing farm Operators. Can.fbrmal insurance schemes be worked out to insure machinery and equipment loans to large, highly leveraged farm.Operators by 1980? Can a.more widely accepted crop insurance program be established as a.means of combating risks? Will the trend toward more fOrward contracts be an effective means of controlling price risk? 128 Finally, there is a pressing need fOr more imaginative research concerning improved methods of financing farm firms of the future. HOW can existing credit institutions make themselves more responsive to the changing needs of farm.Operators? Are new and different insti— tutions needed for financing farm.Operations of the future? The next few years will be very challenging for farm.lenders. Their responsive- ness to the changing needs Of a changing farm.environment will have a very profOund effect on the structure of agriculture in the Eastern Corn Belt by 1980. 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Rep. 111:, Michigan State Univ. , East Lansing, June 1966. Nikolitch, Radoje. "‘Ihe Adequate Family Far-m—Nainstay of the Farm Economy," Agricultural Economics Research, Vol. XVII, July 1965. Official Guide, Tractors and Farm Equipment, National Farm and Power Equipment Deafers Association, St. Louis , Missouri, Spring 1970. Peter, Laurence J. and Raymond Hull. The Peter Principle, William and Morrow Co., 1969. "Preview of Corn in Illinois in 1976," Circ. 961, Univ. of Illinois Ag. Exp. Sta., Urbana, Feb. 1967. Rhodes, V. James. "What's Ahead for U.S. Agriculture," speech presented at 140th Annual Meeting of the National Council of Farmer Cooperatives, Jan. Ill-15, 1970, Washington, D. C. Rooney, W. R. "Financing the New Agriculture," Highligts , published by FLB and FICB, St. Paul, Mimesota, Feb.-March l9 0. Shaffer, James Duncan. "On Institutional Obsolescence and Innovation- Background for Professional Dialogue on Public Policy," Ame___r_-_ ican Journal of Agricultural Econcmics, 51: 2, May 1969 Speicher, J. A., D. Lyall MacIachlan, C. R. Hoglund, and James S. Boyd. "Labor Efficiency in Open Lot and Covered Free Stall Dairy Housing," Res. Rep. 107, Michigan State Ag. Exp. Sta., East Lansing, March 1970. The Farm Credit System in the '70s, the report of the Corrmission on Agricultural Credit, March 1970. The Fann Credit System in the '703, Appendix, the report of the Commission on Agricultural Credit, March 1970. [56] [57] [58] [59] [60] [61] 133 "The Way Cows Will Be Milked on Your Dairy Tomorrow," Sixth edition, Bobson Bros. Dairy Research Service, Oak Brook, Illinois. VanArsdall, Roy N. "Guides for Use in Planning Beef Feeding Systems," AE-39lll, Univ. of Illinois Ag. Exp. Sta., Urbana, in c00peration with FPED, ERS, USDA, Dec. 1963. "Labor Estimates for Beef Cattle in Drylot, " unpublished manuscript, FPED, ERS, USDA. "Labor Requirements, Machinery Investments, and m Costs for the Production of Selected Field Crops in Illinois, 1965, " AE-llll2, Univ. of Illinois, Urbana, Aug. 1966. . "Resource Requirements, Investments, Costs and Expected Returns fran Selected Beef Feeding and Beef taRaising Enterprises ," AE-11075, Univ. of Illinois Ag. Exp. Urbana, in cooperation with FPED, ERS, USDA, Sep. 1965. Wright, K. T. "Economic Prospects of Farmers," Project '80, Res. Rep. 147, Michigan State Ag. Exp. Sta., East Lansing, June 1966. APPENDICES APPENDIX A Price and Feed Input Assumptions 131-! Appendix Table A.l Price assumptions used in budgeting 1980 farm.Operations Item. Price Sell corn 1.00/bu. Buy corn 1.05/bu. Soybeans 2.25/bu. Milking cow 400.00/head Cull cow 200.00/head 2—day—old dairy calves 30.00/head urea 110.00/t0n 450# choice steer calves 32.00/cwt. 1000# choice steers 30.00/cwt. 64 percent beef supplement 120.00/cwt. SBOM 100.00/ton Buy corn silage (in field) 6.00/ton Milk 6.00/cwt. .egdwom mo #83 oocmfimoooqs dunno com 38 egawom "monsom .Boatmflae .8 a mm; a8 .mwmfiw E8 9 2 .E8 .3 03 do 86?. 332 \m Sea film mmlm 8.8m Boos I... 08.0% :| 89mg II 08.3 0.3m I 33 20mm ..I 08.03 nl ooo.mm II 08.2 0.03 \m 33 8.5 8m 89% NS 08.: 8 Sad 0.8 38 ES emflmam mg 08.3 m? oom.m E 8m; 0.3 E mwmflm Eco owe; 8w; :8 8m; mm 3% m: E 8&5 Bug a.m. 33 20% S Ed 58 828m oma fl mwmflm 58 m Am 33 apnea NH 35 E8 832m :2 \m 888 28 \m 888 EB \m 880: Ema “85888 mace. zooloooa meg zooloom mung soolow mpcmmwmwzom.» pong” comm .HmEEm CH owmgm: Una hounds 5m owmflm Eoo mafia: 300}on vane monsoo 08.9.. woéBmmm pogoomaown 98 303339: poem .33on 98 333 m.< magma awesoode. 136 .mHMg cowhocdom "condom Hmom Hm: mma women Hmuoe ll a mom 80mm H 9 cm om? H. 9 mm m.mmom 0: mm cememfldosm ofiopomd azw omma do ooomwa ooomm wzm so ommzm 0mm: moa so mHmoa m.mmom on m shoe coaaoom HN:H B mmmmm ooomm mam B mmwm 0mm: mm B mama m.mmom ca omma owwaam Chou cmmflsoon cohasvoh couscOho codaovoh cohH3don cmoScOAQ confi3dop cwhflsvoa cooscomm deem modem comm p30 modem comm uzo women comm p30 mo mucosa comm soapmnooo nm\co ooom cowpmaodo am\co oom COHuwhodo nm\co mum p30 mom Anmmow moaono .QH oooa wcaaamm cow pocomm .oH om: one: woaonmomv pooeoadozm campomo «no can .cnoo cmHHonm .mwwafiw shoe wcam: whoopm oofiono pom cocoa comm m.< £89 58% APPENDIX B Basic CrOp Budgets Note: Numerous sources were used as benchmarks when constructing the 1980 crop budgets contained in this appendix. Two studies used extensively were Connor [2“] and VanArsdall [59]. Appendix Table 8.1 variable cost (excluding labor and interest) 137 of producing corn using 4—row equipment Item Unit Cost/unit Quantity Cost/acre Seed bu. 20.00 .25 5.00 Fertilizer Anhydrous ammonia 1b. .035 140 4.90 60% Muriate of potash 1b. .025 125 3.13 46% Superphosphate lb. .0375 165 6.19 Lime acre 1.00 1 1.00 Herbicide lb. 3.00 2 6.00 Insecticide 1b. .30 5 1.50 Power and machinery repair acre 2.00 1 2.00 Fuel, grease, oil acre 2.21 1 2.21 Custom hire Apply anhydrous annnnia acre 2.00 1 2.00 Apply other fertilizers acre 1.50 1 1.50 Hauling bu. .05 125 _Q.2_5 Total 41.68 138 Appendix Table 8.2 variable cost (excluding labor and interest) of producing corn using 6—row equipment Item Unit Cost/Unit Quantity Cost/acre Seed bu. 20.00 .25 5.00 Fertilizer Anhydrous ammonia 1b. .035 140 4.90 60% Muriate of potash lb. .025 125 3.13 46% Superphosphate 1b. .0375 165 6.19 Lime acre 1.00 l 1.00 Herbicide 1b. 3.00 2 6.00 Insecticide 1b. .30 5 1.50 Power and machinery repair acre 2.02 1 2.02 Fuel, grease, oil acre 2.56 l 2.56 Custom.hire Apply Anhydrous ammonia acre 2.00 l 2.00 Apply other fertilizer acre 1.50 1 1.50 Hauling bu. .05 125 _Jigg; Tbtal 42.05 138 Appendix Table B.2 variable cost (excluding labor and interest) of producing corn using 6-row equipment Item Unit Cost/unit Quantity Cost/acre Seed bu. 20.00 .25 5.00 Fertilizer Anhydrous ammonia 1b. .035 140 4.90 60% Muriate of potash lb. .025 125 3.13 46% Superphosphate 1b. .0375 165 6.19 Lime acre 1.00 1 1.00 Herbicide 1b. 3.00 2 6.00 Insecticide lb. .30 5 1.50 Power and machinery repair acre 2.02 1 2.02 Fuel, grease, oil acre 2.56 l 2.56 Custom.hire Apply Anhydrous ammonia acre 2.00 1 2.00 Apply other fertilizer acre 1.50 1 1.50 Hauling bu. .05 125 _§_._2_5_ Tbtal 42.05 139 Appendix Table B.3 variable cost (excluding labor and interest) of producing corn using 8-row equipment Item Unit Cost/unit Quantity Cost/acre DfiEEurligzy Seed bu. 20.00 .25 5.00 4.50 Fertilizer Anhydrous anmonia 1b. .035 140 4.90 14.41 60% Muriate of potash 1b. .025 125 3.13 2.82 46% Superphosphate 1b. .0375 165 6.19 5.57 Lime acre 1.00 1 1.00 .90 Herbicide lb. 3.00 2 6.00 5.40 Insecticide lb. .30 5 1.50 1.35 Power and machinery repair acre 2.09 1 2.09 2.09 jFuel, grease, oil acre 2.35 l 2.35 2.35 Custom.hire Apply anhydrous ammonia acre 2.00 1 2.00 1.80 Apply other fertilizer acre 1.50 l 1.50 1.35 .Haulingjg/ acre 2.50 1 _g;§9. _iggz; Tbtal 38.16 35.04 l/ 10% quantity discount on seed, fertilizer, herbicide, and insecticide, and also on custom.rates for applying fertilizers. g/ Includes variable costs of running own equipment (labor, fuel, grease, oil, repairs). 140 Appendix Table B.4 variable cost (excluding labor and interest) of’producing corn using 12-row equipment Item Unit Cost/unit Quantity Cost/acre Dgigguig‘zy Seed bu. 20.00 .25 5.00 4.00 Fertilizer Anmdrous anmonia 1b. .035 140 4.90 3.92 60% Muriate of potash 1b. .025 125 3.13 2.50 46% Superphosphate lb. .0375 165 6.19 4.95 Lime acre 1.00 1 1.00 .80 Herbicide 1b. 3.00 2 6.00 4.80 Insecticide lb. .30 5 1.50 1.20 Power and machinery repair acre 2.11 1 2.11 2.11 Fuel, grease, oil acre 2.70 1 2.70 2.70 Custom.hire Apply anhydrous ammonia acre 2.00 l 2.00 1.60 Apply other fertilizers acre 1.50 l 1.50 1.20 Hauling 2/ acre 2.50 l .Jififll .Jififll Total 38.53 32.28 1] 20% quantity discount on seed, fertilizer, herbicide, insecticide, and also, on custom.rates for applying fertilizer. 2/ Includes variable costs of running own equipment (labor, fuel, grease, oil, repairs). 141 Appendix Table 8.5 variable cost (excluding labor and interest) of producing corn silage with 4-row equipment Item Unit Cost/unit Quantity Cost/acre Seed bu . 20 . 00 . 25 5 . 00 Fertilizer Anhydrous ammonia lb. .035 140 4.90 60% Muriate of potash 1b. .025 125 3.13 46% Superphosphate 1b. .0375 165 6.19 Lime acre Herbicide 1b. 3.00 2 6.00 Insecticide 1b . . 30 5 1 . 50 Power and machinery repair acre 4.22 1 4.22 Fuel, grease, oil acre 4.78 1 4.78 Custom.hire Applying anhydrous amnonia acre 2.00 1 2.00 Applying other fertilizer acre 1.50 1 1.50 Total 142 Appendix Table 8.6 'Variable cost (excluding labor and interest) of producing corn silage with.6-row equipment Item Unit Cost/unit Quantity Cost/acre Seed bu. 20.00 .25 5.00 Fertilizer Anhydrous amnonia 1b. .035 1A0 u .90 60% Muriate of’potash 1b. .025 125 3.13 46% Superphosphate 1b. .0375 165 6.19 jLime acre 1.00 1 1.00 Herbicide lb. 3.00 2 6.00 Insecticide 1b. .30 5 1.50 Power and machinery repair acre 3.94 1 3.94 Fuel, oil, grease acre 5.14 1 5.14 Custom.hire Applying anhydrous ammonia acre 2.00 1 2.00 Applying other fertilizer acre 1.50 l _;I£fll Total 40.30 143 Appendix Table B.7 variable cost (excluding labor and interest) of producing corn silage with 8-row equipment Item Unit Cost/unit Quantity Cost/acre (1:11:22 wig-l! Seed bu. 20.00 .25 5.00 4.50 Fertilizer Anhydrous ammonia 1b. .035 140 4.90 4.41 60% Muriate of potash 1b. .025 125 3.13 2.82 46% Superphosphate lb. .0375 165 6.19 5.57 Lime acre 1.00 1 1.00 .90 Herbicide 1b. 3.00 2 6.00 5.40 Insecticide 1b. .30 5 1.50 1.35 Power and machinery repair acre 1 4.23 4.23 Fuel, oil, grease acre 1 5.30 5.30 Custom hire Applying anhydrous ammonia acre 2.00 1 2.00 1.80 Applying other fertilizer acre 1.50 l _1;§Q_ 1.35 Total 40 .75 37.63 1/ 10% quantity discount on seed, fertilizer, herbicides, and insecticides, and also on custom rates fer applying fertilizers. 144 Appendix Table 8.8 variable cost (excluding labor and interest) of producing soybeans with 6—row equipment Item. Unit Cost/unit Quantity Cost/acre Seed bu. 6.00 1 6.00 Fertilizer 60%.Muriate of potash 1b. .025 125 3.13 46% Superphosphate 1b. .0375 110 4.13 Lime acre 1.00 l 1.00 Herbicide 1b. 5.50 1 5.50 Power and machinery repair acre 1.78 1 1.78 Fuel, oil, grease acre 2.71 1 2.71 Innoculation acre .75 1 .75 Custon.Hire Applying fertilizer acre 1.50 1 1.50 Hauling bu. .05 40 _i;£¥1 Total 28.50 145 Appendix Table B.9 variable cost (excluding labor and interest) of producing soybeans with 8-row equipment Item Unit Cost/unit Quantity Cost/acre £83m? 1/ Seed bu. 6.00 l 6.00 5.40 Fertilizer 60%.Muriate of potash 1b. .025 125 3.13 2.82 A6% Superphosphate 1b. .0375 110 4.13 3.72 Lime acre 1.00 l 1.00 .90 Herbicide 1b. 5.50 1 5.50 4.95 Power and machinery repair acre 1.94 1 1.94 1.94 Fuel, oil, grease acre 2.83 1 2.83 2.83 Innoculation acre .75 1 .75 .75 Custom hire Applying fertilizer acre 1.00 1 1.00 .90 Hauling g/ acre .85 1 .85 __;§5_ Total 27.13 25.06 71/ 10% quantity discount on seed, fertilizer, herbicides, and insecticides, and also on custom.rates fer applying fertilizer. 72/ Includes variable costs of running own equipment (labor, fuel, grease, oil, repairs). 146 Appendix Table 8.10 variable cost (excluding labor and interest) of producing soybeans with 12-row equipment Item Unit Cost/Unit Quantity Cost/acre d2868u82%l/ Seed bu. 6.00 l 6.00 4.80 Fertilizer 60% Muriate of’potash 1b. .025 125 3.13 2.50 46% Superphosphate 1b. .0375 110 4.13 3.30 Lime acre 1.00 1 1.00 .80 Herbicide 1b. 5.50 l 5.50 4.40 Power and machinery repair acre 1.97 l 1.97 1.97 Fuel, oil, grease acre 3.14 3.14 3.14 Innoculation acre .75 1 .75 .75 Custom.hire Applying fertilizer acre 1.00 1 1.00 .80 Hauling 2/ acre .85 1 __485_ __;85_ Tbtal 27.47 23.31 l/ 20% quantity discount on seed, fertilizer, herbicides, and insecticides, and also on custom.rates fer applying fertilizer. 2/ Includes variable costs of running own equipment (labor, fuel, grease, oil, repairs). 147 Appendix Table 8.11 variable cost (excluding labor and interest) of producing haylage Item, Unit Cost/unit Quantity Cost/acre Seed 1b. .70 2.7 1/ 1.89 Fertilizer 60% Muriate of potash 1b. .025 165 4.13 46% Superphosphate 1b. .0375 110 4.13 Lime acre 1.00 1 1.00 Power and machinery repair 2/ acre 2.22 l 2.22 Fuel, oil, grease g/ acre 2.94 1 2.94 Custom.hire Applying fertilizer acre 1.50 1 _ILQQ Total 17.81 1/ Cost of seed prorated over 3 years. 2/ Cost of plowing, discing, and drilling prorated over 3—year period. APPENDIX C Labor Requirements 148 .mmmg Hamcwn< om>_com mzmg moodoo ”oomsow III III we. OH.H mm. mm.H mm. oz.a mm. III III III No.0 nonmem .99 ca III III mm. mH.H mm. mm.a mm. m:.H mm. III III III mw.m pooumsm .pm :H III III m. ca.H mm. H .H w . m:.a m . III III III 3H.» nooomzm .pm we .mwmmwmm III III mm. mm III mm. om. mm. mm. III III III mm.m zoo ma II. III mm. mm II em. WM. 5. am. I... ...I III 2...“. as a II. III a. a II A . a. a; a. II II. II mm 38 m memos om III III ma. ma.m III III me. mm. mm. mo. III III zm.m son w III III mm. o:.m III III mm. mm.H me. so. III III :m.m zoo m III III ma. mm.m III III mo. :m.a Hm. mo. III III :m.m zoo : dwoafiw coco III mm. mm. III III III mm. mm. ma. mo. III III mm.m eon NH III mm. ma. III III III me. mm. mm. mo. III III mo.m son w III mm. mm. III III III mm. mm.a me. so. III III mm.m son 0 III am. so. III III III so. am.H Hm. mo. III III om.e son a cnoo whom mod n z o m a a H. a a z a a .98 onawswswwnmoaoo Hence pooEdHSUo mo moNHm msoanm> wean: macho coflMHoomw pom cocoa non omen mod mpooeonfiSUon momma owma conceaumm H.o magma xficcomq< a.moooopoom .aom owed 882 83 asaa msaa mama awom eeaaImmIa aama amom moma meaa eeaa meaa aamaa .I anboe III asa mom III aaa mmm new mam III III III swam \a gonna mmaoIospo com com com omm com com com oam can com com com omam .Ixm soxaaz mam mam mam mam mam mam mam mam mam mam mam mam oooaa \a nooasooo wuwoo Mons InaoaaoaI am asm mm ooa amm em coma: on on .aocCHmEom omm 0mm omm omm omm omm \m monotone mea mam aom amm mam mwm omm aam mam mwa aea pea soasaamom mm mm mm mm mm mm mm mm mm mm mm mm \m soxaaz I apnea mmm mmm mmm mmm mmm mmm mmm mmm mmm mmm mmm mmm omen ow \a anon spasm III III mm mm as sea ow oma ma III III III mam mm owsassm III III aa 0mm III III we moa mm a III III em: as owsaan noon III we a: III III III we moa mm m III III omm mm aaanm anoo Steaming henna [WHEOEI Shamaaoc 980 a z o m < a a z a z a a no to Emma mason amuse noose doapmnodo zaadc 3978 no.“ mung com mpdogvom dogma m.o canoe xaccooma. 150 .33 .aa .oo 38:3on one :2 as .oo .osoamom .a.o manna. sacaoooa “bosom .nfimmaa \a .nn\oo.ma \m .msa>aa madame s8 a584$ \a .nocoe\nnc omm co sesame: \m .fisosxnaeoas m amazon :0 no: a too can £8528 mm @885 E was m goo pagan ma soaaaz \m .mm\uomaoooaooa com zoo\mno m.:m mo pomthHoooh momma anuou co commm \a A.c.pooov m.o oHowB xficcoqo< a.mopOCpoom mom owed axon oomv :emm memm mmmm maam omwm m am 0 m me e m e m me ~ me m .I amooe ma: mmmm ea mam ame mmwa mom ammo \a gonna mmaoIpnam oaoa oaoa oaoa oeoa oaoa oaoa oaoa oaoa oaoa oaoa oaoa oeoa owama _I \m soxaaz amwa mmma mmma amma mmma mmma :mwa mmma mmma amwa mmma mmwa ooomm \a neoconso m mpwoo ..HOQQH InasaaoaI ama mom m mm mam mom owa coma: on on oomcamEom com com com com com com oom \m naoooomo m mmm mma amm. mmaa mom. mam mae mmma 0mm mam mmm mmm gooaaamom mom mom mom new wow wow wow mom mom mom mom wow mmam \m soxaaz 0am mew mew aema mae aom emm oema mam amm Dam cam mama .I anooe oem cam oam 0am oam oem cam cam cam cam cam cam owaa oom \a coon enamo III III maa amm mea amm ama mam aw III III III ooaa aom omnaeom III III a: mom III III mm mmm mma e III III oaaa mea nwaaam capo III ama mm III III III mm mam mma e III III mew mea canto coco mucgmhfldmmlh .HOQQH lwaHSOSI pm\muoaaoc ozoo a z o m a s a z a z m a no no aooa meson aopoe moao< soapaoooo emanc zooIoom nee npmoo com npcosoaaseos gonna m.o manna xacsooo< 152 .93 as do .8838 one 28 .am .8 .assamom .a.o manna. xasoooa ”ocean .saxmm.ma \a .3869 \m .mcasa saaae toe axoooaaa \a .fioosboamooooBE omm no 5882 \m .x2\mmoc m A.E.d cone on IE.m ooum coo .e.o oonoa on .Ewo ooumv peach paamm_ca moc\mn£ w mxuoz. \m ..aebsosoosaoou ass 38an a.mm as homepage gonna apes so canon \a A.c.pcoov m.o oanma xacoodd< 153 omaa omaa cmaa cmaa cmaa cmaa omaa cmaa cmaa cmaa cmaa omaa cmmma \m cos msaoIaaco m mmem mmem mmem mmem mmem mmem mmem mmem mmem mmem mmem mmem omemaa .em naoaaas m omem cmem cmem omem cmem cmem cmem cmem omem omem omem cmem oocmm \e antennae m mpmoo «.89.me InsaaaocI mea maem mma amm mccm cem coma: on on .I noceaasmm coca coca coca coca coca coca \m soe.maaoIaaco a cma cma cma cma cma cma \m monsoon a mam cmm mam cmm mam cmm mam cmm mam cmm mam cmm .I msaeonm atom .Hmmm cmmm amwm comm ammm ommm ammm cmmm ammm cmmm .emmm ome ea moccaasmm amm amm amm amm amm amm amm amm amm amm amm amm mooa \m ems meaoIaaco m eama mama eama mama eama mama eama mama eama mama eama mama mmmmm \m anoaaas m space comm mmom mmmm mmmm Imamm meem acma mmmm cmmm mmmm comm comm camaa .I acooo comm comm comm comm comm comm comm ccmm comm comm comm comm coccm coca \a coon space o mmm mmma mmmm eam .mema aoea mmam omaa mm c c camaa acoooccm III III mme mmaa eam mema mam mmaa mom III III III momm omca mwcaoam III III cma aeem III III mom com mmm em III III maea mom owaaan coco III mmm oem III III III cem amm ecm mm III III emmm cmo cacao anoo mpooeoaasvoh momma ImHSOSI nm\nnoaaoc mace o z c m a c o z a z a o no no _sooa mason Hopes ooao< coon Soc socIoooa you mmec coo mucoeooazcon cocoa ad magma. 5:33 ..Eommmo \m .naxco.mo \m .measaa eaasno pom oe\poconno poo ccc.aam \e .mopooe noose: weanoc mamoo oeaoIpaoo o co mnaoc spas omaomo 0» com mopooe mode so cocoa \mhn 0mm 0» as ea use on cocoooxo doe omosB \m .wopooe moss ca mpaooooo pcoEomoCMECOC o ea op:0E\mno oma on d: ca mpsm \m .moooa mono nmooxo mo coo doapomodo mmawc one no ownono ea whoopnom m an coenomnod ma hocQHMan ocB \a .mxoos polo: ca pom \m .Ammo mean o>on mooxnoz hmHAwoa does maoxaae moaaoh mocsaoda mcopv xz\wmmc e maoxaae a mo common helm m \N .nm\pdoEoooaoon coo aoo\mne 0.0m mo pooeonasoon momma amaou do comom \a 154 m eea m eea e a me m m eea m N a mmmma eemm mm a m eea m eea m eea H mm .II Hence ooaa ooaa ooaa ooaa ooaa ooaa ooaa ooaa ooaa ooaa ooaa ooaa comma XHH moaaopoaoom m aoe ammoa oom aomm mmow owoa wommm \oa AmaoLOV momma oeaulpnom nm\mpoaaoc ozoo 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