THE COMPETITIVE POSITION OF CATTLE FEEDING IN THE NORTHERN CORN BELT by Paul Rudolph Baabargen A THESIS Submitted to flichigau State University in partial fulfillment of the requirements for the degree of DOCTOR 0F PBImSOPHY Depart-eat of Agricultural Economics 1967 1 L .I 1 I ’) ho 1) T7- {,8 ABSTRACT THE COMPETITIVE POSITION OF CATTLE FEEDING IN THE NORTHERN CORN BELT by Paul R. Hasbargen The objectives of this study were to determine (1) the profit- ability of cattle feeding in the Northern corn belt relative to the Southwest. (2) the profitability of expanding cattle feeding on Northern corn belt farms relative to expanding crop acreage on these same farms and (3) the types of feeding programs and manage- ment practices that would make cattle feeding more competitive on Northern corn belt farms. To accomplish these objectives. the highest profit program solutions obtained under numerous resource. price and alternative opportunity situations in each of three states were compared and analyzed. Cattle feeding in the Northern corn belt was less profit- able than in the Southwest. Because of locational related factors. new feedlot expansion returned at least one dollar less per hundredweight of beef produced on Northern corn belt farms than on Colorado farms. In addition, differences in management practices. such as underutilization of feedlot facilities and the feeding of high forage rations. gave rise to relatively higher nonfeed costs in the Northern corn belt. Also. there are propor- tionately more large scale lots in the Southwest which enjoy both pecuniary and nonpecuniary economies that are associated with specialization in cattle feeding. Paul R. Hasbargen The relative desirability of investing in feedlot facilities as opposed to investing in additional crop acreage depends in part upon the relative efficiency of the cattle feeding and the crop program. ‘Nith high efficiency levels for both the Colorado farm expands cattle feeding sharply beyond the feed supply produced on the farm whereas in the Northern farm situations cattle feeding tends to expand proportionately with expansion in crop acreage. It appears that specialized feedlots are more likely to develop in areas where (l) crop labor requirements are high due to irrigation and (2) nonagricultural land use demands raise the price of land above its agricultural use value. Different rations. types of cattle and types of feedlot facilities were studied in an effort to determine the most profit— able feeding program for Northern corn belt farms. Rations very high in corn silage gave the highest returns to feedlots in the Northeastern corn belt. This was especially true if only one lot of cattle were fed each year and if corn prices were $1.10 or higher at harvest tine. In the Western corn belt. high con- centrate rations were found to be more profitable since both cattle and grain prices are lower. Feeding calves was more profitable than feeding yearlings in the Northern corn belt-~especially in‘lichigan where feeder prices are relatively higher. In the Western corn belt there was little difference and in the Southwest yearlings gave higher returns than calves. As for grade of cattle. in the past lower priced feeders resulted in higher feedlot returns than high grade cattle Paul R. Hasbargen to those operators who were able to upgrade the cattle and sell them for their true value. ‘lore research work is needed to determine how different feedlot facilities affect requirements for labor and bedding as well as feed. Slotted floors may be justified in cases where labor and bedding costs are high and/or liquid manure has a high value. In summary. existing feedlots in the Northern corn belt under top management can compete with the larger lots in the Southwest. However. since economic incentives for feedlot ex- pansion are much lower in the Northern corn belt. cattle feeding will not expand nearly as fast in this area as in the Southern Plains area. ACKNOWLEDGMENTS My sincere thanks to the many pe0p1e who encouraged. guided. and facilitated this research project. Special thanks are due Dr. Glenn L. Johnson who served as my major professor and counselor. The guidance and helpful criticisms of Dr. Hugh Henderson of the Animal Husbandry Department and of Professors John Brake. John Ferris. Raymond Hoglund. Leonard Kyle and Karl Wright of the Department of Agricultural Economics are gratefully acknowledged. Financial support for this study was provided both by Michigan State University and by the University of Minnesota. For making this support available. appreciation is eXpressed to Drs. L. L. Boger and V. N. Ruttan. Chairmen of the reSpective Agricultural Economics Departments of these institutions. and to the Minnesota Agricultural Extension Service. A commendation is due to Priscilla Prophet. Arlene King and Laura Flanders for their extra efforts in moving my problems through the computer. Finally. loving thanks to wife Ervina and daughter Julie Ann for the many ways in which they facilitated the completion of my graduate work. ii TABLE OF CONTENTS ACKNOWLEDGMENTS . . . . . . . . ..... . . . . . . . . LIST OF TABLES O O O O O O O O I O O O O O O O O O O O 0 LIST OF ILLUSTRATIONS . . . . . . . . . . . . . . . . . . CHAPTER I II III IV IN TRODmT IGN O O 0 O O O O O 0 O O O O O O O 0 Past Growth Patterns . . . . . . Factors Affecting Growth Rates . Objectives of Study . . . . . . Previous Investigations . . . . Plan of Study . . . . . . . . . THE ANALYTICAL MODEL . . . . . . . . . . . . . Resource Restrictions . . . . . . . . . . . ActiVities O O I O 0 O .0 O O O O O I I O 0 Projected Prices . . . . . . . . . . . . . . COMPARATIVE PROFITABILITY OF DIFFERENT FEEDING PROGRAMS IN THE NORTHERN CORN BELT . . . . . . Types of Ration . . . . . . Calves Vs. Yearlings . . . . . . Beef Vs. Dairy Steers . . . Feedlot Facilities . . . . . . . . . Summary of Different Feeding Programs COMPETITIVE POSITION OF CATTTE FEEDING RELATIVE TO EXPANDED CROP PRODUCTION ON NORTHERN CORN MLT FARMS O O O O O O O O C C O O O O O I I O The Michigan Situation . . . . . . . . . . . The Minnesota Situation . . . . . . . . .'. Summary of Competitive Investment Opportun- ities on Northern Corn Belt Farms . . . . COMPETITIVE POSITION OF THE NORTHERN CORN BELT RELATIVE TO THE SOUTHERN PLAINS IN CATTLE ”EDING O O O O O O O I O O O I O O O O O O O O O Locational Factors Affecting the Competitive Position of the Northern Corn Belt . . . . . PAGE ii viii 0—! QO‘ANH 12 19 34 34 54 71 75 77 85 87 93 CHAPTER VI SUMMARY. CONCLUSIONS. AND RECOMMENDATIONS . . . . Size Factors Affecting the Competitive Position of the Northern Corn Belt . . . Management Factors Affecting the Competitive Position of the Northern Corn Belt . . . . Other Factors Affecting the Relative Rate of Feedlot Expansion in the Northern Corn Belt. sumary a a a a o a e a o o a o . e a a 0 0 O 0 Purpose of Study . . Method of Study Findings Relative to the Competitive Position of the Northern Corn Belt Recommendations APPENDIX A . . . . . . . . . APPENDIX B . . . . . . . . . APWNDIX C O O C O O O O O O BIBLIOGRAPHY iv Findings and Recommendations Relative to Technologies Necessary to Maximize Returns in the Northern Corn Belt Feedlot PAGE 120 144 173 176 180 180 181 182 193 203 206 209 211 213 TABUE NO. 1.1 1.2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.1 3.2 3.3 3.4 LIST OF TABLES Marketings of fed cattle by areas. 1956-58 average and 1966 . . . . . . . . . . . . . . . . Possible advantages and disadvantages of cattle feeding in the Southwest as opposed to the Northern corn belt. cross classified by type of advantage and by major causal factors . . . . . Three initial resource situations considered in this stUdy O O O C O O O O O O O O O I O O O O 0 Crop activities - Michigan . . . . . . . . . . . Credit activities . . . . . . . . . . . . . . . Labor activities - Michigan . . . . . . . . . . Building activities . . . . . . . . . . . . . . Land activities - Michigan . . . . . . . . . . . Sample of cattle activities - Michigan . . . . . Cattle and corn price projections for the next cattle cycle compared with the last two cycles . Feeder cattle price estimates based on projec- tions of returns over corn costs similar to paSt cattle cycles 0 O O O O O O O O O O O O O 0 Basic feeding programs considered for beef steers in the Northern corn belt . . . . . . . . Carcass weights and comparative liveweight prices for slaughter steers from the different beef feeding programs compared in this study . . Minimum building space requirements per head for different rates of feedlot gain , . . . . . Ranking of rations according to different financial measures for various resource and planning situations in Michigan . . . . . . . . PAGE 14 2O 22 23 25 26 29 32 33 36 37 41 43 TABLE NO . PAGE 3.5 Relative prices which would give equal returns to calf and yearling programs being fed a 1 percent concentrate ration . . . . . . . . . . . 51 3.6 Feeding programs considered for dairy steers . . 56 3.7 Estimated equipment requirements for a 500 head feedlot O I I O O O O O O I O ...... O O O 63 3.8 Investment requirements per standard unit of capacity for three types of feedlot facilities . 65 3.9 Returns from cattle feeding under different housing situations . . . . . . . . . ...... 68 4.1 Per acre resource requirements and crap yields for productive land in Southern Michigan and Minnesota . . . . . . . . . . . . . . . . . . . 78 4.2 The influence of an increase in land price on acreage purchased vs. feedlot facilities pur- chased by the Minnesota beef farm . . . . . . . 87 5.1 Estimated locational advantages and disadvant- ages that Michigan has relative to Colorado in nonfeed costs . . . . . . . . . . . . . . . . 101 5.2 Feeder cattle prices and costs per head de- livered to feedlots in three states . . . . . . 103 5.3 Summary of locational advantages and disadvant- ages held by the Northern corn belt over the SouthweSt O O O O O C O O C O O C O O C O C O O 104 5.4 Optimal organizations and returns from cattle feeding enterprises added to cash crop farms in Michigan. Minnesota. and Colorado . . . . . . . 106 5.5 Comparative returns from large scale cattle feeding enterprises which purchase all resources 113 5.6 Comparative feedlot activity under progressively higher feeder cattle prices by farm type by state 0 O O O O O O O O O O O O O O O 0 O O O O 118 vi TABLE NO. 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 5.18 Number of lots and cattle on feed for two size categories. January 1. 1963 and 1967 for 16 states 0 O O O O O O O O O O O O O O O O O O O 0 Labor and investment requirements as estimated by various studies on economies to size . . . . Differences in nonfeed costs between a 500 head capacity lot and a 2000 head capacity lot in Michigan and Colorado . . . . . . . . . . . . . Comparisons of selected financial return ratios for small and large feedlots. Michigan and Colorado 0 C O O O O O O C O O O C O O O O O O O Feedlot performance of short-fed yearling steers. 1960-1961 . . . . . . . . . . . . . . . Results of wintering calves on hay instead of on corn Silage O C C C O O O O O O O C O O O O O 0 Additional resources required to add one hundred pounds of liveweight to steers weighing 1060 pounds in the feedlot . . . . . . . . . . . Carcass and liveweight market prices for cattle of different weights under different selling conditions . . . . . . . . . . . . . . . . . . Estimated feed conversion efficiency advantage held by large scale Southwest feedlots due to selected management practices . . . . . . . . . Nonfeed costs and returns per hundredweight of beef produced and returns to total feedlot for selected calf feeding programs . . . . . . . . . Returns from cattle feeding in Michigan under average feed efficiency for selected planning Situations O I O C O O O O O O O O O C I I C 0 Summary of the disadvantages of cattle feeding in Michigan as Opposed to Colorado classified by causal factors . . . . . . . . . . . . . . . vii PAGE 120 125 134 143 145 148 156 158 161 163 171 177 FIGURE NO. LIST OF ILLUSTRATIONS PAGE Fed cattle marketings in major feeding states in 1966 and increase since 1956 (1.000 head). . 91 Change from feeder to slaughter grades of yearling steers fed high energy rations for six months . . . . . . . . . . . . . . . . . . 166 viii CHAPTER I INTRODUCTION Cattle feeding is the rapid growth industry of agriculture. Fed cattle marketings have almost doubled in the past 10 years, with an annual growth rate of 6.7 percent. Annual growth is expected to average about 5 percent during the next decade--an increase of about one million head per yeargl/ To what extent will the Upper Midwest be able to share in this economic growth? This study approaches this general question by (l) examining recent growth patterns in the beef industry. (2) determining the most profitable cattle feeding system for northern corn belt farms. and (3) examining the competitive position of cattle feed- ing in the Northern corn belt. PAST GROWTH PATTERNS Rapid growth of the beef industry has been sustained by a steady expansion in the total demand for beef in the United States. During the last decade. the United States population increased by three million each year while beef consumption per person climbed at the rapid rate of two pounds per year without materially affecting prices. l/Paul Hasbargen: "Beef Production and Prices". Minneggtg Fgrm Bgsingsg Notes. No. 475. August 1965. l I‘J Total fed cattle marketings in the 39 states for which United States Department of Agriculture estimates are available increased from 11.5 million to 20.6 million during the last cattle cycle. The rate of growth has varied enough among different areas of the country to significantly affect the relative contribution of each area to total beef production. The corn belt's share of fed cattle marketings dropped from 47 percent to 37 percent while the Great Plains increased its share from 22 percent to 31 percent. (See Table 1.1) The Plains enjoyed an annual growth rate of 11 percent compared to only 4.2 percent for the corn belt. Michigan's growth (5 percent) was slightly faster than the average for the corn belt but below the national average rate while Minnesota and Wisconsin showed slower growth rates. FACTORS AFFECTING GROWTH RATES There are numerous factors that might be hypothesized as con- tributing to the differential growth rates among areas. Most such factors can be grouped according to source under the following general headings: 1) Economic: associated with geographic location 2) Economies associated with size or specialization 3) Economies associated with more rapid rate of tech- nological adoption 4) The relative profitability of alternative opportunities 5) Institutional barriers (credit availability. small farms). .:oaa:m:mx3 cue .coccuc .comxc: zez .csacm .ctwmoficu .emcmommnmo .mzcmmu< mot=~6:H\W .maxee new .aacxmc zuzcw .mEozuch .auoxma sumoz .mxmmmnez .mwmcmx moc=H0:H\m .:mm:oumwz cce .cmamsowz .musommmz .mSCH .aucmoccmz .mmocwfimw .mcmmccm .cmzc "acumen ccmzc-om one mov=~o=H\M .mauoaom come no mo>_mo cam efiaaao «cm: wee moon nonoaoc .wa "eouzem\w w.v ~.m c.m h.o o.- ~.v v.6 oouhmofi uu ovum sesame emaaceouoa ~m===< uu o. m.m H.~ ~.v~ m.~m n.~n com coed m._ m.v m.~ v.vw o.mm o.cv GOH mmuomog uu mmzweoxumz fleece he azoomoa uu cos nae . can Hoo.m evv.o nee.» oHe.om see“ om" omm wvfi oom.~ Nam.m ovn.m mhv.- wmuomo~ uu eczmmzozh cm veaexuez menszz uu E ueeoesm ueeme_e Iago: eoaesm use» cmmccomma cmuwsowz ” u u u u " \wuoumoa " \& umemu u \Ncucu " on u aaomoccmz \meeo~ az< ee< mmuemofi .mcmmmt «\w :mcmceumuaz: euoz. mowu_~moeu no on: mefifizu. acmqaem new ccmmsn cw meson mamco 9.22:2. new museum ease .seH .eemegmse peace. mucceemmacou manna poked. acmmwzo uusa coeuco: :m meson mcmcmeammn gouache. meson newcwwauw: panache. acumen acumen nosed. money can: maxed. mucesoumzvew acmuuon w u .macoseumsceh eaeuocoo u .maeoeommsvou mammao: u azazcn eyaumo counmmomo euch mane seamen meuaonu Amcomuem oueuuncoeco megawzv mcwwo tweak emoEu muzmwox neuzmma um acmuexmmsu no» as: :cmmme>=oo teem acegommuo ewes. ucwmmxo uwac been cm meson ccmcwmmman nouaomc. xcmugm uncuzm need. magma :c mumswfio he woemuw. «casemecmz onmom :omuaooq \Imoomua oawuwo we“ Lozoa. "no cumswfio we uuommm. Imeomua teem uezamz. . \_ =mumez comma aacu veemcoz umoo cook muocoom umossuaom new emeucw>cmmwc we ammu=m>c< mo waxy Louowm mwmsmo mxchu=< kc wmra_~m :mHkamac< SmHmmcmuudé mum—<8 1. Expanded cash crop production on these farms 2. Cattle feeding on farms located in the area of recent rapid growth when northern feedlots have: a. Excellent feed conversion in contrast with average feed conversion b. Larger scale feedlots in contrast with the smaller scale limit imposed by usual credit restrictions. PREVIOUS INVESTIGATIONS Previous studies of cattle feeding might be grouped into the following general categories: 1) production cost studies. 2) econ— omies of size studies. 3) farm organizational and supply response studies. and 4) spatial equilibrium models of the beef industry. Most production cost studies such as animal husbandry re- search and farm record summaries deal with feed costs only. Other special economic studies usually ignore feed costs and deal only with nonfeed costs. Profitability is affected not only by both feed costs and nonfeed costs but by price margins as well. Little attempt has been made to put all three of these factors to- gether and to identify highest profit feeding systems under vari- . ous specified resource situations. Also. direct comparison of production costs--whether feed or nonfeed--among states is pre- cluded since different accounting methods are used by different researchers. Also. feed costs are difficult to compare since quality of feeds. especially silage. may not be comparable and there is no standard method for pricing silage and other forages. Economies of size in feedlot operations have been studied in several states. These studies have established the fact that non- feed costs per unit of production decline as feedlot size is in- creased. A Kansas study found that most economies were achieved already at 280 head.l/ However. Hunterg/ found that it required a 1500 head capacity lot in Colorado before most of the economies of size were achieved for nonfeed costs. But the question as to how much advantage has been gained by the large lots in the South- west over the smaller farm feedlots in the North has not been answered. Farm organizational studies indicate that cattle feeding and hog production are the most profitable livestock enterprises on medium to large corn belt farmsiz/ Which of the two is the more profitable often depends upon the assumptions used in the particular study relative to resource restrictions. price relation- ships. and feed conversion efficiencies. l/J. H. McCoy and H. D. Wakefield. Economies 2; Scale jg_Farm Cgttlg Feedlot: gf,Kansas-ggg Analysis 2f,Nonfeed Costs. Technical Bulletin 145. Agricultural Experiment Station. Kansas State University. January 1966. g/Elmer C. Hunter and J. Patrica Madden. Economies _o_f_ Size fg;,§pgcialiggd Beef Fgedlots ip_Colorgdg. U. S. Department of Agriculture. Economic Research Service and Colorado Experiment Station. Agricultural Economics Report 91. May 1966. é/Dale Colyer and George D. Irwin. "Beef. Pork. and Feed Grains in the Corn Belt; Supply Response and Resource Adjustments." Missouri Agricultural EXperiment Station Research Bulletin (forthcoming). and North Central Regional Public 178. Other studies have developed spatial equilibrium models of regional production based on the costs of major production inputs. market location. and transportation costs. These studies often do not adequately take into account differences in some important production cost variables which may result in differences in cattle feeding profits among areas. Rather. most spatial models estimate optimum cattle feeding locations on the basis of exogenous variables such as the location of population centers. feed supplies and feeder animal supplies. King's ambitious model which was pub- lished in 19631 was more complete in that it also considered variations in feed conversion and nonfeed costs. However. regional cost differences had to be based on sketchy information which resulted in what now appears to be inappropriate feed conversion relationships among areas. The results of this study as well as the results of a United States Department of Agriculture studyz/ and of a North Dakota studya/ all suggested that differences in production costs or alternative opportunities were probably more important factors in feedlot location than were differences in transportation costs. l/G. A. King and L. B. Schrader. "Regional Locations of Cattle Feeding-A Spatial Equilibrium Analysis". Hilgardia. Vol. 34. No. 10. July 1963. -2/F. A. Nilliams and R. A. Dietrick. Ag Interregional Analysis gf_§§gg peg; Ecgngmy. Agricultural Economics Report No. 88, USDA, ERS, Oklahoma and Texas Agricultural Experiment Stations. April 1966. -3/Thor A. Hertsgaard and Sylvester D. Phillips. Qigtgibgtigp Pattern; f9; Beef. Department of Agricultural Economics. Agricul- tural Experiment Station Bulletin No. 435. North Dakota State University. June 1961. Consequently. despite the numerous studies alluded to above. research of the type outlined in this proposal appears necessary to identify relevant variables which decision makers can manipulate in order to improve their competitive position within the con- straints of existing exogenous variables. Also. if production cost differences among areas can be quantified more precisely. the! can be utilized to provide additional refinement to spatial models. Finally. a study which compares the potential profitability of large scale feedlots in the Northern corn belt with other areas will be a useful guide to investors who are considering alterna- tive locations for large scale feedlots. PLAN OF STUDY In general. this study is concerned with the i iv status of cattle feeding on prgdgctive gggthgggwgggnnlagg. Con- sequently. it does not consider small scale feeding enterprises which utilize many resources which have little alternative use value. It is generally agreed that such enterprises can be main- tained on a supplementary basis so long as corn belt farmers do not have to price all resources used at current acquisition prices. However. if the Northern corn belt is to significantly expand cattle feeding it must come through the development of larger scale competitive feeding enterprises rather than by having a few more farmers utilize old dairy barns to feed a small number of steers. 10 Therefore. this study considers several relevant planning situations in which farmers or potential investors have enough capital to develop feeding operations of at least a few hundred head if it is profitable to do so. Initial resource situations considered include: 1) a one man cash crop farm. 2) a two man cattle feeding farm. and 3) an investment group which has no physical resources. The extent to which these initial resources are utilized to feed cattle is determined under different labor. capital. and price situations. Input-output coefficients were developed for a number of steer feeding programs for each state being studied in consulta- tion with economists. nutrionists. engineers. and cattle feeders in these states. Coefficients for crop production were also developed. The types of production activities were selected so as to facilitate achievement of the study objectives. Linear programming models and budgets were developed and used to: 1. Compare the profitability of utilizing various amounts of corn silage in the ration of corn belt cattle feeding programs under varying resource and price situations. 2. Determine what price relationships would be needed between holstein steers and beef bred steers and between calves and yearlings to give equal returns under the relative efficiency levels assumed in this study. 3. Determine what change in returns would be nec- essary to compensate for lower or higher investment of beef housing systems. 4. Compare the profitability of cattle feeding with expanded crop production on corn belt farms. ll 5. Compare the profitability of expanded cattle feeding among selected states given various initial resource situations. feed conversion ratios. and price conditions. Additional detail on the development of the specific models used to obtain the results called for in 1-5 above will be dis- cussed in succeeding chapters. CHAPTER II THE ANALYTICAL MODEL Linear programming is the basic tool used in this study. However. for those problems where the programming model cannot be constructed so as to give the refinement desired. supplementary partial budgeting is also used. RESOURCE RESTRICTIONS The cropland considered in the Northern corn belt is top quality level land capable of producing continuous corn. This assumption is made since expanded corn belt feeding must be based primarily on the utilization of this highest return crop for feed. To require that the cropland have some minimum amount of a legume- grass crop in a "rotation” would only complicate the comparison among different rations without contributing to the objectives of this study. This study'ygll_determine the hay yield that is nec— essary to compete with a given corn yield in the production of cattle feed. If hay yield is less than this but it must be grown on a particular farm. haylage can be substituted for other feeds at known ratios without affecting the performance of the cattle-- but total farm income. of course. will drop. On the other hand. if hay yields are greater than the breakeven yield. hay could be profitably produced as needed for cattle feeding. l2 13 No government restrictions on crop production are considered in this program. Whether or not to participate in any voluntary feed grain program that may be available in any given year is large- ly a decision that is independent of the decisions considered in this study. If it pays an individual farmer to participate in such a program. he can. thereby adding income over and above that ob. tained from the organization suggested by the program results of this study. However. such a situation would probably be very rare given the quality of land and management resources used in this study along with the historical pattern of narrow variances from county average yields which are assigned to individual farms for purposes of computing program payments. As for wheat allotments. they are so small on the type of farms considered in Southern Michigan and Minnesota that this program is ignored and wheat must compete on the basis of its market price plus the value of its straw. Normally most farmers with an allotment would benefit by participating in the wheat program--but this should be deter- mined for individual cases. Planning Situations Two general classifications of resource situations are dealt with in this study. One is a classification according to the extent of the physical assets originally under control of the entrepreneur--an "initial resource" classification. The other system used is a classification of the attitudes of the entre- preneur and/or his creditors--a "planning horizon" classification. 14 Three initial resource situations that are considered are: l. A one family. 350 acre cash crop farm 2. A two man. 350 acre. 500 head capacity cattle feeding farm 3. No physical assets or family labor. The initial resources assumed for each of these basic situa- tions are shown in table 2.1. TABLE 2.1.--THREE INITIAL RESOURCE SITUATIONS CONSIDERED IN THIS STUDY Cash Beef No . CrOp Feeding Physical Itgm_____2_ JLUnit : Farm Farm Assets Crop Acres Acres 350 350 -- Labor. family Hours 2.500 4.500 -- Cash $ 10.000 10.000 0 Oper. Credit’ 5 15.000 80.000 120.000 Real Estate Credit’ 3 30.000 30.000 90.000 Beef Facilities Hd. cap. -- 500 -- ‘ Credit restrictions were varied to test effect of differ- ent assumptions relative to credit availability. The initial land and labor levels selected for situations 1 and 2 above are based primarily on existing levels as indi- cated by farm record projects and by the "large farm" categories of the NC-54 farm organizational study conducted in Michigan and 1/ Minnesota." Initial capital positions in these two situations are also partially based on these sources. However. several levels of short-term credit restrictions are used under the assumption Of different levels Of internal and/or external credit rationing. This brings up the second classification Of resource situa- tions--the "planning horizon” system. The following planning horizons are considered at certain times in the study. . Land and labor are fixed: labor is limiting factor. . Land is fixed; short—term credit is limiting factor. . Land is fixed: feedlot capacity is limiting factor. . No assets are arbitrarily fixed-~capital is limiting factor. unnatu- In situation A. neither land nor labor can be bought: land cannot be sold: family labor will not be used unless it can earn returns equal to the farm wage rate. This situation represents the planning frame of mind Of an Operator who does not wish to have hired labor and who either cannot find additional land or does not want tO buy any more. He has sufficient capital so that labor is the effectively limiting resource for cattle feeding. Situation 8 represents a situation similar to A with respect to land but the Operator is willing to hire labor if added returns l/Curtis F. Lard. Profitable Reorganization of Re resentative Farms in Lower Michi an and NOrtheastern Indiana WTt eciaI Em hasT? on ee rains BEE Livestock. unpu 18 ea PH.D. Thesis. Michigan Siate University. 1963. and C. O. Nohre and H. R. Jensen. Profitable Farm Adjustments in South-Central Minnesota. Station Bulletin 471. University of MTnnesota Agricultural Experiment Station. 1964. 16 are high enough to pay going industrial wage rates. The effec- tive limit on cattle feeding is that imposed by creditors who will not loan money to buy corn or forage for cattle feeding. Consequently. cattle numbers are limited to those that can be fed with home produced feed supply. Situation C is similar to B except that in this case operat- ing credit is readily available to a "proven" feeder but the operator is either unwilling or unable to increase the size of his feedlot beyond a given capacity. In situation D. all resources will be endogenously fixed by the program. This long-term planning horizon will be utilized most extensively in comparing profit maximizing courses of action among states under different price situations. In contrast. sit- uations A. B. and C will be used to determine the profitability of different types Of feeding programs in Michigan under these different planning horizons. Labor equations The one family farm has 3.500 hours of labor available but 1.000 hours are assumed to be needed for overhead labor. Con- sequently. only 2.500 hours of family labor are available for use in handling the direct labor required for crop and livestock production. However. if such employment returns less than $1.50 per hour. this labor will be sold for wages rather than being used on the farm. The labor supply is divided into 6 different labor periods as follows: 17 "U D. H I December 1 - March 31 April 1 II May31 June 1 - July 31 Pd 4 - August 1 - August 31 Pd 5 - September 1 - October 15 Pd 6 - October 16 - November 30 'U'U an. (AM ll When the labor hiring activity is allowed to function. it provides labor only on a yearly basis. However. as full time labor is hired. a reserve of overtime labor equal to one fourth the full time help is developed. This can be utilized as needed on a seasonal basis by paying 25 percent more than the normal wages for these services. This feature allows hired men to put in longer days during busy seasons provided they are given a bonus for this overtime work. Land 22g crop machinery equations The initial land resource is 350 crop acres with no rotation or government program crop restrictions. When allowed to vary. this re- source can be added to by renting or buying: or it can be diSposed of by selling or renting out. It is assumed that acreage and crop machinery are in apprOpriate balance. Therefore. crop machinery will be acquired or diSposed Of with the land--50 as to maintain this balance as acreage is varied. NO economies of size relative to machine cost per acre are assumed. Capital 222 credit equations An initial supply of $10,000 in cash is available for use as either Operating capital or as real estate capital. The initial supply of chattel credit is varied to reflect different assumptions about external or internal credit rationing. 18 Operating capital needs must be met with the initial supply of cash plus borrowings through the chattel credit activity. Long-term capital needs must be met with real estate mortgage credit or through a "cash transfer" that permits use of the initial cash supply for capital investments instead of for Operating expenses. 93225 resource equations There will be no initial supply of feed or feedlot facilities on the cash crOp farm. Housing and feed storage must be purchased as needed for this situation as well as for the no physical asset situation. However. the large cattle feeding farm will have an initial supply of feedlot facilities sufficient to house 500 head Of feeder cattle. When comparing rations. equipment necessary for feeding will be determined after the solutions are run and annual ownership costs subtracted. This supplemental use of the partial budget will enable more precise estimation of these overhead costs. However. when comparing land acquisition alternatives with cattle feeding. the livestock equipment costs will be included in the linear model. To minimize errors from this procedure. separate program runs are made with changed coefficients when large scale feeding Operations are brought in. l9 ACTIVITIES Crop activitiesv//// Crops considered on the Michigan farms are corn. corn silage. haylage. wheat and soybeans. Since crOp production doesmpgtfitie up Operating costs for_a_fu11myear. onlyhalf of the cash costs Of production are required out of the Operating capital limit if the -EEER.A§l§91du9t harvest._ However._if the crop is helquqr_feeding. thgfprgdnntinnflcostsflarefiassumedmtq be tied up for another nine ‘months.. Costs of harvesting corn and silage are assumed to be tied up for one year when the crOp is fed. These assumptions are used in calculating the ”operating capital" requirements of each activity. Table 2.2 shows the resource requirements and contri- butions of each crOp activity. Standing corn can be harvested as silage or as grain with the Operators own machinery or by custom operator. Silage_can be‘ stored in an upright silo with a lO_percent loss or in a horizontal -silo with a715 percent loss. If~silagefiisqstqred in §_h2£iz°2181 siqu/figyper acre more is charged to cover the cost of the extra man who must be hired to pack silage. Hay is handled as haylage although yield and feed requirements are put into the model on a dry hay basis. Haylage must be stored in an upright silo but storage requirements are cut by about 20 percent since partial refilling is possible. 2O .manoo we>c esoogm moae:Ot euwm m==w=\w mm u ve.m u o.o u u ugmwma: u mm u u u u u gaucowmmou cob Oceam ogwm u u on. oc. u mm. mm. 6 .cd o.~ o.m om. u mm. me. an. m .um u u, u NH. em.“ mm." ofi. v .um u u u mm. mv.m an. me. m .cm u u u we. mm. vo. an. m .um u u u c“. u o~. u u H .um o.m o.m be. fie.“ o~.v vo.m an.m .mus boned ~m===< mm.o «n.22 mv.~ ec.~v me.e~ mo.e_ no.o » Hessesu .uoeo om o~ c- u o.v on ma .h we .=n u~oma mn.o mm.- mv.m mo.mn mo.m~ o~.ocu ow.Obu » “Hoscesem acumen: Haucewmuo: " :uoo " cmcu " he: " ewes: " nemenmcm u «we: anu camfimm :moo uno>mez m umo>uez m czmceaum m m m m zou Oz» :w osooem moaozou came m==m=\w oo~ » umewq wommzmwh ocH w umcowu ouaumm “mom 2 9. \moc_u \moofiu a Haemaeo eewumm “mom 9: e, :85 8:988 9: >62- 9: e 2528 9.3225 u om.o om.m ucm.vu a oaeesoz h 83 w 83 m 88 m 88 m meumcwuh H commune: H wannabe: . ma=m>cm . «we: seam smau H _Ouuwsu H Ouwauw you: w m mfienaho" HHcmmuuu.n.N Ema. 23 .zem saga cm comuwooam ccmuw=ce oousouem on» oucm mecca mu coxmuoma mumacaav use Sega memes am xwmums as» cw anemone aw cog: "sou o=:o>ou cm osoocw mouococ came mscwz\w n H at ~- HI gt ”0.” no.” mo.m $0.0 .H: m n .b: m w .tl u H .mm none; oemauo>o ham .0 .0 Q. .0 ~n.u ~m.u -.u Nv.u mv.u mw.u vm.—u mm.~u mw.u wo.~u wc.~u mn.nu oau oc.om oo.om .mh: OH acne; ham e .um m .um v .nm m .nm N .cm g .wm .muz been; osmuuo>o vm._ 0 .cm n~.~ m .cm mm. v .cm wo.~ m .cm wo.~ N .um was a .2 cu .mw: Lena; ~w===< w fimuwawo mewuwuoao co.m~u w moaco>oz .mu: cu menu; -em awe: seam Z<¢HIUH2 u mEHHaHnE §5uu.v.~ Saga 24 comparable off-farm opportunities in each area. This was esti- mated at $2.90 in Michigan compared with $2.70 in Minnesota and Colorado. (Equals wage paid in ”non-durable" industries in 1965.) Six "overtime labor” activities will provide additional labor on a seasonal basis on an overtime wage rate. This rate was set at 25 percent over the regular wage. (This practice is often followed on an informal "bonus” basis at present--it may become more formalized in the future.) ' Building investments As shown in Table 2.5. feedlot and silo investment costs must come out of real estate credit. These capital investments are assumed to be only 25 percent self-financing since such in- vestments usually do not add greatly to the value of a farm. Thus. every dollar spent on these investments increases the real estate credit limit by 25 cents. Annual costs are based on a—*? 20 year life plus 2 percent for taxes. insurance and repairs on silos and 3 percent for these items on housing. (Subsequent budgeting considers alternate depreciation rates.) One housing unit provides 30 square feet of building space. Different feeding programs require varying proportions of this standard unit. Associated livestock equipment costs are tied to the building investments in some of the programs but are deter- mined by hand budgeting in early runs in which several different rations are compared. 25 TABLE 2.5.--BUILDING ACTIVITIES : Horizontal : Upright : Beef Item Unit : Silo : Silo : Housing 10 tons 10 tons One unit Revenue $ 2.80 7.00 4.48 Real Estate Capital $ 40.00 100.00 56.00 Real Estate Credifll $ -10.00 ~25.00 -14.00 Silo Spacel/ Tons Horizontal -lO Upright -10 Building Spacel/ Head -1 1/ -Minus sign denotes that quantity is added to the resource. Each silo activity provides storage for 10 tons of silage per unit of the activity. Corn grain and haylage must be stored in an upright silo--corn silage may be stored in either type un- less otherwise specified in a particular planning situation. Land activities A sample of the land acquisition and disposal activities are shown in Table 2.6. In the activities shown land could be pur- chased for $550 per acre or rented for a cash rent of $30 which gave the owner a 4 percent return plus paying for his land taxes. Additional operating costs are required to own the machinery re- quited to operate the land. Purchased land is 85 percent self- financing. thus. a $467 credit is added to the real estate credit TABLE 2.6.--LAND ACTIVITTES - MICHIGAN so an .; Item Unit Q Rent ; Buy Rent Out Revenuel/ $ 39 8.65 -42.00 CrOpland Acres acres -.9 -.9 1 Operating Capital 5 69 56.65 -76 Operating Credit S -27 -27.00 30 Real Estate Capital $ 550 Real Estate Credit $ -467 Annual Labor hrs 1.0 l 0 —l.O Pd. 1 .2 .2 .2 Pd. 2 .15 .15 -.15 Pd. 3 .26 .26 -.26 Pd. 4 .17 .17 -.17 Pd. 5 .07 .07 -.07 Pd. 6 .15 .15 -.15 Rent in Limit acre 1 Buy Limit acre 1 Rent Out Limit acre 1 l/Minus sign denotes income in revenue row; when it appears in the matrix it means that the quantity prefixed is added into the resource equation specified in that row. x (I. 27 / \J limits when $550 land is purchased. In other words. only a 15 percent downpayment is required on a contract for deed land purchase. A complement of equipment valued at $100 per crOp acre must be purchased along with each acre. However. it is assumed that when eXpanding crop acres this original cost would be spread over two years: thus $50 of Operating capital is required for machinery rather than $100. This equipment must be financed out of the chattel limit and is assumed to be 60 percent self-financing. The added annual cost of owning the extra land includes machinery replacement ($10.00). tile and drainage maintenance ($5.00) and taxes of 1.3 percent. However. land values are expected to rise at an annual rate Of 2 percent. 80. when the "n 1)” land acquisition alternative is compared with feedlot expan- ,: i) sion an annual credit must be given to land purchase. (If the . land purchase alternative were to be considered for its own merits. it should be contrasted to opportunities for investment in the stock market.) The Operating capital needed in the year of purchase would be the total extra machinery purchased that year to facilitate Operating the extra land plus annual taxes and drainage expenses. Machinery Operating expenses are included in the production activities. Since there is overhead labor associated with the Operation of land. one hour is required for each acre added in the first 28 .\.‘- ’ . increment of rented or purchased land. one-half hour per acre for the second increment. but none thereafter. The larger scale machinery purchased along with the land assures that field Operations can be performed so long as adequate labor is available. (In fact. direct labor require:flm) ments per crop acre should be lowered as farm and machinery size increase--thus. machine capacity should be less of a problem with the larger Operation than with the original.) Costs and returns from renting or selling land are about the converse of those incurred in acquiring land. Since the Operator is required to buy machinery when acquiring land-—he should be allowed to sell when disposing of land. This would mean a $50 (market value) machine complement sale with each acre of land disposed and an accompanying loss of about $30 in the chattel credit limit. /:B_q_qf feeding activities To facilitate examination of the effects of price changes. feeder buying and beef sale activities are entered separately from feeding activities. (See Table 2.7) Beef is sold as car- cass beef. This provides a more reliable basis for comparison of prices between areas and simplifies price comparisons among feeding programs which give rise to slaughter beef animals which have different dressing percentages. / 29 .mcm «age cm vomumoogm comawzvo Oomacmom one oucm mauve mm uoxmuem: mumucmav as» ans» m:aes um xmmuas one a“ muwoaaw am cos: "sou m==O>OA cm vacuum mouccec came m==m2.l \m H ”.0! ”.0... . 2:5 ~08 mumps—WU . n.v n.v _. .szo become . me. o.~ owe: «seem e=2e_a=m . we. eo. . e .ee - Av. . u m .em - es. en. - v .ea - mm. ee. . n .ee - mm. ea. . N .ee - as.” mm.~ - _ .em - we.” co.n . .mu; geese Hm===< u oc.om oc.Cn u n awamawo unwashed: . mm.v ne.v . cos seesaw ease - we.e~ ee.e_ . .szo ebeo cm.vv- em.en em.en om.mn » ue==o>om .uxo new: new; .uso Home mumowamu ownmwm Mano umca seam “mom geese: x2 ammo ease moon Lem z one lot of cattle per year. Feedlot facilities can be utilized much more efficiently if a program is planned in which the facilities are used most intensely in the winter and least in the summer after hot weather arrives. Professor Robert Maddox of Agricultural Engineering and Dr. R. Hugh Henderson of the Animal Science Department at Michigan State University have concluded that 2 square feet of building space per hundredweight of animal is 4O sufficient in the winter. but 3 square feet is necessary in the summer. Using these constraints. the Space requirements shown in Table 3.3 were developed. These requirements are based on pur- chase dates of feeders that would maximize use per unit of build- ing space for each ration. Calves must be bought in the summer as well as in late fall in order to get maximum use out of a given amount of shelter Space. Fortunately for the farmer-feeder these purchase-sale patterns are somewhat supplementary to crop production in terms of labor re- quirements since heaviest demands for feedlot labor come in the winter. Unfortunately. if too many operators attempt to purchase feeder calves during the summer. the supply at that time will be- come limiting. In this case cattle of different weights can be bought at different times of the year to keep the lot filled in the winter. Whether these cattle are "calves” or ”yearlings” is of less importance than is the fact that a given building should contain more beef in the winter than in the summer in order to realize the significant decrease in overhead facility needs per head shown in Table.3.3. .o \ A decrease in building overhead leads to increased profits in 3 two ways. First. it means that each animal fed will have a lower feedlot facility cost charged against it. Secondly. a given size { feedlot will turn out a larger number of finished cattle in a ' Specific time period--thus. if returns over variable costs per head are positive. the larger volume handled through a given I fixed plant results in greater profits to the firm. Consequently.! 41 .m magma xmuceaa< eon huwomamo no comuanm~wa= E=EWXmE c>~a c~=o3 sows: mcucauaa ouamuvmmsouza we .c—asaxo you .mcmxoma choc ueuum -am 6:» cm once was menusouzc uc~ emccwm .ammuuzco 2H .mowgm we on: Esemxms mxme -m3 ma mesmu seam um acme mcmmsouza gum: macmguawm new mwmasouzc new» a mcemu ownsa he czu uzm ApoEE=m use Mummy mc>~mo new momusousa new» a coma» :c woman one mucoseumzcou zumomaao_l \N .um=m=< ucm mgsw .cczw am; ccm gmua< .uenoeoc .uocEcuaom scum: czm acnec>cz : : : : : mumzusmu can mumzcwn .ucnseoeo acmuzc usuwozcouvczz he: umew oumzdm N o. o. o. o. o. C o. o. o. o. 0. e NWO NNC‘D "we azaccs m: mucoseumacmu woman :c comma cum mnemum~=o~m0\w me "a av co co co macadcam» mm oo~ cc com n» no mc>~mu acmm euw=Um on we ems: tumccmam mo «sconce m~ mm 42 em a“ em macmficmm» m.c~ om m~ on mm mm me>~mo two; we; even eumzcm \NXamowamu " umomxuow H ” NMXamomcao " umezxucH H comuwm cook -=k u comps: manhucmucoo Ra xmwumomamu " umoaxuow n " Emuooum . :cmum: ommamm -< ” 2Haw= Seaman shomwzsz az< zHhu=ccmm mCh madam» memo az< oo.m oo.o~ m~.h ow.m oc.m oo.v mc.w mm ov 9v mm unecnmom -ao=z oo.m oo.c~ mm.» mn.m mv. mm. ov.m m.v c.m hm: ON Om" N.NN swam-m - awake - cuoo :mame>ua= - Naa O. I. .0 cuoo m=m30uo scamhm omwcmmpa lucoeecmgacz kwocwgeae o-uam \M.@ .m .aexeh may“; Eeaasu Ia wagon a “can \m acme-uocaca acme-nae: teem Imoww~wuuom n \N muneu :mmu ome- mow; .n~ z levee: nonmawuuom \~ acwvocu new ue>uomcun c~eww :oa ue.=n veamc>ums .ugomw umfib EOHH wise-Some 858mm 95¢ mum-1;... 59:. 79 .»~o>waoomuc unwamuoac mezoumc ecu me~ma u=maocx new casuwc:caxo ~m===<\M .euom won co» town we o=He> vc-awocuacc a new: geese-:Eee amezmzoas owmmn a :fieacmma ea emcee: ousamcecaxc ~a===<\m .t=m~ no c=~m> one we aceeuca n.~ on on tossmmm one moxmh\m .ccwzuwsn use taken we mean m.~ vegan: new mm «megs new on“: Ecuu=o\w .m-vum< “Home: acmsnmmoewfi~u .Hdmcmu< :m> >4 ccaueacu mm amen-zone tea 0 cc cemmm\m Atoscwucoovna.~.v mum<8 80 Situations conducive Le buying e: selling land With corn and beef at the standard prices a series of differ- ent land prices were considered to determine the prices at which land of the above specified quality would compete with a top feed- lot operation in Michigan. The land that could be bought had crop- land Of the same quality as that already operated. CrOpland con- stituted 90 percent of the acreage available for purchase so $500 land is equivalent to $556 per acre of cropland. At this price and a 15 percent downpayment, the Optimum solution on the 350 acre cash crOp farm Shows a‘slight preference for using limited real estate capital for buying land rather than feedlot facilities. The $30,000 real estate credit was utilized to buy 219 acres of land and a 298 standard unit capacity feedlot which was used to feed 542 head Of calves on the full feed ration. (When land is priced too high to be bought. the MVP of capital is lower and 20 percent of the 800 cattle fed are fed the 1 percent ration.) The land added 197 cropland acres to increase the total to 547 which was used to produce 256 acres of corn for grain. 232 acres of soybeans and 59 acres of corn silage. The soybeans were raised even though it was necessary to buy 2,482 bushels of corn because of the relatively high cost of purchased labor for the one Operator cash crop situa- tion. When the downpayment requirement on the contract for deed land purchase was drOpped from 15 to 10 percent, relatively more of the available real estate credit was used to buy land. With the lower downpayment, 400 acres were purchased at a price of $550 ($611 per 81 crop acre) along with a feedlot not much smaller than in the prev- ious situation. When the beef farm (a two man Operation with a 500 unit feedlot) situation was considered, more land would be bought at a higher price since labor was available to enable the farm to produce more of the corn needed for its cattle enterprise. The above examples illustrate the difficulty of pinpointing a land price that would make investment in land more attractive than investment in feedlots eyee if perfect knowledge 2!.323252 conditions ie assumed. The range in which land bought ee contract IEEWQEEQ begins to get priced out of the competition under the con- ditions assumed in this study-~which included an annual apprecia- tion in land values Of 2 percent--is $500 to $600 ($550 to $650 per acre of crOpland). The midpoint Of this range is where expanded cropping and expanded cattle feeding give equal returns to real estate capital as indicated by their respective MVP's when the two alternatives are considered separately for £22.2222H2522.£EEE° If the beef farm situation is considered. or if an assumption of economies of size in crop machinery costs is included, the upper end of this range is more apprOpriate. Conversely, if the assump- tion of an annual increase Of 2 percent in land values is removed. the lower end is more appropriate for the top cattle feeder who has not yet expanded cattle feeding facilities to utilize his corn production. Changed assumptions relative to crap and livestock efficiency levels or price relationships would also change the boundaries of this price range. 82 For example. as corn prices move up, the land of course becomes worth more relative to feedlots if beef prices do not also increase. If the corn price is increased by 10¢, more than $600 will readily be paid per acre of crOpland and, if cattle are fed. they get less corn grain in the ration. If beef prices are de- creased. the same changes occur since the MVP of real estate capi- tal devoted to feedlots drOps relative to that devoted to land in both cases. But. as indicated above. there is no sudden shift from one investment alternative to the other as price relationships change. Rather, since corn production and cattle feeding are in part complementary to one another, the MVPS of the two investment activities are brought back to equality by an accompanying shift in the amount of capital devoted to each activity. Competitive land prices were also determined for situations in which only average performance is achieved in the cattle feed- ing enterprise. The results from these are more indicative of the course of action that should be followed by the operator who is just average as a cattle feeder but perhaps above average as a crop producer. Average daily feedlot gains in this situation were assumed to be a quarter pound lower and corn and silage require- ments 15 percent higher than for the high efficiency case. This decrease in performance results in an increase in the amount that would be paid for land relative to feedlot facilities. The alter- native investments in this case would give approximately equal re- turns at about $700 per crOp acre in contrast to the $600 deter- mined for the high efficiency cattle feeding situation. 83 Several land disposal activities were checked under different situations. No land was rented out under the situations that were checked. Whether or not land was sold depended upon the terms of sale. Land was not sold on a contract for deed even if carcass beef prices were increased by $2.00 per hundredweight ($1.25 in- crease in live price) or corn prices were decreased. But, if land could be sold for cash. a limited number Of acres would be sold already at the ”breakeven” price of $600 per crOp acre. This occurred because the land could be exchanged for a relatively larger investment in feedlot facilities since this investment was 25 percent self-financing. This points out that the method of financing greatly affects the relative profitability of buying as well as selling land. If land can be sold for cash, the efficient feeder who is short of credit may sell some land so as to be able to finance feedlot expansion. 0n the other hand, if the sale is allowed only on some partial downpayment basis the cattle feeder would prefer to keep the land. Conversely. when looking at land acquisition alternatives, if limited capital must be used to buy land on a conventional mortgage basis it may not be a competitive alternative to the efficient cattle feeder. On the other hand, the efficient feeder who can buy land for a small downpayment will find it profitable to expand both in land and feedlot resources. Situations conducive £2 renting land Land rentals involve the use of large quantities of short term credit in contrast to the relatively greater demands on real estate credit required by land purchase. If a manager is 84 relatively short of one type Of capital or credit he will prefer acquiring land in such a manner as to require little of that type. Since the general programming model used in this study was structured so as to keep the two types of credit separate. the above preference could be demonstrated. But if both types of acquisition and disposition of property are considered at the same time in a situation where there is a wide divergence in the MVPS of the two types of capital. the profit maximizing program may select both a land acquisition and disposition activity at the same time in an attempt to equalize the two MVPs. For example, if land is allowed to be sold for cash at the same time that a rent-in activity is available, both activities may be selected thereby generating additional capital for feedlot expansion while maintaining crop acreage. If the two types of capital are earning about equal returns. the equivalent cash rent can be estimated in the usual manner of calculating a rate of return on investment in the land and then adding on the landlord's cash costs. (Annual appreciation of land should also be considered. In this study the landowner is assumed to obtain a capital appreciation income of 2 percent per year.) The higher the balanced level of the MVP of capital. the higher will be the equivalent cash rent since the purchase activity uses up about $60 per acre more of the combined credit restraints. Thus. if the MVP of the last dollar of credit is 10 cents. approx- imately $6.00 is added to the relative value of the rental alterna- tive. Given this situation and a land price of $500, an interest 85 charge of 5.5 percent and a landlord net cost of $2.00 ($12.00 cost less an appreciation of $10.00) gives an equivalent rent of $35.50 ($6.00 + $27.50 + $2.00). By contrast, if the MVP of capital is about 4 percent rather than 10 percent, a cash rent of $35.50 per acre would be equivalent to a $550 land price rather than $500. THE MINNESOTA SITUATION Crop alternatives in Southern Minnesota are essentially the same as those in Southern Michigan except that wheat is rarely produced. Oats is still produced on many farms but since it is not competitive on land capable of growing continuous row crOps. no small grain activity was considered in the Minnesota situation. Corn and soybean yields and production costs were estimated to be the same as those for Michigan. However, value of production is less in Minnesota due to lower crop prices. Corn was assigned an average annual price of $1.08 in contrast to the $1.20 used for the Michigan situation. The soybean price was set at $2.60 per bushel. I With the assumed yields, costs and prices. corn and soybeans were about equally profitable in Minnesota--with corn holding only a slight edge. When no cattle were fed, the cash crop farm situa- tion produced 191 acres of corn and 159 acres of beans. When cattle are added to the initial crop farm situation. enough corn silage is produced to fill requirements of the high concentrate ration and the remaining acreage is evenly divided between corn grain and soybeans. However, in the resource situation depicted 86 by the cattle feeding farm (2 men and buildings and silos for 500 head) no soybeans were produced. This was apparently due to the larger initial labor supply which permitted higher peak labor loads since the reservation price on labor was $1.40 per hour in con- trast to the $2.70 that had to be paid to attract more labor to Minnesota farms. The capitalized value of land in Minnesota Should be somewhat lower than in Michigan due to the lower value of crop production resulting from lower prices. However. this fact says nothing about the relative desirability of investing in feedlot facilities instead of land in Minnesota. The answer to this question again hinges on the relative profitability of these two investments in Minnesota. And, since cattle feeding geg_ee turned out to be about equally profitable in the two states, comparable Quality land must be bought for about $150 less in Minnesota. That is,the cash crOp farm Situation is indifferent to expanding crop acreage as opposed to investing in feedlot facilities at a $450 price per acre of cropland. Again, the two man cattle feeding farm would be inclined to pay more (about $50 per acre) for additional acre- age tO better balance land with labor and feedlot facilities. And with surplus operating credit available, the beef farm con- tinued to buy land even after the price was increased by another $200 per acre. (See Table4.2.) Also. other changes in price or production relationships would affect this "breakeven" land price as discussed in the previous section. 87 TABLE 4.2.--THE INFLUENCE OF AN INCREASE IN LAND PRICE ON ACREAGE PURCHASED vs. FEEDLOT FACILITIES PURCHASED BY THE MINNESOTA BEEF ”my Units of Feedlot Land Price Acres Purchased Facilities Purchased W $450 271 276 500 234 291 550 203 303 600 166 314 650 112 336 l/Initial resources were 350 crOp acres, 4500 hours of labor, a 500 head feedlot. $80,000 of Operating credit and $30, 000 of real estate credit. SUMMARY OF COMPETITIVE INVESTMENT OPPORTUNITIES ON NORTHERN CORN BELT FARMS The ”breakeven" land prices determined for the one family cash crOp farm in Michigan and Minnesota are surprisingly close to the current land prices in these states. However, overall results of the various land purchase activities considered in this study suggest that land prices will continue to move upward. This con- clusion stems from the following findings: (1) that one family can Operate more than 350 crop acres, (2) at present land prices, the land purchase alternative is a more attractive investment than feedlot expansion for the cattle feeder getting only average per- formance in cattle feeding, (3) as efficient cattle feeders expand to two or three man Operations they will be willing to pay above current prices to expand land acreage. (See Table 4.2.) 88 Thus, it appears that a strong demand for land will come from most above average crop producers whether or not they feed cattle. The exception will be the farmer who is doing very well with a small cattle feeding Operation and wishes to expand this first to fully utilize his home produced feed. Also, the operator who wishes to limit the total farm labor load to what he and his family can handle may favor feedlot expansion over land expansion. This one family Operation should be able to handle a 300 to 500 head feedlot along with 300 to 400 crop acres. Considering that variations do exist among farm Operators in both crop and livestock production efficiencies, additional Spe- cialization can be expected to deveIOp in cattle feeding and crOp production. As those who are more proficient in crop production continue to bid the price Of land up, proficient cattle feeders may find it to their advantage to buy a higher proportion of their feed rather than to compete for the land. To the extent that the efficient expansion-minded cattle feeder does expand in crOp produc- tion it is more apt to be via renting rather than buying. (or by contracting feed production from neighboring crop farmers.) At this time there appears to be little difference between Michigan and Minnesota in the relative profitability of investment in land vs. investment in feedlots. If any does exist it favors 1/ land purchase in Minnesota slightly more than in Michiganu— l/There are no precise land price series that quote current land prices in such a way that they can be compared with the "break- even" prices determined in this study. Consequently. the above judgment is based on land price estimates made by Extension Specialists, agents and farmers in the two states. 89 Given that the urban influence on land values will continue to be much greater in Michigan. land prices can be eXpected to continue to move up more rapidly in Michigan. Given this relative change in land prices and the previously mentioned pressures toward specialization. one might expect that relatively more cattle . feeders in Michigan will eXpand via the intensification route than in Minnesota. In conclusion. under the price assumptions of this study. investment in cattle feeding facilities can be competitive with investment in additional cropland for the efficient cattle feeder. However. the efficient cr0p production man who is only an ”average” cattle feeder is willing to pay more than current land prices and can be expected to bid land prices up. If land goes up in price relatively faster than the cost of feedlot facilities. Specialized feedlots can be expected to develop. This development is more likely to occur in Michigan than in Minnesota where feedlot facilities and farm acreages will tend to grow together on cattle ‘feeding farms since land prices are eXpected to remain closer to the value of the land for agricultural use. CHAPTER V COMPETITIVE POSITION OF THE NORTHERN CORN [ELT RELATIVE TO THE SOUTHERN PIAINS IN CATTLE FEEDING One major objective of this study was to compare the potential profitability of cattle feeding in the Northern corn belt with the profitability of feeding in the area of recent rapid growth. Dur- ing the last decade the rapid growth area has been in the South- western states--Texas. Oklahoma. Kansas. Nebraska. and Colorado. Marketings of fed cattle have more than doubled in these states since 1956. with Nebraska showing the largest absolute increase of 1.6 million head. Texas also had an increase in excess of one million head to show the largest percentage gain from a very small base. Kansas and Colorado each had increases of about 700.000 head. By contrast. Minnesota increased marketings by 224.000 head while Michigan and Wisconsin together had an increase of only 116.000 head between 1956 and 1966. The accompanying map shows the number of fed cattle marketed in all major feeding states in 1966 and the changes in marketings since 1956. Note that Iowa in- creased marketings by 1.5 million head to retain its first place position. For purposes of a detailed comparison of cattle feeding profitability with the Northern corn belt. the Platte River Valley of Colorado was selected for study. 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