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 Knowledge for the CommonWealth

The Management Calendar

Farm Business Management Update, April/May 2003

By Gordon Groover

The start of the second quarter of 2003 was a little rough - Blacksburg got 8 inches of snow on March 30. Yet last year at this time, most farmers in the East were concerned about drought conditions and the prospects for an even drier summer. As we start a new production season, drought condition worries have been relieved from a winter of rain and snowfall, but farm business managers' worries have not subsided. This year starts a new year with higher energy costs that will impact prices of all petroleum-based products (diesel, pesticides, nitrogen fertilizers...) and bulk commodities that must be shipped long distances. The best way to get a handle on cost control of petroleum related expense is to review last year's crop, livestock, and financial records looking for trends and problem areas and to identify the top five cash expenses.

Bill Brant (retired Virginia Tech Farm Management Specialist) illustrates the key point for any decision using the following Virginia Tech agronomic data presented in an updated example from the 1980 budget guide. Consider the response of corn grain on Congaree, Davidson, and Cecil soils to varying levels of nitrogen (Table 1). From the data presented, the productivity of the soils for producing grain declines from left to right with Cecil being the least productive. As additional nitrogen is applied the yield of corn grain declines. The largest response to nitrogen is to the first 40 lb. application.

This marginal analysis provided by data in Table 2 looks at the cost of the incremental increase (40 lbs.) in nitrogen and the added value of the incremental increase in corn grain yield for the three soils. Table 2 is based on $0.25 per lb. for nitrogen and corn grain sales of $2.50 per bushel. The values in Table 1 are multiplied by their prices yielding the marginal cost or value of a change in yield. Therefore, a farmer looking to make efficient use of nitrogen on these three soils would apply the first 40 lbs. of nitrogen on the Davidson soil followed by two 40 lb. applications to the Congaree, then the Davidson, and so on. The first unit of nitrogen would not be applied to the Cecil soil until 160 lbs. had been applied to the Congaree and 80 lbs. were applied to the Davidson. Under the stated prices, 200 lbs. (Congaree), 160 lbs. (Davidson), and 120 lbs. (Cecil) of nitrogen are the best or profit maximizing choices. Note: Applying more that the levels listed above leads to a decline in profits from additional nitrogen fertilizer applications.

Now consider the current situation when nitrogen prices increase to $0.40/lb. Table 3 illustrates the profit maximizing reduction in nitrogen usage for these soils with a 60% increase in nitrogen price and corn price remains the same. Total nitrogen usage on the Congaree does not change however, nitrogen is reduced by 40 lbs. on the Davidson and the Cecil only receives 40 lbs. total.

Similar points could be made as prices of both corn grain and nitrogen are changed. However, the key concept is to match the input usage with the expected returns. This concept applies to most inputs for crops and livestock. Be sure to use your crop and livestock records to support your decisions to use inputs (fertilizer, seed, fuel, pesticides, feedsŠ) and for culling and/or cropping plans. From this simple example, a prudent farmers should always ask, will 40 more pounds of N per acre or 5 more pounds corn per head per day lead to more profits or will it lead to more losses?

Calendar Items

Listed below are the items that need to be included on the farm business managers' calendar for spring of 2003.

Now is the time to put your plans into action and enjoy spring, uh, when the snow melts.

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