Agronomist Notes

It’s March 28th, there’s a foot or two of snow on the ground and the forecast is for a high of plus one. Needless to say, there hasn’t been much happening on from the farming front. Machinery is slowly being pulled, ah, into the shed to start going over pre-seed maintenance. Seed cleaning is nearly finished with some cleaning extra barley, just in case things get late.

This week’s Beyond Agronomy News we’ll compare AFSC’s spring price endorsement to buying a put option to protect price risk. Next, we’ll look at a study that compares high-profit farms to low profit farms and why they differ. Last, we’ll look at the temperature effects on wheat and barley pollination. We’ll finish with fundamental and technical grain market news.

Agronomy

 

Spring price endorsement vs. put options

With heavy volatility in the grain markets the last few months, minutes, days, years I was thinking about the spring price endorsements offered by AFSC. The SPE provides a floor price on commodities for a specific level of production. For example, if your crop insurance average is 40 bu/ac on canola at 80% then you could lock in a floor price on that 40 bu/ac. It may seem quite attractive to some to be able to lock in a floor price and still have upside potential but things aren’t always as they seem. I decided to look into the cost of buying a November Canola put option through a broker versus the SPE which both provide a floor price and leave upside potential on price. 

Steve’s quick math

Canola SPE: $11.00/bu or $485/T
SPE trigger price: $485 × 90% = $436.50/T
November Canola put option @ $435.00/T = $4.30/T ($3.80/T put + $0.50/T commission)
My SPE $/T: $6.92/ac ÷ 0.504T/ac = $13.73/T

When you break it down, the SPE is locking in a floor price of $436.50/T and not $485.00/T as posted. The price of November canola has to average 10% below $485.00/T during the month of October before the SPE is triggered. In my case, the true cost of the SPE is $13.73/T when you consider my production average and 80% coverage level. Essentially, I’m locking in a floor price of $436.50 for $13.73/T with the SPE. Compare that to a broker and I can buy a $435/T November put option including commission for $4.30/T. AFSC is charging me more than three times the cost of a put option to offer the same floor price on canola! In this example the SPE is not your best option, literally. If you really wanted to spend $13.73/T on price insurance, you could buy a put option with a floor price of $500.00/T and be $65.00/T ahead. SL

Source: Farms.com http://www.farms.com/FarmsPages/Markets/tabid/214/Default.aspx?&page=optqte&sym=RSX11

What separates high profit farms from low profit farms?

I was reading through a 10-year study from Kansas State University that looked at the differences between high, medium and low profit wheat producers. In spite of many uncontrollable variables that impact farm profitability, there are some within the farm manager’s control. The study looked at these variables and outlined what separated the high profit farmers from their peers. 

Economies of scale

High-profit farms farmed 10% more acres than mid-profit farms and twice as many acres than low-profit farms (i.e. there are financial benefits from economies of scale and the advantage is growing).

Cost of production

Machinery costs had the biggest impact on profitability. Machinery costs were 33% lower for the high-profit farms relative to the low-profit farms. The second greatest influence on farm profitability was the ability to buy crop inputs with fertilizer and herbicide in the top two. High-profit farms spent $18 an acre less on fertilizer and herbicide than the bottom third.

Price and yield

The average yield difference plays a larger role in explaining income differences than the average price difference. Yield and grain prices contributed the least to overall profitability. There’s little evidence indicating that producers can consistently get higher prices than the average (i.e., the fact that they get a high price one year is somewhat of a random occurrence).

What this study revealed was that farm managers should focus on building economies of scale and controlling costs without sacrificing yield. High-profit farms had the highest income, lowest cost, and highest acreage of the three groups leading to a difference in returns of approximately $120 per acre. The differences in profitability were primarily driven by cost and yield differences with cost being number one. Having reviewed fixed costs across dozens of farms I’ve seen differences in machinery costs upwards of $80 an acre. With variable inputs, the difference in fertilizer cost alone across my client base is $13.50 an acre in 2011. Some of us really love agronomy but we must also wisely consider machinery and crop input purchases to separate us from the rest. SL

Source and to read more about the study go to:
http://agmanager.info/crops/prodecon/production/KCD_MAC_Winnipeg%28Dec2010%29.pdf

Record 212 bu/ac Harrington barley in Alberta

I was sent some archived research from the late 1980’s last week looking at Intensive Crop Management or ICM. The research project tried to evaluate a number of different intensive crop management practices in wheat, barley and canola. The research sites were located in Lacombe, Calmar, Lethbridge and Vauxhaul. The project looked into high fertility, fungicides, growth regulators and high plant populations.

With higher commodity prices and new multiperil insurance programs, I think it’s time to revisit the potential for intensive crop management once again. Seventeen years has passed since this research was published and advancements in genetics, technology and agronomy may give way to even better results.

Here is a summary of the treatments and results:

Wheat
Plant density: 315 plants/m2
Fungicide: Tilt at 200 ml/ac at flag leaf and Tilt at 200 ml/ac at ear emergence
Growth Regulator: Cerone sprayed at 400 ml/ac at booting stage
Nutrients: 146-27-54-27 + 5 lb Zn, 2 lb Mn, 2 lb B, 1 lb Cu deep banded prior to seeding. 27 lbs of P205 was seed placed. 
Row spacing: 7 inches
Rotation: barley, wheat, canola
Variety: Katepwa
Max Yield: 132.9 bu/ac
Yield Range: 61 bu/ac to 132.9 bu/ac 

Barley
Plant density: 315 plants/m2
Fungicide: Tilt at 200 ml/ac at flag leaf and Tilt at 200 ml/ac at ear emergence
Growth Regulator: Cerone sprayed at 400 ml/ac at booting stage
Nutrients: 146-27-54-27 + 5 lb Zn, 2 lb Mn, 2 lb B, 1 lb Cu deep banded prior to seeding. 27 lbs of P205 was seed placed. 
Row spacing: 7 inches
Rotation: canola, barley, wheat
Variety: Harrington, 2-row
Max Yield: 205 bu/ac
Yield Range: 114 bu/ac to 205 bu/ac

Canola
Plant density:  7 lbs/ac
Fungicide: Benlate @ 500 g/ac
Growth Regulator: Terpal C @ 200 ml/ac at 30% bloom
Nutrients: 146-27-54-27 + 5 lb Zn, 2 lb Mn, 2 lb B, 1 lb Cu deep banded prior to seeding.
27 lbs of P205 was seed placed. 
Rotation: wheat, canola, barley
Variety: Westar or Pivot
Row spacing: 7 inches
Max Yield: 80.1 bu/ac
Yield Range: 35.1 bu/ac to 80.1 bu/ac

The most interesting results from this study indicate that the fungicide treatment (flag and ear emergence) plus the growth regulator in barley was the highest yielding treatment with a maximum yield of 205 bu/ac. High plant populations increased wheat yields in most years but only 50% of the time in barley. The growth regulator treatments decreased wheat stem length by 10% and barley by 5% to 15%, but rarely increased yield in this study. The only significant effect on canola yields came from the high fertility rates compared to normal fertility rates.

I shared the basic agronomy used during this four year study and I don’t want to get caught up in those details. What I would like to point out is that the time has come to revisit ICM given the potential return on investment, equipment, genetics, technology, and agronomy support available to us today. I’ve run some numbers on business as usual agronomy programs compared to an ICM program for barley and costs are about $110/acre higher for ICM. If we could find a way to cover off the additional risk, the potential returns are staggering. For example, 150 bu/ac malt barley verses 90 bu/ac malt barley, even with $110/ac more in inputs, the additional revenue is $360/acre gross and $250/acre net. The risk is high but so is the return. It’s a matter of finding a new balance between production costs, returns and protecting the added risk. SL

Source: D.C. Penney, J. Helm and R.H. Mackenzie: Intensive Crop Management Systems for Dryland and Irrigated Barley, Wheat and Canola Production – Farming for the Future Project 1994

New farm applications for your iPhone

There are a number of new resources available to overseas farmers with iPhones or iPads from Apple. Unfortunately, the applications are tailored for countries like Europe and Australia and not Canada. No-one in Canada has designed an application that has relevance to Canadian farms but I’m sure it’ll eventually happen. When it does I’m ditching the Blackberry for a different fruit! I really like the concept of all three of these applications.

Have a quick look to see what’s up and coming in the smart phone technology world for agriculture:

iPad field records app
http://itunes.apple.com/au/app/agro/id413485998?mt=8

iPhone tank mixing app
http://www.mixtankapp.com/ 

iPhone Growing area index app
http://www.fwi.co.uk/landing-page/arable/GAI-app/