Developing Financial and Risk Management Tools for Organic Grain Farmers

Our overarching goal is to increase the sustainability of the organic grain industry in the North Central Region. To this end, we established an advisory board at the onset of the project.  The advisory board helped identify financial support materials/tools that farmers in the organic grain industry needed at that time.  Consequently, our financial tool was built based on the advice of the advisory board.  Advisory board members were also invited to review and provide feedback on the calculator that was developed.. The advisory board consisted of a diverse group of grain farmers from Indiana, with varying levels of experience in organic production, scale, and diversification. Additionally, Purdue's new Extension Organic Agricultural Specialist aided in contacting/recruiting organic grain farmers in Indiana and surrounding states to test and provide feedback on the tool that this project developed.

In years 1 and 2, a dynamic financial calculator (software) was developed using data collected from enterprise budgets, and will allow farmers to explore transitioning or adding new crops into their rotation. We will follow enterprise grain budgets already developed by the Center of Commercial Agriculture at Purdue University to summarize information provided and to develop financial indicators for transitioning and certified farmers.  Data on the costs and revenues of grain production will be obtained from three “representative farm” scenarios: 1) the feasibility of a beginning farmer transitioning to produce organic grains, 2) the feasibility of a traditional grain producer shifting a portion of their acreage into organic , and  3) the feasibility of an entire operation to organic certification using different crop rotations.   Financial indicators that will be included in the calculator will be net present value and  benefit cost ratio, which serve as measures of risk; both of which can be used to determine if transitioning or adding a new rotation will be the most profitable option for a farmer.  Software will also present revenue per acre, as well as costs per acre.  This information will be compared with benchmarks from the industry obtained from enterprise budgets, allowing farmers to assess their performance relative to industry benchmarks and track their own performance over time. 

As previously mentioned, financial indicators can be used to assist in on-farm decision making.  Net revenues per acre will be calculated by subtracting per acre costs from per acre gross revenues.  Overall cost of transitioning will be the sum of all fixed and variable costs incurred during the transition period.  Net present value is a measure that puts all monetary values in in the current year, and future years, on the same time-basis, this is a time weighting of financial flows.  The net present value can be used on cash flows of individual costs/revenues or total costs/revenues.  When looking at the total net revenue, a greater net present value is most beneficial.   The benefit cost ratio will be calculated by dividing the net present value of total benefits/revenues by the net present value of total costs.  If the benefit cost ratio is greater than one, then the interpretation is that the crop rotation decision is profitable.  Higher benefit cost ratios are more beneficial.  Though both of these measures seem to have the same interpretation, there is agreement among scholars about the use of these parameters, as multiple should be investigated when choosing the optimal decision. 

The financial tool was built using enterprise budget information from organic crop production released in October 2020 by Purdue University. As previously mentioned, this tool is a simplified, interactive version of an enterprise budget, and is not meant to replace the enterprise budget. Consequently, some information found in the enterprise budget is not included in this financial calculator and vice versa. Additionally, this financial calculator does not give long-run projections (10 years), but gives outlooks over a single year and a complete rotation cycle. The calculator asks the producer to input operation costs of farm activities pertaining to corn, soybean, and wheat production, before asking the producer to input anticipated price, yield, variable costs, and frequency of fieldwork and harvesting activities. The calculator then presents the total income per acre, total cost per acre, and the annual benefit-cost ratio for each crop (corn, soy, wheat) for both transitioning and organic crops. The calculator then presents a risk analysis by sensitivity of yield and price deviations for each crop individually, and for each crop rotation.

In year 3, we we interviewed NCR organic grain farmers that are transitioning and those operating as certified organic. The purpose of these interviews is to accumulate feedback on the calculator built. These interview allowed to assess the usability of the calculator by farmers and other individuals, as well as gain insight on parameters individuals would like to see added to the calculator.  Feedback provided by farmer interviews allowed researchers to make modifications to the calculator to enhance farmer usability, interpretation, and understanding of their financial status.  Though many enterprise budgets have been created by researchers and extension specialists, most of them are static and do not allow to analyze the financial feasibility of different crop rotations over time. Additionally, enterprise budgets are typically not interactive, in a way that do not analyze the financial impact of different farm scenarios. Our financial tool overcomes these challenges by allowing farmers to reach long term financial sustainability across several crop rotations. At the beginning of Fall 2021, we reached out to 46 organic grain farmers in Indiana inviting them to provide feedback on our calculator, and compensating them with a $100 Amazon gift card after completion of the feedback process.  The feedback process included the farmers receiving the calculator (via email) and asking them to spend time on their own reviewing it.  We would also schedule a time to meet with farmer's via Zoom for them to provide feedback on the calculator.  The feedback meeting would be scheduled upon sending the interested farmer's the calculator for review.  Nine farmers expressed interest in completing the feedback process and were sent the financial calculator for review.  However, only one farmer scheduled and completed the feedback process.  Thus, one farmer received the compensation set by the study.  Nonetheless, the farmer provided valuable insights on alterations the researchers could make to improve the usability of the calculator.  After receiving feedback, researchers then amended the calculator to be more flexible in field operations farmer's could input, and provide additional clarity to the risk table outputs including how to interpret risk outputs and what the new prices/yields would be under various percentage based changes in prices and yields.

To date, an extension publication is in process.  The purpose of this extension publication is to introduce this tool and potential uses of the tool.  Due to the close relationship and ability of this tool to be used alongside a developed enterprise budget, we are inviting the producers of the enterprise budget to be coauthors of this extension publication.  The goal of inviting these coauthors is to be able to produce an extension publication that would show farmers how to use these two respective tools together to gain a more complete financial understanding of their operation.  Though inviting these coauthors has delayed our publication release, it is believed that the extension publication produced by this act will be much more useful to those interested in or currently producing organic grains. This publication will be peer-reviewed and published in the Purdue Organic Extension series, estimated release of this publication is February/March 2022.  No funding is needed for this extension publication.