Developing Financial and Risk Management Tools for Organic Grain Farmers

Progress report for GNC18-262

Project Type: Graduate Student
Funds awarded in 2018: $12,000.00
Projected End Date: 10/30/2021
Grant Recipient: Purdue University
Region: North Central
State: Indiana
Graduate Student:
Faculty Advisor:
Brady Brewer
Purdue University
Faculty Advisor:
Nathan Delay
Purdue University
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Project Information

Summary:

This project will develop a dynamic financial calculator using enterprise budgets and financial indicators for transitioning and certified organic grain farmers. This software will be hosted online at the Horticulture Business of Purdue University, and available free of charge. Software can be used by farmers, extension educators, or financial institutions to determine the financial feasibility or profitability of transitioning to organic certification, or adding a new crop into a rotation. The software will be built conducting interviews with farmers to test enterprise budgets from the Center of Commercial Agriculture and determine the actual enterprise budgets faced by transitioning and certified grain farmers. These enterprise budgets will be used for building the software. Software outputs will be measures of financial health and efficiency, including net present value, internal rate of return, benefit cost ratios, and risk that can be used to determine certification, addition of a new crop in a rotation, or operational expansion are feasible and profitable. Additional calculations presented by the software will include profit per acre, return on investment or equity, and fixed and variable costs per acre which can be used to determine how the operation is performing relative to industry benchmarks found by the enterprise budgets. Two workshops will be held for farmers and extension educators to demonstrate software use and explain how to interpret outputs. A guidebook containing the same information will be published. Findings from this project will be published in a peer-reviewed journal and presented at two regional conferences. By using this software, farmers can more successfully transition to certification and maintain certification in the long-term, increasing the adoption rate of sustainable agricultural practices. Ultimately, this project will assist the adoption of organic certification and provide information to the financial decision-making processes of grain farmers in the North Central Region (NCR). Increased adoption of organic practices will improve the adoption of sustainable agricultural practices in the NCR.

Project Objectives:

We will generate a financial tool for grain farmers, extension educators, and financial institutions to assess financial feasibility of transitioning and certified organic grains. This software will be dynamic, allowing for assessment of the profitability and financial feasibility of crops rotations over time. This tool could result in improved record keeping and long-term sustainability for organic grain farmers. Farmers using the tool can plan and budget growth and expansion of grain operations. In order to build the software, enterprise budgets of organic, transitioning, and conventional crop rotations will be utilized. This project builds upon our current NCR-­SARE grant (LNC17-397), in which we are analyzing the demand for organic grains, and grain buyer preferences and perceptions.

The tool would also allow grain farmers to assess a production goal and analyze their financial efficiency in meeting that goal. Being able to use this software to easily assess and monitor cash flow, return on investment/equity, variable costs, and revenue per acre can allow farmers to track yearly performance and identify areas of improvement and expansion in their operations. Increasing production of domestic organic grains could soften the dependency on imported grains and assure the economic sustainability of the organic industry.

This project is anticipated to attract novel farmers to organic production and reduce decertification of organic operations. Farmers will be able to access new market opportunities for other grains utilized in organic crop rotations, like small grains. Increased adoption of organic practices will improve the adoption of sustainable agricultural practices in the NCR. 

Cooperators

Click linked name(s) to expand
  • Dr. Michael Langemeier (Researcher)
  • Michael O'Donnell (Researcher)

Research

Materials and methods:

Our overarching goal is to increase the sustainability of the organic grain industry in the North Central Region. To this end, we will meet with advisory board members at the onset of the project, to identify farmers to interview, and midway through completion of the project to ensure the project is on track and receive feedback on workshops introducing our financial tool. Annual meetings, email, and/or phone communication will provide us with key feedback for our financial tool. The advisory members will be a diverse group of grain farmers from Indiana, with varying levels of experience in organic production, scale, and diversification. As needed, we will also request support from extension educators, certifiers, and organizations in the organic industry to ensure the representation of the sector. 

In years 1 and 2, a dynamic financial calculator (software) will be 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, internal rate of return, benefit cost ratio, and risk; all 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, return on investment or equity, as well as fixed and variable 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 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.  Return on investment/equity will be calculated as a ratio of total returns from a decision divided by the total investment cost (including financing) or total equity invested.   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 and other 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. 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. The calculator is undergoing a final round of formatting to increase user friendliness and the addition of an instruction page before being sent to farmers for feedback (described below). This will be completed by Summer 2021, allowing for farmer feedback to be collected beginning in the same period.

In year 3, we will interview NCR grain farmers that have transitioned and those operating as certified organic. The purpose of these interviews is to accumulate feedback on the calculator built. These interviews will serve 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.  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 will overcome these challenges by allowing farmers to reach long term financial sustainability across several crop rotations. Farmers will be identified and selected with guidance of Purdue’s Organic Extension team.

An extension publication is being written introducing this financial tool, uses of this tool, and directions for working with the calculator. This publication will be peer-reviewed and published in the Purdue Organic Extension series.

The final component of this grant involved attending workshops/regional conferences to present this work. However, the COVID-19 pandemic canceled workshop events targeted in 2020, and the outlook for these workshops for 2021 is uncertain at this point. These workshops typically run in the summer/fall. Ideally, this work would be able to be presented at the anticipated workshops summer/fall 2021 after receiving farmer feedback. However, alternate options are being considered.

 

Research results and discussion:

Data for the construction of this calculator was released October 2020. The calculator has now been built and is undergoing editing before sending out for farmer feedback and presentation at regional workshops.

Participation Summary
3 Farmers participating in research

Educational & Outreach Activities

4 Consultations

Participation Summary

3 Farmers
2 Ag professionals participated
Education/outreach description:

These activities are scheduled to begin Summer 2021, pending COVID-19 related restrictions.

Hands on workshops will be held in year 3 to help grain farmers mitigate risk and uncertainty associated with adoption organic certification. The workshops will take place at the Indiana Organic Grain Farmer Meeting and the Indiana Small Farm Conference. The main goals of these workshops will be to use the organic financial calculator (software) to train farmers and extension educators on potential profitability, financial benchmarks, and risk mitigation strategies for organic grain production systems.  Cost-benefit decision techniques will also be discussed in order to ensure proper interpretation from financial health parameters that are displayed by the software.  Workshops will also stress the importance of record keeping for farmers and demonstrate the value of records in being able to track business progress over time. The workshops will be followed by a panel of farmers, in which participants will share their experiences and financial benchmarks while transitioning to organic grain production. We expect that these events will create farmer-to-farmer organic networks, which has been shown to increase the adoption and success of organic production practices. 

Project Outcomes

3 New working collaborations
Project outcomes:

Anticipated project outcomes:

Short term

·         Knowledge for farmers/ extension agents/financial institutions to investigate the financial health or feasibility associated with organic grain production

·         Produce a tool (software) to set a production goal and analyze the efficiency of the business in meeting that production goal

·         Increased profitability and financial health of organic grain operations in the NCR

·         Improved recordkeeping among organic grain operations

·         Publication of financial benchmarks for organic grain operations in the NCR

Medium term

·         Allow organic grain farmers to become more financially efficient by allowing them to monitor measures of financial health, aiding in the identification of areas of their business that could be improved

·         Growth of the organic grain market by increasing the domestic supply of organic grains from the development of a tool that would allow those considering organic grain production to accurately measure the amount of risk that would be involved in organic conversion and production

·         More stable supply of organic grains from the development of a financial tool accessible to farmers and benchmarked information for the organic grain industry

Long term

·         Attract novel farmers to organic certification

·         Reduce decertification though ability to track financial performance

·         Increased market opportunities of other grains used in organic crop rotations

·         Improve adoption and retention of sustainable practices in the NCR

Knowledge Gained:

Further technical understanding of organic grain production systems has been obtained through this project.

Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or SARE.