Developing Financial and Risk Management Tools for Organic Grain Farmers

Final 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 and benefit cost ratios, serving as risk measures that can be used to determine if 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, 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. Farmers were given the opportunity to test and provide feedback on the calculator via Zoom.  This was an alteration to the original plans of hosting workshops that was necessitated by the COVID outbreak and the resignation of Purdue's Organic Extension Specialist.  The calculator includes an instruction page that farmers/extension educators/other users will see when first opening the calculator.  The purpose of this instruction page is to allow the calculator to be a stand alone item without the need of additional guidebooks or resources.  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.  These organic enterprise budgets were built by the Purdue Center for Commercial Agriculture and made freely available to farmers in late 2020.  The tool built in the present project is intended to work alongside the enterprise budgets already available to provide farmers a more comprehensive understanding of their financial horizon.  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/collapse or show everyone's info
  • Dr. Michael Langemeier (Researcher)
  • Michael O'Donnell (Educator)
  • Ashley Adair (Educator and 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 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.

Research results and discussion:

Feedback provided on the initial draft of the calculator indicated that the calculator was easy to understand, the instructions were clear and that the calculator was providing reasonable numbers that farmers have experienced.  Farmers also indicated they feel this tool will be useful in farm planning and for farmers considering transitioning into organic production.  The farmer would also recommend this tool to other farmers.  It was indicated that we needed to add more flexibility in field operations used by farmers and add price/yield values to the risk tables as opposed to just having percentage increase/decrease in prices and yields.  Additionally, it was suggested to have a description of net present value and the benefit cost ratio in the calculator itself to make it more self contained.  We worked to incorporate all of the suggestions we received during the feedback process to produce the final version of the calculator attached to this report.  

The final version of this calculator will be hosted on Purdue's Organic Agriculture website and available free of charge to the farmers.  There is some debate on what Purdue entity will host this website in the future as the new organic extension specialist now holds a departmental affiliation, causing some delay in this calculator being available online.  The hosting of the Organic Agriculture website is set to be determined January 2022, at which time the calculator will be made publicly available.

Participation Summary
4 Farmers participating in research

Educational & Outreach Activities

7 Consultations
1 Curricula, factsheets or educational tools
2 Online trainings

Participation Summary:

4 Farmers
3 Ag professionals participated
Education/outreach description:

As previously mentioned, the advisory committee consisting of 3 farmers met at the onset of the project to indicate what kind of financial indicator tool organic grain farmers needed.  This input was taken into account when creating the calculator in the present study.  Once the calculator was built, it was reviewed by extension educators and other agricultural professionals before sending to farmers.  One extension educator also requested an online meeting to fully learn the tool.  One farmer participated in our feedback process, which also encompassed an online meeting.

 

An extension publication is currently in progress.  The calculator built is also in the process of being published online.  We hope that once the calculator is publicly available, we will be able to participate in field days and workshops that the new Extension Organic Agriculture Specialist at Purdue will plan.

Project Outcomes

4 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.

Information Products

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.