July 23, 2024

Return on investment: Reducing input costs adds profitability for operation

ROCHELLE, Ill. — Switching from a traditional tillage system to a no-till and cover crop program can result in major benefits, including increased return on investment.

“It is hard to get out of the mindset that I need to maximize how much I’m going to make this year,” said Aaron Clark, who farms in west-central Indiana and east-central Illinois with his uncle, Rick, and grandfather, Richard.

“I urge you when you are trying to evaluate the optimal crop plan for your farming system to take a step back and look at the return on investment for the overall crop rotation of three or four crops,” he said during a presentation at the Illinois Conservation Cropping Seminar in Rochelle.

“It takes a few years for the soil to go through a change to begin to see more of the benefits,” Aaron Clark said. “I think you’ll see after four or five years that it was a better way to go than just doing a corn-corn-soy or corn-soy rotation and that you’re are actually financially better off to have a more diverse crop rotation.”

The Clarks have been planting no-till corn, no-till soybeans and cover crops for many years, as well as farming green for eight years.

Their entire farm is in a five-crop rotation that includes corn, soybeans, wheat, alfalfa and regen — which is a cover crop. In addition, the farmers plant 100% non-GMO seeds and 100% of the farm is in transition to organic.

“I’m striving to be a low cost input producer,” Rick Clark said. “My cost per acre of corn is $70 for non-GMO, untreated seed.”

Aaron Clark compared costs for the farm between 2011 and 2019, including items such as applying nitrogen, lime and chemistry costs.

“For 2011, which was the last year we did a sizable portion of tillage, we used 3300 horsepower to cover an acre of corn,” Clark said.

“In 2019, we were not running the tractor over those acres, not burning the fuel and not putting wear and tear on the machine,” he said. “Our requirement is down to 1200 horsepower and our actual cash leaving the operation went from over $650,000 to less than $120,000 in eight years and that doesn’t even include machinery costs.”

Moving to a no-till system with cover crops, Clark said, has resulted in yield stability for corn and soybean crops.

“Before cover crops, our corn yield would fluctuate 28 bushels for our farm average, and after cover crops that went down to less than 5 bushels,” he said. “Soybeans is a similar story with almost a 9-bushel fluctuation in yield, and today it’s less than 3 bushels.”

A more consistent yield aids with marketing the crops.

“You feel more comfortable in the amount of bushels you’ll have to sell earlier, so if there’s a marketing event like China buying soybeans, you have the confidence to make sales a little earlier than when the combine moves through the field,” Clark said.

“This is a system about building soil health, being a good steward, being regenerative and the yield will come along for the ride,” Rick Clark said.

“You can adjust the fixed costs to better fit your yield environment like how much debt you can take on, the cash rent you can pay, or the capital expenditures you want to make,” Aaron Clark said.

Although some farmers are concerned they will see reduced yields with a no-till and cover crop system, that is not the case for the Clarks.

“The national corn trend line yield is 4 bushels per acre, and we’re seeing our corn yield going up around 3 bushels per acre,” Aaron Clark said. “And it is a similar story with soybeans.”

Purdue University does a mock budget that estimates the cost for a farmer to plant one acre of corn, and Clark did a similar budget for his farm. The Purdue numbers are based on an expected yield of 211 bushels per acre and a market price of $3.70 per bushel.

“For my budget, I have our yield at 200 bushels per acre with the same market price,” Clark said.

“This mock farm will lose money in 2020,” he said. “To breakeven, the corn needs to yield 222 bushels an acre, or the price needs to go up to $3.80 per bushel.

“With our system, our contribution margin is $100 per acre higher and our breakeven yield is 140 bushels per acre and the price can go to $3.11 per bushel,” he said. “That is all coming from keeping the inputs low, so we don’t need the same amount of yield.”

Clark talked about the debt service coverage ratio that measures the ease that an operation has to pay off a debt the farmer has with a lending institution.

“The Purdue mock budget has a debt service coverage ratio of negative 21 cents, and that means for every $1 of debt, the farmer has only 79 cents to pay it,” he said. “For every $1 of debt, our operation has we have $1.45 to pay it, and the industry standard is $1.20.”