6.8 Break-Even Analysis and Interest Rate Considerations
in Precision Agriculture Adoption
Investigators
Carl
R. Dillon, Agricultural Economics, cdillon@ca.uky.edu
Steve Isaacs, Agricultural Economics, sisaacs@ca.uky.edu
Introduction
Precision agriculture is not an inexpensive new technology to adopt.
However, the benefits of increased yields and reduction of some inputs
(such as fertilizer) can justify the adoption of this technology.
Nonetheless, the question arises as to how much additional yield or
reduced input is needed to justify the new technology.
Farmers considering precision agriculture production are concerned
whether or not it will be profitable.
If the perceived benefits of greater yield and reduced inputs outweigh
the additional costs of adopting precision agriculture, it will be more
profitable to engage in precision agriculture production.
Another benefit of precision agriculture is the potential for
environmental improvement associated with reduced chemical application.
To the extent this is true and society values environmental improvement,
the benefits of precision agriculture to the individual producer will understate
the total value of precision agriculture. This
in turn means that farmers will invest too little in precision agriculture
because they are considering only their profit and not the benefits to society
resulting from environmental enhancement. Consequently,
society should be willing to assist farmers in adopting precision agriculture to
the extent that farmers will under-invest in the technology.
Cost sharing or interest rate buy down represent means of encouraging
farmer adoption of precision agriculture.
Objectives
The fundamental purpose of this research project is twofold. First, it is
to provide Kentucky farmers with insights regarding the necessary yield
differences or input differences that justify the adoption of precision
agriculture. The second purpose is
to provide information to policy makers regarding the required interest rate buy
down that would place precision agriculture on an equal footing with
traditional, field average agriculture. The specific objectives are to:
Develop break-even
procedures to calculate the additional yield required to justify the
adoption of precision agriculture,
Develop break-even
procedures to calculate the reduced input level required to justify the
adoption of precision agriculture and
Develop break-even
procedures to calculate the reduced interest rate required to justify the
adoption of precision agriculture.
While
this research is not unrelated to current analysis being conducted by Debertin,
Fleming and Dillon that proposes to examine capital requirements and potential
adoption rates as related to farm size, this project has a different focus and
somewhat different analytical methods.
Specifically, it aims to provide farmer’s with simple benchmark figures
in evaluating the benefits needed to justify investing in precision agriculture
technology. Additionally, it hopes
to provide policy makers with information regarding benchmark levels of
incentives that might be required to induce farmers to invest in precision
agriculture technology to account for social benefits (e.g., environmental) not
being reflected in the producer’s decision-making process. A differential break-even analysis is proposed as an
evaluative approach as briefly discussed later in the section on procedures.
Background
The
usefulness and applicability of break-even analysis for agricultural production
decisionmaking and planning has been proposed and discussed (Kay and Edwards;
Schmisseur and Landis; Casey; Dillon and Casey; Forster and Erven; Herbst;
Barnard and Nix; Giles and Stansfield). Agricultural
enterprise budgeting enables farm managers to conduct break-even analysis,
estimate production costs and select among various production alternatives.
The more common break-even yield and price relationships have been
expanded to incorporate more advanced break-even components such as acreage or
usage levels for machinery management (Herbst; Forster and Erven; Barnard and
Nix), returns above purchase and feed costs for livestock management (Herbst),
break-even output price and yield analysis between agricultural enterprises
(Casey; Herbst) and break-even output price elasticities between agricultural
enterprises (Dillon and Casey). While
the budgeting techniques and break-even analysis equations already developed
serve as worthwhile and relatively simple decision-making tools, further
development of advanced enterprise budget break-even analytical procedures has
been suggested (Giles and Stansfield; Forster and Erven). Attention has been
devoted to computerization of existing budgeting and break-even analysis (Levins
and Rego; Hoag; McGrann, et al.), as
well as concerns over the means of data estimation (Libbin and Torell) and
linkages to economic theory (Bradford and Debertin).
Methodological development for deepening the comprehension of interactive
effects, studying implications of risk, and providing detailed information is
possible by using more advanced break-even analysis of existing agricultural
enterprise budgets has also been undertaken (Dillon).
Procedures
The economic analysis satisfying these objectives calls for a combination
of enterprise budgeting, partial budgeting and break-even analysis.
These will be discussed in turn with the data requirement needs also
explained.
The enterprise budgeting technique is mechanism for conducting detailed
analysis of production costs associated with a given commodity.
Budgets for traditional and precision agriculture production will be
developed. Standard crop
enterprises important to Kentucky will be included: corn, soybean and wheat. Computerized enterprise budgeting software will be used:
Mississippi State Budget Generator. Operating
and ownership costs will be estimated using standards for production economics
and the American Society of Agricultural Engineers.
Data required for these enterprise budgets include machinery prices,
input prices and input requirements. Published
data regarding current Kentucky machinery and input prices (Kentucky
Agricultural Statistics and UK Agricultural Economics) will be used when
possible and supplemented with agribusiness supplier information and contact
with farmers and other expert advisors. Expert
opinion will also be utilized in revising existing traditional enterprise
budgets regarding input requirements,
Partial budgeting will be used to provide comparisons for producers
considering the adoption of precision agriculture.
Partial budgeting deals only with the changes in costs of production or
changes in income resulting from the adoption of precision agriculture.
It also permits one to calculate, through algebraic manipulation in a
break-even framework, the benefits needed under precision agriculture to be
equally profitable to traditional, field average agriculture production.
Thus, the additional yield needed to justify the greater costs of
investing in precision agriculture technology will be calculated. Likewise, the
decrease in input usage needed to justify precision agriculture equipment
ownership will also be estimated. Finally,
the interest rate for precision agriculture equipment investment that is needed
to make it cost effective in comparison to tradition agriculture independent of
other benefits will be determined.
Expected
Benefits
This
research project focuses on providing some basic rules-of-thumb for evaluating
the economic potential of precision agriculture.
Kentucky producers will be provided with techniques and decision aids to
calculate break-even yield differences, reduced input levels or reduced interest
rates needed to cover the additional costs of precision agriculture adoption.
Actual baseline results for these calculations will provide estimated benefits
for evaluating the need for further study in precision agriculture adoption
decision. Several key questions
will therefore be addressed. How much additional costs per acre are needed to
adopt precision agriculture? How much extra yield is needed to cover these
costs? How much reduction in
fertilizer costs will cover these additional expenses?
How much of a reduction in interest rate would cover these additional
costs? This research project
attempts to provide some farm cost procedures in place for evaluating the
potential of adopting precision agriculture by providing procedures and rules of
thumb for comparison. Dissemination
of these procedures and comparison levels is anticipated through computerized
decision aids, web pages, popular articles, extension materials, presentations
and field days.
Deliverables
Many
deliverables are expected from this research.
Model results should provide insights useful in the refinement of current
and developing new recommendations on the economically optimal selection of
production practices for greater profitability and reduced production risk.
Refereed journal articles, popular articles including materials for decision
support tools, web pages, presentations and extension materials including items
suitable for field days are the physical deliverables anticipated from the
project. These outlets provide the
greatest exposure to different audiences: other researchers and extension
specialists, county agents, and producers. Additionally, it is noted that in
today’s electronic age it is necessary to provide information via the Internet
and such will be done through various web sites (e.g., University of Kentucky
College of Agriculture). Presentations,
professional meetings, and in-service training with county agents will be
provided to facilitate dissemination of information directly to producers.
Furthermore, communication of results through extension newsletters,
extension publications and field days is envisioned.