Author: Brian E. Mills

Long-term loans are a valuable financial tool that producers can use to purchase large capital investments, including farm equipment, land, or housing. These types of loans are typically paid off over a period of time lasting longer than one year. Long-term loan payments are made up of principal and interest. The principal is the original amount of money borrowed. Interest is set by the terms of the loan and accrues over the lifetime of the loan based on the interest rate, the principal balance remaining, and the length of the loan. 

Loan amortization is the schedule for how payments will be made over the lifetime of the loan. The loan amortization schedule tells borrowers the beginning period loan balance, the regular payment, the amount of the payment that goes towards interest and the principal, and the remaining loan balance. A fixed payment schedule is the most common, where each payment is the same amount. 

When considering securing a long-term loan, it is important to consider not just the monthly payments but the overall amount you will be paying over the lifetime of the loan. Since interest accrues on the loan, the amount you pay will be more than the initial loan amount. Table 1 is an example of a loan amortization schedule for a 5-year, $30,000 loan, with a 5% interest rate and payments made annually. In that example, the initial loan was $30,000, but total payments equaled $34,646.22. The loan amount, interest rate, and length of the loan can all have large impacts on how much you end up paying in total. A lower interest rate will decrease the overall amount paid, so it is important to search for a lender that will charge you the lowest interest rate. But, most lenders will likely offer a similar interest rate. A more effective way to reduce the total payment amount is to take a loan with a shorter payment schedule. This will increase the payment made each pay period but will reduce the total amount paid over the lifetime of the loan. Lastly, putting down a larger down payment and reducing the loan amount will also decrease the total amount paid. Since interest accrues based on the principal, a reduction in the loan amount will result in less interest accruing, and the total amount paid on the loan will decrease.            

There are several tools available that can help you evaluate a loan and the total costs involved. Mississippi State University has a free loan amortization calculator Excel tool that can be found at: https://www.agecon.msstate.edu/whatwedo/budgets.php. The Farm Credit Services of America also has a free loan amortization calculator at: https://www.fcsamerica.com/products-services/digital-tools/loan-payment-calculator.Understanding how your loan payments are constructed and what factors impact total payments is essential in getting the right loan for your farm business. 

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Mills, Brian, and Kevin Kim. “Loan Amortization.” Southern Ag Today 3(12.3). March 22, 2023. Permalink

Enterprise budgets are a helpful tool for organizing and understanding what production costs are for the coming year. Producers can use enterprise budgets to examine their farm by crop, variety, irrigation, tillage, or any other production practice. The more specific the enterprise budget, the more a producer can determine where their farm is profitable and where it can be improved. Enterprise budgets are typically developed in the late fall or winter as producers plan their next year’s crop decisions. 

Table 1 is an example of a corn enterprise budget developed at Mississippi State. The budget title should describe what is being examined in as much detail as possible. The income section should be a projection of the prices and yield expected for that enterprise. The costs can be broken down into direct and fixed expenses. Direct expenses are any costs needed in the production of the given crop, such as costs of fertilizers, herbicides, insecticides, seed, labor, etc. Fixed expenses are any costs that would be paid regardless of the production. In the example budget, this would be fixed expenses related to equipment, such as depreciation and interest. Returns above total expenses or break-even prices can then be calculated based on the expenses.

Mississippi State creates yearly enterprise budgets across various crops, like the one presented in Table 1. Costs are obtained from companies across Mississippi, and a multidisciplinary team puts together example enterprise budgets based on the latest trends/recommendations. Since every producer will have different costs and revenues, it is important for each producer to determine their own enterprise budgets that match their farm’s situation. Over 80 example budgets are available to help with this process at: https://www.agecon.msstate.edu/whatwedo/budgets.php. In addition, each state in the Southern Region will have their own version of enterprise budgets, so contact your local Agricultural Economics department for more information (links below).  In times where input costs are especially high, developing an enterprise budget can help in managing those costs and in determining which crop is going to be the most profitable. 

Alabama: https://www.aces.edu/blog/tag/profiles-and-budgets/?c=farm-management&orderby=title

Arkansas: https://www.uaex.uada.edu/farm-ranch/economics-marketing/farm-planning/budgets/crop-budgets.aspx

Florida: https://fred.ifas.ufl.edu/extension/commodityenterprise-budgets/

Georgia: https://agecon.uga.edu/extension/budgets.html

Kentucky: https://agecon.ca.uky.edu/budgets

Louisiana: https://www.lsuagcenter.com/portals/our_offices/departments/ag-economics-agribusiness/extension_outreach/budgets

North Carolina: https://cals.ncsu.edu/are-extension/business-planning-and-operations/enterprise-budgets/

Oklahoma: http://www.agecon.okstate.edu/budgets/

South Carolina: https://www.clemson.edu/extension/agribusiness/enterprise-budget/index.html

Texas: https://agecoext.tamu.edu/resources/crop-livestock-budgets/

Tennessee: https://arec.tennessee.edu/extension/budgets/

Table 1. Example Corn Enterprise Budget

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Author: Brian E. Mills

Assistant Professor and Extension Economist

Delta Research and Extension Center

Mississippi State University

Email: b.mills@msstate.edu

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Mills, Brian. “Enterprise Budgeting.” Southern Ag Today 2(50.3). December 7, 2022. Permalink

Research into cover cropping has shown some benefits to soil health and conservation. However, adoption of cover cropping has been relatively low due in part to uncertainty about its profitability. When considering whether to adopt this practice it is important to understand the associated costs.

            Seed and planting cost make up the bulk of additional costs of cover cropping. Table 1 shows examples of the cost of planting various cover crops from prices obtained in Mississippi. Seed costs range from $18.00/ac for oats to $43.80/ac for Austrian winter peas. Planting costs are estimated at $11.68/ac including direct expenses as well as indirect equipment costs (estimates derived from the Mississippi State Enterprise Budgets assuming a 20’ grain drill). Total costs of cover cropping range from $29.68/ac to $55.48/ac. Your costs will vary depending on local conditions, seeding rates, and equipment.  In some cases, an additional herbicide application is also needed to terminate the cover crop.

Table 1. Costs of Cover Cropping

Crop	Seed Cost $/lb	Seeding Rate lb/acre	Seeding Cost $/ac	Planting Cost $/ac	Cover Crop Costs $/ac
Austrian winter pea	0.73	60	43.80	11.68	55.48
Crimson Clover	1.80	20	36.00	11.68	47.68
Cereal Rye	0.39	60	23.40	11.68	35.08
Tillage radish	2.40	8	19.20	11.68	30.88
Oats	0.36	50	18.00	11.68	29.68
Rye+Clover (89/11 Mix)	0.45	50	22.36	11.68	34.04

For cover cropping to be profitable there needs to be a positive yield benefit to offset the added costs. However, research has shown that cover cropping may have no effect on yield or in some cases decrease yield. The impact on yield is highly dependent on which crop is being grown. Spencer et al. (2021) found that Austrian winter pea and cereal rye decreased corn yield by 37 and 45%, respectively, in the first year of implementing cover crops. In subsequent years there was no significant differences in yield found. But, net returns were significantly reduced in 2 out of the 4 years examined. Bryant et al. (2020) found that, relative to reduced tillage-subsoiling, a cereal rye cover crop had no impact on soybean yield but a radish cover crop reduced soybean yield by 12%. However, these results are atypical for what is usually observed in soybeans under cover cropping. Regardless, the lack of a positive yield response led to lower net returns under both the cereal rye and radish cover crops in that study. Lastly, Denton et al. (2021) found no yield response from cover cropping in cotton. This led to lower net returns of $20.34/ac to $124.64/ac under cover cropping. These studies show why cover cropping may not be profitable in the Mid-South.

One way to help alleviate the lack of profitability would be to secure Environmental Quality Incentives Program (EQIP) payments. As shown in Table 2, payments vary from state-to-state and by cover crop. Producers are only eligible for payments on land that is not currently under cover cropping. There are also limitations on payment amounts and duration. More information on your specific state’s EQIP payments can be found at: https://www.nrcs.usda.gov/wps/portal/nrcs/detailfull/national/programs/financial/?cid=nrcseprd1328426

Table 2. Environmental Quality Incentives Program Payments for Cover Cropping 2021

The results discussed here may differ from what is found on your farm. When deciding whether to adopt cover cropping it is important to test if the practice is profitable on a small area first. Once it is determined if it is profitable for you then larger scale adoption can be implemented. Your local NRCS office can also help with additional information about obtaining EQIP payments.

References

Bryant, C.J., Krutz, L.J., Reynolds, D., Locke, M., Golden, B.R., Irby, T., Steinriede, R., Spencer, G.D., Mills, B.E., & Wood, W. (2020) Conservation Soybean Production Systems in the Mid-Southern USA: II. Replacing Subsoiling with Cover Crops. Crop, Forage & Turfgrass Management. http://dx.doi.org/10.1002/cft2.20058

Denton, S.D., Dodds, D.M., Krutz, L.J., Varco, J.J., Gore, J., Mills, B.E., & Raper, T.B. (2021). Impact of Cover Crop Species on Soil Physical Properties, Cotton Yield, and Profitability. Journal of Cotton Science. 25:68-78.

Spencer, G.D., Krutz, L.J., Locke, M., Gholson, D., Bryant, C., Mills, B.E., Henry, W., & Golden, B. (2021) Corn productivity and profitability in raised, stale seedbed systems with and without cover crops. Crop, Forage & Turfgrass Management. http://dx.doi.org/10.1002/cft2.20142

Mills, Brian. “Profitability of Cover Cropping“. Southern Ag Today 2(32.3). August 3, 2022. Permalink

Agriculture has experienced a significant amount of change in both crop prices and input prices in the last couple of months. These changes can make it difficult for producers to determine which crop is going to be the most profitable for their situation. When deciding between two different crops a producer should examine what the costs of production for those two systems would be, along with their respective yield potential and crop price. Yield can vary from year to year so evaluating over a range of yield outcomes can give a better idea of how optimal crop choice could change as well.

Figure 1 is an example output from the Net Returns Comparison Calculator developed at Mississippi State, showing the difference in net returns between an irrigated corn system and an irrigated soybean system across a range of yield outcomes. Returns were compared using costs of production from the Mississippi State Enterprise Budgets and prices of $6.00/bu for corn and $14.68/bu for soybeans. Corn is shown to have higher returns than soybeans at most of the yields examined. Soybeans have higher returns than corn when soybean yields are relatively high. In this situation the producer can see that corn will generally be the more profitable option, unless they have a field that historically produces high yielding soybeans and low yielding corn. These results will change as prices and input costs change. For example, a fertilizer price increase would negatively impact corn more than soybeans, making soybeans more competitive.

The results shown in Figure 1 are not going to be the same for every producer. Every producer has their own unique costs and yield potential. It is important for them to evaluate their crop choices given their own situation. The Excel tool used to create Figure 1 can be found at https://www.agecon.msstate.edu/whatwedo/budgets.php (select and download the Net Returns Comparison Calculator). Users can compare net returns between various crop production practices for corn, cotton, rice, and soybeans. This tool can even be used for enterprises outside of Mississippi as users can customize the budgets to reflect their own farm’s costs, yields, and prices received. The more information collected on costs of production the more accurate these comparisons will be and ultimately the more informed decision on which crop is going to be the most profitable. 

Figure 1. Comparison of Net Returns between a Corn and Soybean Production System with MSU Net Returns Comparison Tool

Difference in Returns Between Corn and Soybeans $/ac

Corn Yields bu/ac

	190	200	210	220	230	240	250
45	$       246	$       303	$       361	$       419	$       476	$       534	$       592
50	$       173	$       231	$       289	$       347	$       404	$       462	$       520
55	$       101	$       159	$       217	$       275	$       332	$       390	$       448
60	$         29	$         87	$       145	$       202	$       260	$       318	$       376
65	$        (43)	$         15	$         73	$       130	$       188	$       246	$       304
70	$     (115)	$        (57)	$           1	$         58	$       116	$       174	$       231
75	$     (187)	$     (129)	$        (71)	$        (14)	$         44	$       102	$       159

Note: Any value in white, corn has higher returns than soybeans. Any value in red, soybeans has higher returns than corn

Mills, Brian E. . “Crop Returns Comparison“. Southern Ag Today 2(13.3). March 23, 2022. Permalink