Case Study C: Farmer 3, Upper Wapsipinicon Watershed

Farmer 3 from the Upper Wapsipinicon watershed (Wapsi3) operates a 360 acre organically certified farm and farm operation, making Wapsi3 unique in this capacity among the 13 interviewed producers. Wapsi3 had a 10-year tier 2 CSP contract worth $40,000 total. Wapsi3’s conservation philosophy was grounded in the four-crop rotation required for organic certification: corn, soybeans, alfalfa/hay and a small grain (barley) as well as organic pasture-based livestock. Additionally no pesticides were used and the hog manure from the organic hog operation was applied to soil without any additional synthetic fertilizer. Wapsi3 was also a skeptic of no-till, arguing it does little to improve “soil aggregate structure”, soil particles that aren’t immediately soluble in water, advocating instead that pasture with grazed livestock or a perennial nitrogen fixing crop such as alfalfa, in combination with spring moldboard ploughing and ridge-till is essential for establishing organic matter and soil structure.

Table 4.5.3A – Farmer 3, Upper Wapsipinicon. 2005 revenue budget.

CASE STUDY C:

Farmer 3 (Organic) – Upper Wapsipinicon Watershed Farm Revenue

CROPS

Corn Soybeans Alfalfa/Hay Barley Pasture Buffer Total Acreages 72 68 75 53 70

(120 sows) 22 360

Owned 30 25 75 53 70 22 275

Rented 42 43 0 0 0 0 85

YIELDS bu/ac bu/ac t/ac bu/ac hogs (cwt)

2005 186 36 3.8 65 n/a 5 year average 137 35 3.6 60 2500 $ per unit* $5.45 $18.00 $90.00 $5.00 $46 REVENUE Revenue $72,986 $44,064 $25,650 $17,225 $114,827 - $320,186 Revenue per acre $1,014 $648 $342 $325 $1,640 - $889 Government Programs $45,979 Insurance $1,153 Tier 2 10 years First Year Average CSP $40,000 $13,334 $4,000 CSP per acre $111 $37 $11

GROSS ANNUAL REVENUE $380,650 $371,317

Annual Revenue per acre $1,057 $1,011

CSP Payment as percent of Annual Revenue 4% 1%

*Regarding Organic prices: all crops were taken from relevant Organic Price Exchange (OPX) listings for Minneapolis (the closest OPX to Wapsi3’s farm), except for Alfalfa/Hay which was taken from ISU extension organic farming budgets. Hog price also from ISU extension: Farm Costs and Returns for “partial confinement farrow-to-finish”.

Wapsi3’s revenue budget is outlined in Table 4.5.3A. While the farm size was one of the smallest of all interviewees at 360 acres, it grossed $1,011 per acre, which was high for all the interviewed producers that together averaged $732 per acre. This was partly due to organic price premiums that normally offset the higher operating costs typical for organic operations, but was also due to the integration of livestock into the farm operation; producers without livestock on their CSP acres averaged only $314 per acre revenue. Farmer 1 of the North Raccoon watershed (Rac1)65, a non-organic farmer, had a farm of similar size with a 3 crop rotation plus pasture and achieved a similar boost in revenue per acre, with $563 per acre gross revenue, by grazing beef cattle. CSP payments for Wapsi3 were equivalent in their proportion of total revenue to other interviewees, at around 1 percent for the average annual payment.Wapsi3’s conservation budget is provided in Table 4.5.3B. Despite a history of heavy investment in conservation on the farm, Wapsi3 had only achieved tier 2 status, and was prevented from achieving tier 3 status due to some issues involving livestock’s

proximity to waterways. Wapsi3 successfully resolved these issues in time for the farm’s 2006 annual contract review and was graduating to tier 3 for the 2007 growing season.

The total cost of installing all conservation practices on the farm in 2005 dollars was $132,341 with annual costs for conservation totaling $22,849 including $1,207 of

opportunity cost for income forgone on the 22 acres of buffer ground as well as taxes, interest, insurance and labor. Compensation levels for CSP payments were at 30 percent of total conservation costs, with 58 percent of annual conservation costs compensated by a first year CSP payment and 18 percent of annual conservation costs covered by average annual CSP payments.

Since Wapsi3’s operation included both a four-crop rotation and pasture livestock it lent itself well to a comparison of CSP contracts and compensation rates with operations of lesser diversity. Farm scenarios for Wapsi3 are outlined in Table 4.5.3C with the total compensation rate of 30 percent applied to test for effects on CSP contract amount and annual conservation levels.

Table 4.5.3B - Farmer 3, Upper Wapsipinicon watershed. 2005 Conservation

Budget

CASE STUDY C:

Farmer 3 (Organic) – Upper Wapsipinicon Watershed Conservation Cost Compensation

EXISTING

Cost is proportion of total item cost

attributable to conservation practices. Annual Cost

Total 2005 Value Machinery $4,670 $79,750 Buildings $656 $34,500 Total $5,326 $114,250 CONSERVATION Shaped Waterways $480 $4,997 Manure Nutrient Management $1,501 $1,500 Shelterbelt Establishment $171 $3,000 Wildlife Habitat Management $278 $4,400 Conservation Crop Rotation $594 $594

Conservation Cover $137 $3,600

Total $3,160 $18,091

Opportunity Cost of Buffer Ground $1,207

Combined Cost

(Equipment, Buildings and Conservation Practices)

$9,693

Insurance and Taxes (1.5%) and Interest (3.5% over depreciation

period)

$11,156

SUB-TOTAL $20,849

Labor for Conservation Practices $2,000

TOTAL CONSERVATION COST $22,849 $132,341 per acre $63 $368 CSP COMPENSATION

First Year annual compensation level 58%

Table 4.5.3C – Farmer 3, Upper Wapsipinicon watershed. Enterprise mix scenarios evaluated. ACREAGES Baseline (All Organic) Baseline as Conventional Conventional Cash Grains Conventional Cash Grains plus Livestock Organic Cash Grains Corn 72 72 172 172 107 Soybeans 68 68 171 166 103 Alfalfa/Hay 75 75 - - 75 Small Grain 53 53 - - 53 Buffer 22 22 17 17 22

Pasture 70 (120 sows) 70 (120 sows) -

5 (120 confined sows) - Total 360 360 360 360 360 CSP +0% -67% -46% -13% Tier 2 (10 yr) Contract $40,000 $40,000 $13,257 $21,411 $34,649 First Year $13,334 $13,334 $4,419 $7,137 $11,565 Average Annual $4,000 $4,000 $1,326 $2,141 $3,469 CONSERVATION COSTS Total Annual $22,849 $22,049 $15,308 $17,451 $19,156 Total $132,341 $132,341 $43,897 $70,897 $114,881 CSP COMPENSATION

First Year: %Annual 58% 61% 29% 41% 57%

Average: %Annual 18% 18% 9% 12% 17%

Contract: %Total 30% (30%) (30%) (30%) (30%)

The first scenario, the baseline enterprise mix without organic certification, attracted the same CSP contract as the baseline case of $40,000. First year annual compensation level was slightly higher, due to the lower conservation maintenance costs, at 61 versus 58 percent, while the average annual compensation rate was unchanged at 19 percent.

The second scenario, a more traditional corn and soybeans rotation without livestock, resulted in a drop of 67 percent in CSP contract amount to $13,257 for maintaining the 30

percent total compensation incentive. Annual compensation levels were also lower with 29 percent for first year compensation rate and 9 percent for average annual compensation rate.

The third scenario, a cash grain operation with confinement livestock, resulted in a 46 percent reduction in CSP contract to $21,411. Annual compensation levels followed a similar trend with first year compensation at 41 percent and average annual compensation at 12 percent. Similarly to the Nish1 and Rac3 studies, the addition of livestock provided a slight improvement to annual compensation rates.

The fourth and final scenario utilized the baseline organic grain mix but without livestock. CSP contract amount for maintaining total compensation incentive was 13 percent less than the baseline amount at $34,649. Annual compensation rates were also comparable to the baseline condition at 57 percent for first year compensation level and 17 percent for average annual. This was consistent with the previous scenario and scenarios from previous case farms that livestock potentially adds a small boost to annual compensation rates.

Figure 4.5.3A – Farmer 3, Upper Wapsipinicon watershed. Scenario effects on CSP contract with

As displayed in Figure 4.5.3A all four scenarios resulted in either equivalent or smaller amounts for total CSP contract when compared to the baseline case. Unlike previous case studies, Nish1 and Rac3, annual compensation levels tracked closely with CSP contract adjustments as evident from Figure 4.5.3B. This was likely due to the extensive nature of conservation infrastructure that Wapsi3’s baseline scenario contained and the need for little or no additional spending when modeling the alternative reduced conservation scenarios.

Wapsi3 was an example of a comprehensive level of stewardship across all acres on the farm since there was little opportunity to improve or expand on these conservation practices. Under such conditions it is reasonable to say that Wapsi3’s entire CSP contract was a reward. This is in contrast to Nish1 and Rac3 who were faced with steep transition costs if moving to a more diverse crop rotation such as evident in Wapsi3’s baseline scenario.

Figure 4.5.3B – Farmer 3, Upper Wapsipinicon watershed. Total CSP contract and annual