Variable Rate (VRF ) Study

Transcription

1 Variable Rate (VRF ) Study 2013 Crop Year Financial Analysis Presented by: Date: Mark Wobick January 21, 2015

2 Acapulco Cliff Divers Dive from the rocky cliffs to the sharp rocks below. Passed on from generation to generation, legend says there has never been a death. Most may think this is scary but if done right it can be successful.

3 The Basics Cliff diving is not for everyone, those with the fit / right training / right plan can it can work well. Not saying to avoid the water, but for some doing something new take the appropriate steps to proceed and can probably expect a better result.

4 Study Background Variable Rate Fertilizer Study Parent study focused on how crops respond to fertilizer over several field trials of varying terrain. Our study was to provide a financial analysis based on margin over fertilizer. Goals Review basic financial considerations of VRF. To move the industry towards an increased consideration of margin in their decision making process. Today s focus / message is on the take away s

5 Study Background Investment in Variable Rate Fertilizer (VRF) technology is significant. VRF equipment costs Annual consulting costs Assessing the financial benefit is important. As with any significant investment cost benefit Margin focused Technology is part of our lives and our future. How do we make it fit best for our individual farms? Example laptop vs. IPad

6 Study Background Based on ARD data only. Not industry. Not individual farms. One year of data only (2013). 4 th year of involvement. Not evaluating or commenting on any environmental or stewardship benefits to variable rate fertilizer. Margin over fertilizer focus. Scope of study (engagement) limited to margin over fertilizer. Not net farm income, ROI, pay back period etc. Large variable. Within that focus, a multitude of variables

7 Study Methodology Limited scope, multitude of variables Five sites in Alberta Dryland and irrigation Various crops Multiple plots Multiple fertilizer treatments (forms, rates and applications). Multiple slopes (hill, mid and low) Multiple commodity prices Various yields Each location s data was aggregated into Hill, Mid and Low slopes based on the various fertilizer treatments

8 Study Methodology Margin over Fertilizer per Ha = Gross Revenue (yield x price) Fertilizer Expense (treatment x fertilizer price) Revenue = Standardized price, public source Fertilizer = Standardized prices, public source

9 Study Background Interesting background on margin over fertilizer focus. Yield is a driver of gross margin; Margin is a key determinant of profit.

10 Yield is a Driver of Gross Margin Yield vs. Cost of Production Dryland Wheat 2009 COP Higher the yield = lower COP per unit (lower breakeven) Driving yield is crucial to driving gross margin.

11 Gross Margin is a Key Determinant of Profit (2009 COP) Those that had sufficient Gross Margin were more likely to be profitable. Both yield and margin are important. Makes sense to focus on margin over fertilizer as it is often the largest variable in Gross Margin.

12 Observations: Yield Trend and Margin Trend In general one would expect increasing yields as fertility increases. Yield didn t increase with increased fertility in all cases. Indicates variability. Margin becomes more inconsistent as fertility increases. This is the first indication it is worthwhile to include a margin analysis in a decision making process. Over the five sites, no clear pattern emerged indicating increased fertility or yield will translate into increased margin. Although yield is a driver of margin, what we saw indicated that yield alone can t provide clear indication of increased profitability.

13 Observations: Yield Trend and Margin Trend Yield Response Magrath Yield Response Barley Trend on yield was higher. Yield Response Mg Per Ha Hill Mid Low At the 90 treatment (as fertilizer increased) the margin benefit began to flatten Check Sub Treat Treatment Per Ha Margin Response Magrath Margin Response Barley In terms of margin, the additional yield here doesn t offset the increased fertility. $1,800 $1,600 Margin Response Per Ha $1,400 $1,200 $1,000 $800 $600 Hill Mid Low $400 $ Check Sub Treat Treatment Per Ha Caution to reader, one example only

14 Observations: Yield Trend and Margin Trend Yield Response Coaldale Yield Response Nexera Canola 8.0 Yield Response Mg Per Ha Check Sub Treat Treatment Per Ha Margin Response Coaldale Margin Response Nexera Canola Hill Mid Low Trend on yield was generally higher, but not a dramatic increase (irrigation). Even though yield went up slightly as fertility increased margins dropped on the Mid and were mostly flat on the Hill. $1,800 $1,600 Margin Response Per Ha $1,400 $1,200 $1,000 $800 $600 Hill Mid Low $400 $ Check Sub Treat Treatment Per Ha Caution to reader, one example only

15 Yield vs. Margin - Gold Silver Bronze - Example Quick score to show areas of the field with the highest yield or margin Gold highest Silver 2 nd highest Bronze 3 rd highest

16 Yield vs. Margin - Gold Silver Bronze Observations Often saw a difference in yield response vs. margin response. Gold yield (highest yield) didn t consistently correspond to the Gold margin (highest margin). We also found the Silver and Bronze didn t consistently correspond either. Producers often translate more yield to equal more profit. If evaluating VRF from a financial perspective, there is a need to include a margin analysis. Should the goal be to drive yield or drive profit? Or manage both?

17 Yield vs. Margin - Gold Silver Bronze Average of Total Yield Mg per Ha Select Slope Row Labels Hill Mid Low Check Sub Treat Gold yield (highest yield) doesn t consistently match gold margin (highest margin) in this sample. Silver and bronze don t consistently match as well. Margin Response Column Labels Row Labels Hill Mid Low Check $ 229 $ 275 $ Sub Treat 1 $ 370 $ 393 $ $ 432 $ 474 $ $ 553 $ 586 $ $ 574 $ 632 $ $ 545 $ 617 $ 639 Caution to reader, one example only

18 Yield vs. Margin - Gold Silver Bronze Average of Total Yield Mg per Ha Select Slope Row Labels Hill Mid Low Check Sub Treat Gold yield (highest yield) doesn t consistently match gold margin (highest margin) in this sample. Silver and bronze don t consistently match as well. Margin Response Column Labels Row Labels Hill Mid Low Check $ 867 $ 1,065 $ Sub Treat 1 $ 870 $ 1,079 $ 1, $ 1,020 $ 1,255 $ 1, $ 1,012 $ 1,221 $ 1, $ 1,020 $ 1,241 $ 1, $ 1,064 $ 1,223 $ 1,099 Individuals must decide if it is beneficial to pursue the variability. Caution to reader, one example only

19 Benefit Review Variable Rate vs. Flat Rate Is there a benefit to identifying specific areas of the field (finding the variability) and varying the rate of fertilizer? Does finding the variability provide a better margin than a flat rate of fertility? i.e. a flat rate of vs. finding the peak margin in the field.

20 Benefit Review Variable vs. Flat Rate Barley E.g. Fertilize at a flat rate of at across the field as compared to finding the peak margins of the field and varying the rate of fertility, does the average of the flat rate provide a higher or lower margin than finding the peaks? Margin Response Column Labels Margin 'Map' Row Labels Hill Mid Low Peak Average Benefit per Ha Comment Check $ 229 $ 275 $ 273 $ 275 $ 259 $ 356 Common good agronomy Sub Treat 1 $ 370 $ 393 $ 395 $ 395 $ 386 $ 229 Common good agronomy $ 432 $ 474 $ 484 $ 484 $ 463 $ 152 Common good agronomy $ 553 $ 586 $ 615 $ 615 $ 584 $ 31 Small Benefit $ 574 $ 632 $ 634 $ 634 $ 613 $ 2 Limited Benefit $ 545 $ 617 $ 639 $ 639 $ 600 $ 15 Limited Benefit Peak $ 574 $ 632 $ 639 $ 639 $ 615 The flat rate of fertilizer at 90 provided an average margin of $584. The average of the peaks (gold) on three slopes was $615. The benefit was $31 per Ha moving from 90 to the gold. Using our Benefit Grid, the 90 / 120/ 150 results indicates a small to limited benefit to finding the peak margin. Large benefit if not applying good common agronomy. Caution to reader, one example only. The range of benefit was from limited to large in some areas.

21 Benefit Review Variable Rate vs. Flat Rate Benefit results at each location: Range of limited to large. Each site different result. Not one general recommendation. Benefit Large Benefit Medium Benefit Small Benefit Limited Benefit $ per ha > $100 per ha $51 - $100 per ha $26 - $50 per ha < $25 per ha Why is determining if the benefit is enough is difficult to answer? Inconsistent results. Each farm will have a different cost of capital and consultation that needs to be compared against. The analysis is based on a specific set variables, and the financial benefit (+-) will change when we adjust those. Caution to reader, the benefit grid is one example only of measuring benefit. Benefit can be defined in many different ways and each individual will have a different definition.

22 Changing Variables What if our variables changed (commodity price and fertilizer price)? 25% drop in commodity price 50% increase in fertility cost

23 Changing Variables - Analysis Observations In both the price decrease and fertilizer cost increase vs. the original margin: Margins results are reduced. Usually shifting of the Gold Silver Bronze (GSB). The GSB shifting does not always occur the same in each of the Hill, Mid, and Low slopes. Again supports that yield outcome alone can t be relied upon as an accurate measure of profitability. A 25% commodity price drop has a far greater impact on the farm s margin than a 50% increase in fertilizer expense. Need to manage both commodity price risk and fertilizer price risk.

24 Changing Variables Comparing Impact Original Margin Vegreville Original Margin Margin Response Column Labels Row Labels Hill Mid Low Peak Average Margin 'Map' Benefit per Ha Comment $ 1,012 $ 1,189 $ 1,407 $ 1,407 $ 1,203 $ 2 Limited Benefit $ 991 $ 1,103 $ 1,369 $ 1,369 $ 1,154 $ 50 Medium Benefit $ 1,018 $ 1,067 $ 1,373 $ 1,373 $ 1,153 $ 52 Medium Benefit Peak $ 1,018 $ 1,189 $ 1,407 $ 1,407 $ 1,205 Scenario Margin 25% Decrease in Commodity Price Vegreville Scenario Margin 25% Decrease in Commodity Price Margin Response Column Labels Margin 'Map' Row Labels Hill Mid Low Peak Average Benefit per Comment $ 722 $ 854 $ 1,018 $ 1,018 $ 865 $ - Limited Benefit $ 695 $ 780 $ 979 $ 979 $ 818 $ 47 Small Benefit $ 706 $ 743 $ 972 $ 972 $ 807 $ 58 Medium Benefit Peak $ 722 $ 854 $ 1,018 $ 1,018 $ 865 Scenario Margin 50% Increase in Fertilizer Vegreville Scenario Margin 50% Increase in Fertilizer Margin Response Column Labels Row Labels Hill Mid Low Peak Average Margin 'Map' Benefit per Ha Comment $ 938 $ 1,114 $ 1,333 $ 1,333 $ 1,128 $ - Limited Benefit $ 896 $ 1,008 $ 1,274 $ 1,274 $ 1,059 $ 69 Medium Benefit $ 903 $ 952 $ 1,258 $ 1,258 $ 1,038 $ 91 Medium Benefit Peak $ 938 $ 1,114 $ 1,333 $ 1,333 $ 1,128 The 25% price drop has a far greater impact on the farm s margin than a 50% increase in fertilizer expense ($263 per ha). Note: it is important to recognize the change in the GSB and benefit. Important to manage the basics. Caution to reader, one example only

25 Summary Variable rate analysis is not simple. There are a multitude of variables that must be considered. There is variability and finding it could be very beneficial. A margin analysis would provide farmers with more information to determine if VRF is beneficial for their farm.

26 Summary Is the benefit of utilizing VRF enough? A margin analysis (check-up) both at pre-seeding (predictive) and post-harvest (result based) is essential to providing an answer (to each farm). May mean field scale research.

27 Summary Is the benefit of utilizing VRF enough? What about the positive attributes that seem to go along with the use of technology? Data collection Real time data Improved agronomy Improved management in general

28 Summary As You Prepare to Dive What are some considerations? Decision Making Model example: Go No Go Check list Size of farm Cost equipment Variability of your land Agronomics Marketing Margin analysis Time Learning curve Gut feeling Other Evaluate & rate each as Red, Yellow, Green. Red = stop Yellow = caution Green = proceed

29 If It Was My Farm Get the Basic s Right A. The first step is to get basic agronomic and marketing principals right (the Gross Margin). Grow the right crop (margin based). Get the agronomy right (yield, seed, chemical, and fertility focused). Manage crop price risk (decrease). A drop in commodity price has a much larger impact on financial results than does a rise in fertilizer price. Manage fertilizer price risk (increase).

30 If It Was My Farm Once You Decide to Move Forward Fine Tune A. Difficult to do by yourself, engage support from agronomists, equipment dealers, management consultants etc. B. Be prepared to conduct field scale research. Scientific method to analyze your results. C. Target the right fields for your farm. Variability. C. Manage your margin not just your yield. Both are important and related. Both have variability. There are different results between yield and margin and it may influence your plan. Develop a Model for your farm to conduct both pre-seed and post-harvest margin assessments.