Seed Production Economics. Thomas G Chastain CROP 460/560 Seed Production

Transcription

1 Seed Production Economics Thomas G Chastain CROP 460/560 Seed Production

2 Seed Production is a Business Seed production is a business with its own unique set of economics. Seed production enterprises have costs and returns associated with the production of seed. The best way to increase the profitability of seed production enterprises is to reduce the cost of production. Seed production enterprises are largely family-based entities. Center pivot in Kentucky bluegrass seed field (top), seed conditioning plant (right) TG Chastain photos

3 Choosing a Seed Crop The decision to grow a particular seed crop is based on the following factors: 1. Site considerations - soil type, drainage, rainfall/irrigation, other factors 2. Market conditions 3. Contract availability 4. Past experience with the crop Aerial photo of Willamette Valley seed fields

4 $/Acre Seed Crop Income Seed crop income varies with seed yield and crop price, but some seed crops are more valuable than others. Cereal seed crops typically have the lowest incomes while grass and legume seed crops with moderate incomes. Vegetable seed crops produce the highest income but are grown on only a few acres Dryland Winter Wheat Flower Seed Grass Seed Alfalfa Seed Carrot Seed Hybrid Cabbage Seed

5 Market Conditions and Seed Price Supply and demand dictate the price of seed. Since seed is an international commodity, the production conditions and seed yields in all regions around the world are important factors affecting seed supply. The size of the carryover stock from one year to the next can effect prices. Low supply or high price of one species of turf grass can lead to substitution in seed mixtures with another species, lower cost or more plentiful species. Corn harvest (Joe Sherman photo)

6 Seed Price ($/lb) Oregon Seed Crop Price Trends Factors that affect demand vary from crop to crop. Cycles in the construction industry affect the price of lawn seed such as Kentucky bluegrass. Changes in consumer nutrition preferences affect prices of food crop seed. The demand for animal feed has an impact on the price of forage seed such as red clover. (TG Chastain graphic) 2.0 Red Clover Kentucky Bluegrass 1.6 Annual Ryegrass Year

7 Perennial Ryegrass Seed Price Trends Grass seed crop prices are sensitive to the state of the economy. Economic recessions and significant events such as the bankruptcy of ABT and the formation of the PRBA have influenced the price of perennial ryegrass seed. ABT Bankruptcy Perennial Ryegrass Bargaining Association established (TG Chastain graphic) Economic Recession

8 Energy Costs Energy supply and farm profits are linked. Rising fuel costs reduce the profitability of farming enterprises. Seed growers are large consumers of transportation fuels including diesel and gasoline. Profit Cost Low fuel prices Profit Cost High fuel prices (TG Chastain graphic)

9 Energy Costs Unlike the nominal price for perennial ryegrass seed which has risen over time, prices have fallen when indexed in 1976 dollars. Oil prices have outstripped seed prices in times of recession and economic instability. The gap between oil prices and seed prices has grown and is a threat to profitability. (TG Chastain graphic)

10 Energy Costs Measured against fertilizer price, perennial ryegrass seed prices have done somewhat better. Nevertheless, like oil prices, fertilizer prices are highest in weak economic conditions and price gap is greatest in these periods. (TG Chastain graphic)

11 Contracts Specify the price paid to the grower according to the quality of the product. The seed grower is obligated to plant the seed stock and to harvest and manage the crop. Discounts on contracts may be negotiated if the seed quality standard is not met. Ownership of seed and plants remains with the seed company. Rights on termination - grower agrees to deliver seed to the seed company and destroy (plow out) plants on termination of the contract. Seed Stock - Seed company provides the grower with seed stock to be used in planting the crop at an agreeable price. White clover seed field (TG Chastain photo)

12 Contracts Types of Contracts: 1. Firm price. A minimum price per pound is guaranteed. 2. Premium over market price. An amount over the market price is paid contingent on the quality of the seed. 3. Variable pricing contract. Grower in ryegrass seed field (TG Chastain photo)

13 Variable Pricing Contract Some contracts offer variable or multi-tiered pricing. Prices paid to the seed grower will decline with increasing seed yield in these contracts. Variable pricing contract for carrot seed production. Price per pound Carrot seed yield increment lbs/acre $ $ $ 3.25 >501

14 Seed Brokers Seed companies buy from seed growers and from other dealers to meet the demand for seed. Seed brokers link buyers of seed and sellers. Sellers pay a brokerage fee. Seed brokers work for the buyer. Carrot seed crop near Madras (TG Chastain)

15 Enterprise Budgets Used to estimate production costs, planning production of a seed crop. Enterprise budgets for a seed crop consist of cost estimates based on the actual costs of a selected group of growers. An enterprise budget was responsible for the formation of the Perennial Ryegrass Bargaining Association in 1994.

16 Enterprise Budgets Variable costs production costs, labor, interest

17 Enterprise Budgets Fixed costs - land rent, machinery and equipment insurance, etc. Assumptions - size of enterprise, cost of labor, cost of machinery, interest rate, depreciation, etc. Amortization - costs of establishing perennial seed crops are amortized over the life of the stand.

18 Partial Budgets A tool for determining the benefit of changing selected management practices without changing all of the fixed and variable costs in the enterprise budget. Partial budgets provide an estimate of the effect of a change in management on costs and returns of existing farming operations. Is it economical to establish creeping red fescue seed crops with cereal companion crops? Red fescue seed crop companion cropped with wheat (TG Chastain photo)

19 Partial Budgets Winter barley was a less competitive companion crop, cost less to grow, but did not produce as much income as winter wheat. Winter wheat depressed red fescue yield and decreased income by $23.45 per acre as a result of being a more competitive companion crop. Wheat companion cropping was more profitable than barley companion cropping, but both companion crops increased income over monoculture establishment. Partial budget for establishment of creeping red fescue seed crops with cereal companion crops Item Barley Wheat $/acre Increased Cost Decreased Cost Increased Income Decreased Income Net Change in Income Chastain and Grabe (1988)

20 Partial Budgets Exceeding the optimum N rate at 135 lbs/acre in annual ryegrass causes a reduction in net returns. Annual ryegrass N fertilizer economics: net return on investment. N fertilizer rate (lb/acre) Net return ($/acre) Incremental net return ($/acre) Assumptions: N = $0.33/lb and seed = $0.22/lb. Annual ryegrass seed field (TG Chastain photo)