Iowa State University Animal Industry Report 2004 SwineDiversified versus Specialized Swine and Grain OperationsA.S. Leaflet R1959Laura Borts, Undergraduate Assistant,Gary May, Extension Associate,John D. Lawrence, Associate Professor of EconomicsSummary and ImplicationsStochastic budget analysis compares diversified hogand grain operations to a specialized cash grain operationbased on fixed labor resource. Benefits to diversified farmsinclude decreased fertilizer costs due to manure application,shared machinery costs, and more stable grain price/costassurances. As modeled manure application covers nearlyall fertilizer requirements of the grain operation, greatlyreducing fertilizer costs. The diversified operation is able tohave dual-purpose tractors, enabling them to spread thetractor costs over more hours. Lastly, combining a grain andhog operation allows both enterprises to improve priceassurance by treating the grain operation as a cost center.Grain is priced to the hogs at cost of production, therebyprotecting the hog operation from volatility in the cornmarket. The risk reduction benefit of diversification isovershadowed when the 2002 Farm Bill is included in theanalysis.IntroductionThere is a long-term trend in agriculture towardincreased specialization and larger operations. The numberof farms in Iowa decreased 22 percent between 1980 and2001 while the average number of acres per farm increased23 percent. Over 53% of Iowa farms produced hogs in 1980while only 11% did so in 2002. Changes in farmer age,government farm programs, and tightening margins in porkproduction have contributed to this change. This papersummarizes a study examining the potential economicadvantages to a diversified hog – grain operation comparedto separate specialized farms. Areas of potential benefitsinclude: nutrient utilization, greater use of fixed assets,diversified risk reduction, and other cost savings. Theobjectives of the study include:1. Compare cost and return difference between adiversified hog and grain operation and a specializedcash grain operation for family sized businesses.2. Evaluate the impact of the 2002 Farm Bill on the leveland variability of returns by enterprise mix.Methods & MaterialsA spreadsheet model of the farming operationsconsidered was developed using Iowa State UniversityExtension Budgets for production coefficients, investmentlevels, and input prices. The grain production estimatescame from Estimated Costs of Crop Production in Iowa for2002 (FM 1712), the swine budgets came from LivestockEnterprise Budgets for Iowa 2002 (FM 1815) forconfinement production, and the manure nutrientmanagement came from Managing Manure Nutrients forCrop Production (PM 1811). The model compares fourdifferent operations:• Cash grain, corn – soybean production• Farrow-to-finish and grain• Producing SEW pigs and grain• Finishing SEW pigs and grainThe model has two primary assumptions. First, theamount of operator and family labor was set at 6000 hoursper hear and no additional labor was hired. Thus, the size ofthe farm operation was determined by a yearly labor hourlimit and the labor needs of each enterprise. There is noseasonal labor constraint and assumes the work can be donein a timely fashion. Second, the diversified operations mustbe “in balance”. That is:• Corn production equals feed demand for corn from thehogs• Corn and soybean acres are equal and are in a rotation• Manure from the hogs is applied to meet the cropnutrient needs.Thus, increasing the farm by one sow has to account for thelabor to produce the corn to feed the production from thesow and an equal acreage of soybeans to maintain therotation. Also, the nutrients from hog production wereapplied to the land to produce the grain.The program is based on 2.2 litters per sow per year.The farrow to finish operation market 7.8 hogs per litter;breed to wean markets 9.0 pigs per litter. Replacement giltswere raised within the operation. The model also assumesthat the hog facilities and farm fields were perfectlyadjustable to solve the model rather than restricting theresults to fixed sizes (i.e., 80 acre tracts or 20 sowincrements). The model also assumes sufficient on farmcapacity to store the corn required, and the manureproduced. Estimates are made regarding the amount oftractor sharing between enterprises on the diversified farms.All prices other than corn, soybeans, hogs, and nitrogenfertilizer originated from the ISU budgets. Fourteen yearaverage (1988-2001) prices for corn, soybean, soybeanmeal, hogs and nitrogen fertilizer were used. Estimatedmanure nutrient production is figured into estimated nutrientrequirements for the grain enterprise and removed from thefertilizer recommendations for each operation.The analysis compared the specialized cash grain anddiversified farms based on the 6,000-hour per year laborconstraint. Table 1 compares the size of the operationsunder this labor and management constraint. The cash grainoperation naturally includes more acreage than thediversified farm alternatives. The diversified farms hadfewer acres but also hog production. By design, half of theacres are corn and half soybeans. Manure is applied to landthat will be planted to corn each year.Table 1 also shows the amount of capital invested intoeach enterprise. The capital investment estimates assume50:50 Rent:Own land tenure arrangement and a $2,500 peracre land value. Under these assumptions the specializedcash grain enterprise requires a substantially higher capitalinvestment than the remaining three alternatives.Table 1. Description of the four enterprises included in the analysis.Enterprise Acres SowsHogsMarketedCapitalInvestment(1,000 Dollars)Specialized Cash Grain 2,378$3,463Diversified Farrow-Finish with Grain 550 191 3,270$1,281Diversified Breed to Wean 229 616 12,200$1,002Diversified Wean to Finish 723 5,963$1,784Budgeted returns to an enterprise using long runaverage prices ignore the importance of production andprice risk. The profitability of each enterprise can vary fromyear to year depending on prevailing prices and weather. Toaddress this issue, we tested the robustness of the staticmodel results by simulating grain prices and yields, as wellas hog production and prices. The simulation model wasdesigned to mimic historic variability in hog production,market hog prices, weaner pig prices, grain prices, and grainyields; while maintaining the historic