The Klarenbach Report, Feb 7
My farmer friends keep me aware of the cost of their production inputs. The rise in land values, fertilizer prices, chemicals and farm machinery require greater operating capital than ever in previous years. Capital deployment decisions weighing the short and long-term risks and returns on investment are critical in grain farm operations.
These capital deployment decisions are difficult as the cost is known, but the returns are not. Consider machinery, less expensive equipment will often produce better returns than more expensive equipment. Calculating fertilizer’s return on investment with fertilizer is difficult due to the numerous variables affecting crop yield and the crop and soil production yield capacity.
The challenge facing grain farmers in determining the allocation of a fixed amount of capital to produce the maximum returns. Does one invest in fertilizer or chemicals? Does one invest in machinery or education? These decisions lead to a discussion of asymmetrical returns.
Asymmetrical returns of grain farming inputs refer to the unequal distribution of returns for a given set of inputs in grain farming. In other words, not all inputs used in grain farming provide equal yield, quality, and profitability benefits. The concept of asymmetrical returns highlights the importance of carefully considering the inputs used in grain farming and the potential impact of those inputs on the operation’s overall success.
Soil quality is one major factor contributing to asymmetrical returns in grain farming. Soil quality can vary significantly across different fields and regions and can have a significant impact on the growth and productivity of crops. Grain farmers can appreciate soil quality’s importance to production and enterprise value.
Another important factor contributing to asymmetrical returns in grain farming is using inputs such as fertilizers, pesticides, and herbicides. Using these inputs can be critical for maintaining high crop yields and quality, but using them cost-effectively and sustainably is essential. For example, nitrogen provides the best return among fertilizers for wheat production. However, excess nitrogen relative to phosphorus will result in diminishing returns.
Farmers also know that economic thresholds for applying pesticides and herbicides are subjective and difficult to calculate. As a result, grain farmers must carefully evaluate their inputs and use them to maximize their benefits while minimizing their negative impacts.
Developing new technologies and farming practices can also result in asymmetrical returns in grain farming. For example, precision agriculture tools and techniques, such as GPS-enabled tractors and drones, can significantly increase crop yields and quality by enabling farmers to apply inputs more effectively and efficiently. However, these technologies also come with a cost, and farmers must weigh the benefits and costs of these technologies to determine the best course of action.
Finally, grain market information sources and analysts can also provide asymmetrical returns with improved sale prices scalable across the entire farm operation. Actionable, specific price analysis can allow for calculating the return on investment.
In conclusion, asymmetrical returns of grain farming inputs are an essential concept for farmers to understand, as they highlight the importance of carefully considering the inputs used in grain farming and the potential impact of those inputs on the operation’s overall success. Whether it is the quality of soil, the use of inputs, the development of new technologies, or grain marketing resources, farmers must carefully evaluate each input’s risks and potential returns to maximize the returns from their grain farming operations.
Life’s good.
Trent Klarenbach, BSA AgEc, publishes the Klarenbach Grain Report and the Klarenbach Special Crops Report, which can be read at https://www.klarenbach.ca/.