Financial

Cover crop use has increased significantly during the past few years. According to a survey conducted by the Conservation Technology Center (CTIC) in 2013, an estimated 1.5 million to 2.0 million acres were planted in 2012. The trend toward cover crop use was confirmed by the 2012 Census of Ag, which estimated 133,124 farms had utilized cover crops on significantly more than the 2.0 million acres estimated by the CTIC survey.

Producers interested in using cover crops are encouraged to “pick a cover crop for the condition of the field you wish to change.” Thus, cover crop selection is based on specific field conditions, an individual farmer’s or landlord’s preferences and overall farm goals.

Benefits that can accrue to producers include increased soil organic matter, nutrient management, reduced nutrient leaching, reduced soil erosion, alleviation of soil compaction, resistance to soil compaction, reduced pest pressure due to adding a new crop to the rotation, potential disease suppression and additional nitrogen inputs from legumes. Most of these benefits can be aggregated into two broad categories: those that reduce input costs and those that have an overall yield impact.

Potential input cost reductions are relatively easy for producers to quantify. In the same manner, increased costs associated with cover crop seed, additional field operation and higher management costs can be quantified. Producers are accustomed to evaluating annual production costs and revenues. More difficult to quantify are the long-term cover crop benefits that ultimately impact yield but are more difficult to evaluate on an annual basis.

Direct Impacts of Planting Crimson Clover

Many producers use crimson clover in cover crop mixes (e.g. crimson clover and annual ryegrass mix or crimson clover and oilseed radish mix), and it can be a nitrogen source. Although crimson clover can fix from 90 pounds to 135 pounds of nitrogen, producers should expect much less if they terminate the clover prior to planting corn. Researchers estimate that a producer in Missouri could expect approximately 30 pounds of nitrogen if crimson clover is terminated in early April. If producers delay termination until the first of May, nitrogen contribution can increase to up to 100 pounds.

When evaluating crimson clover, producers should consider additional costs, including seed, inoculum, field operation costs associated with establishment and additional costs associated with termination. See the Enterprise Budget for estimating your costs. Producers should only consider additional costs associated with the cover crop. For example, many producers already spray a burndown for their no-till, vertical till or reduced tillage operations. Therefore, the additional cost associated with termination includes additional herbicides (e.g. 2,4-D) that will increase the likelihood of successful termination versus using glyphosate only.

Including crimson clover in your rotation can also reduce input costs, specifically by decreasing additional nitrogen needs. As noted above, crimson clover can fix nitrogen. The amount varies based on the establishment date but most certainly depends on termination date.

Many producers who have utilized cover crops for multiple years report the opportunity to reduce herbicide and pesticide applications. These benefits are viewed as dependent on an integrated cover crop system and a higher level of cover crop experience and management.

Longer Term Benefits Associated with Cover Crop Use

Many producers adopt cover crops not for the near-term potential to reduce inputs but for longer term benefits, including reduced nutrient leaching, reduced soil erosion, alleviation of soil compaction and increased soil organic matter. These variables are difficult to measure on an annual basis, but they all impact yield.

The 2013 national survey conducted by CTIC reported that cover crop users benefited from extra bushels in the bin during the drought of 2012. Cover crop users reported an average 9.6 percent increase in corn yield after cover crops and an 11.6 percent increase in soybean yield.

• Increased Soil Organic Matter (SOM): Increasing soil organic matter creates larger, more stable soil aggregates near the soil surface, which increases infiltration and decreases the potential for soil erosion. A pound of SOM can absorb 18 pounds to 20 pounds of water. This translates to 20 gallons to 25,000 gallons of additional water available for every 1 percent increase in soil organic matter. Increased SOM levels in your field will also increase available nutrients, specifically nitrogen, phosphorus and sulfur.
• Nutrient Management: Cover crops can effectively scavenge nutrients such as nitrogen, convert it to plant tissue and later release it for use by the following crop. Some within the cover crops industry have termed this a “catch and release” program for nutrients that potentially would have leached from the soil profile. The 2012 drought demonstrated the value of cover crops in scavenging nitrates and preventing them from leaching into the soil and water supplies. Nutrient loss reductions represent both an environmental benefit and also a savings to producers in terms of lost inputs.
• Reduced Soil Erosion: For producers, the value of reduced soil erosion is less clear, though research suggests that a 2-inch top soil reduction can reduce corn yields by as much as 5 bushels per acre.
• Alleviation and Reduction of Soil Compaction: Compacted soil has a higher density than non-compacted soil, has less biological activity and acts like a paved road in terms of water infiltration. The absence of soil aggregates and pore space decreases the amount of water available to the plant. Increased residue from cover crops will also help to prevent soil crusting and increase water infiltration rates. Oilseed radish and other deep-rooting cover crops can help alleviate soil compaction.
• Reduced Disease and Weed Pressure: Cover crops can help suppress weeds by competing for light, nutrients and moisture; generating allelopathic effects that inhibit weed germination and growth; and attracting beneficial insects that negatively impact weeds. Cover crops can also help with disease suppression. Research indicates that cover crops such as brassicas and annual ryegrass may negatively impact nematode populations.

All of these long-term benefits will impact yield. The extent of yield differences will vary farm to farm. If mixed with other cover crops such as oilseed radish or annual ryegrass, crimson clover helps to support the companion cover crop. Crimson also plays a role in nutrient management by fixing nitrogen and serving as a catch for other nutrients.

Farm Financial Assessment

Farm financial performance and records are important to consider when evaluating a new alternative crop. Past financial performance, current financial condition and the capacity to take on risk influence alternative crop adoption viability. If you need external financing to kick start your entry into alternative crop production, then your lender will likely want to see a good business plan and, if available, financial and production histories.

Financial recordkeeping systems are important for tracking financial performance and making decisions. You can keep records manually through a written system or electronically through a computerized system such as Quicken or Quickbooks. For you to make sound decisions, financial records need to be kept current and accurate.

Information from financial statements and income tax records can measure a farm’s financial position and performance. The balance sheet, statement of cash flows and income statement are three important financial statements. Balance sheets communicate the financial condition of a farming business on a specific day, such as the beginning or end of the year. They share detailed information about a farm’s assets, liabilities and equity. The statement of cash flows (cash in, cash out) shows cash receipts and cash expenditures during a certain time period. The income statement reports the revenue, expenses and profit during a given time period. Historical balance sheets, statements of cash flows and income statements demonstrate how the business has performed. Additionally, these statements can be used to project the business’ future performance. IRS Schedule F and 4797 tax forms are important to existing producers for accurately conducting accrual-adjusted financial analysis.

Key financial measures also help to evaluate a farm’s financial condition. Numerous financial measures can help with evaluating a farm. Usually, these measures tend to look at the profitability, financial efficiency, liquidity and solvency of the business. Examples include return on assets, the operating expense ratio and the debt-to-asset ratio. Lenders typically use a set of key measures when they evaluate loan applicants. Key financial measures can also help with benchmarking your farm relative to other operations. Benchmarking data can be obtained through developing good relationships with other local farmers who are willing to share some of their key financial measures. Alternatively, you may try contacting state recordkeeping business associations, universities or extension services.

Many tools and spreadsheets available online may assist producers in developing financial statements, keeping records and conducting financial analysis. Additionally, accountants, bankers and other business specialists are good resources who may assist with assessing farm financial performance.

For More Information

Measuring and Analyzing Farm Financial Performance (Purdue)

Worksheets for Measuring and Analyzing Farm Financial Performance (Purdue)

Farm Finance Scorecard (Minnesota)

Establishing and Using a Farm Financial Record-Keeping System (eXtension)

Farm Analysis Solutions Tools (FAST) (Illinois)