You are a retired landowner whose Conservation Reserve Program (CRP) contract fo
ID: 2510224 • Letter: Y
Question
You are a retired landowner whose Conservation Reserve Program (CRP) contract for 100 acres will expire next year. You can renew your contract for another ten years and receive a payment of $130 per acre each year, but you wonder if it would be more profitable to put it into hay production and have it custom farmed. Provisions: 1. Your expected yield if you grow hay is 5 tons per acre, and the long-run expected selling price is s100 per ton, at the farm. 2. Variable costs of production are about $140 per acre every 4 years to re-establish the seeding and fertilizer costs of $150 per acre each year 3. You can hire a custom operator to harvest and store the hay crop for you for $50 per ton. 4. If you take the land out of the CRP program, you will no longer have to spend $800 per year to control weeds, but you will give up the $130 per acre annual payment from the USDA You realize you can complete your analysis by competing a partial budget of the proposed change. Proposed Change:-100 custo Added Income A. he tion Added Costs 50x 5000 250,000 Reduced Income B. Total additional revenue and reduced costs A. Total additional costs And reduced revenues Net Change in Profit (B-A) B. what advice would you give them? why? Compute the hay yield (tons/acre) at which the proposed plan would break-even with the current plan C. Compute the hay selling price (S/ton) at which the proposed plan would break-even with the current plan. D.Explanation / Answer
A) If the landowner moves to hay production and have it custom farmed then the yearly net benefit or loss would be as follows:
Added Income:
5 tons per acre X 100 acres = 500tons X $100 per ton = $50000
Reduced Cost:
$800 per year = $800
Added Cost:
Seeding Cost: $140 per acre X 100 acres / 4 years = $3500 ( $140 is cost for 4 years)
Fertilizer Cost : $150 per acre X 100 acres = $15000
Custom Operator Cost: $50 per ton X 5 ton X 100 acres = $25000
Total Added Cost: 3500+15000+25000 = $43500
Reduced Income:
$130 per acre X 100 acres = $13000
Total additional cost and reduced revenues = $43500 + $13000 = $56500
Total additional revenue and reduced costs = $50000 + $800 = $50800
Net Change in Profit = $50800 - $56500 = ($5700) i.e. Net Loss
B) It is advisable to renew the CRP contract because there is net loss is the landowner moves to do hay production.
C) Let the hay yeild (tons/acre) be x. then Added income be 100x X $100 per ton = $10000x
Added Cost: Seeding cost $3500 + fertiliser cost $15000 + custom operator cost $50 X x X 100 = $5000x
Total added cost = $18500 + $5000x
Net Income: $10000x - $18500 - $5000x = $5000x -18500 (a)
This must be equal to Income from CRP Contract for breakeven i.e $13000 - $800 = $12200 (b)
Taking both (a) and (b) eqaual: 5000x - 18500 = 12200
5000x = 30700 then x = 6.14 i.e 6.14 tons of hay per acre.
D) Let the Selling Price be 's'
Added Income would be 500 tons X $s per ton = $500s
Added Cost will remain same as in A) i.e. $43500
Net revenue is $500s -$43500
For breakeven Net revenue must be equal to revenue from CRP Contract i.e $12200 as in (b) above
So 500s - 43500 = 12200
500s = 55700 then s = 111.4 i,e Selling Price = $111.4
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