By Jordan Shockley and Greg Halich, University of Kentucky
Across Kentucky, we have seen the rapid expansion in of the staple spirit of Kentucky, bourbon, resulting in increased production capacity and new distilleries entering the market. This expansion provides opportunities for corn producers to supply this market and provide distilleries with locally sourced inputs. As new and existing distilleries attempt to increase market share in this industry, production of their mainstay bourbon is increasing. Furthermore, distilleries are also producing signature or boutique bourbons to differentiate themselves from their competitors and provide new products to consumers. Distilleries are experimenting and demanding premium corn varieties to produce their boutique bourbons. An example of this is New Liberty’s Bloody Butcher Bourbon Whiskey which uses the bloody butcher heirloom corn variety. Therefore, there are potential opportunities for Kentucky farmers to supply various premium corn varieties to support the expansion in these markets.
While corn markets have increased throughout 2020, we are likely to be back to lower prices within two years and producing premium corn varieties may be a way to diversity their crop mix and increase overall farm profitability. However, Kentucky grain farmers need a way to efficiently assess the profitability of these specialty-market corn varieties if they are going to be serious about producing them. Key factors like premiums received, production costs, and storage/delivery costs are currently unknown. Therefore, the overall aim of this project is to determine the profitability of growing premium corn varieties in Kentucky. More specifically, the original objectives of this project were:
Determine the premiums offered for locally sourced premium corn varieties including white corn, heirloom corns (e.g. bloody butcher and blue corn), organic corn, and non-GMO corn;
Determine the production costs for the premium corn varieties stated in Objective 1;
Develop enterprise budgets for producers to download and use to assess the profitability of the premium corn varieties stated in Objective 1 for their operation.
It is important to note that while the original proposal included evaluating organic corn as part of the premium corn varieties, it was not included in the final report. Due to the complexity of this proposal and the difficulties of completing in the proposed timeframe due to COVID-19, organic corn was not included. However, it is the goal of the investigators to pursue objectives 1-3 for organic corn production in the near future at no cost to the Kentucky Corn Growers Association.
To accomplish Objective 1, interviews were conducted with previous growers of premium corn varieties and potential buyers. From the information gathered through these interviews, there is no standard regarding pricing strategies for premium corn varieties grown in Kentucky. For varieties like white corn and non-GMO yellow corn, pricing is linked directly with the Chicago Board of Trade (CBOT) and reported openly by potential buyers. However, for heirloom varieties, it was anticipated that a traditional price premium would exist (e.g., $1.50/bu premium over #2 yellow dent corn prices), but that was not the case. Most producers were paid on a set per acre basis that attempted to cover all costs of production and would generate a gross return that was equal to what they would have made if they had grown a traditional corn variety that cropping year. Therefore, it is crucial for producers considering premium corn varieties to understand the costs of production (Objective 2), yield potential, and utilize enterprise budgets (Objective 3) to ensure at least all costs are covered when negotiating a payment structure with potential buyers.
Objective 2 of this research was to understand the costs of production and profitability potential for growing premium corn varieties in Kentucky. Producing premium corn varieties were compared to traditional no-till corn grown in the state. Understanding the production practice differences, we can adjust our current enterprise budgets to reflect growing premium corn varieties. Discussions with Dr. Chad Lee and producers who have experience growing premium corn varieties provided insights into these differences. The major differences in costs between producing premium corn varieties versus traditional varieties include seed costs, fertilizer and pesticide costs, machinery costs, and storage costs. Seed costs for premium corn varieties are typically greater per bag than traditional corn varieties, and heirloom varieties can be challenging to acquire in large bulk sizes (e.g., 5 lb bags versus 50 lb bags). Furthermore, heirloom corn varieties are typically planted at lower seeding rates than traditional varieties (e.g., 15,000 seeds per acre compared to 30,000 seeds per acre). These differences in planting density and potential row spacing can be challenging for a modern planter setup designed for traditional corn varieties.
In addition, fertilizer and pesticide costs will differ between premium corn varieties versus traditional varieties. Given the yield potential being significantly lower for heirloom varieties than traditional varieties, less nutrient uptake is expected, requiring fewer macronutrients. Furthermore, pesticide costs could be different since new chemistry may not be labeled for premium corn varieties. Machinery costs, specifically trucking costs, will differ given the limited number of buyers for premium corn varieties. A buyer may also only require a partial truck delivery at a time given their on-site processing and storage capacity, which increases the cost per load. Therefore, the hauling distance must be considered by the grower as this could be a high cost for growing premium corn varieties. Finally, storage costs will differ between premium corn varieties versus traditional varieties. On-farm storage will be required to allow for just-in-time delivery of a specific volume (usually small compared to traditional varieties). This means that more of the corn crop will be storage initially and will remain in storage longer, resulting in higher storage costs than traditional corn varieties.
Expected crop yields for premium corn varieties vary drastically depending on the variety. While white corn and non-GMO varieties can have slightly lower yields than traditional yellow corn varieties (or even comparable depending on the year), heirloom varieties experience considerably lower yields due to planting density, plant vigor, and susceptibility to crop failure. Given the yield risk associated with growing heirloom varieties, conservative yield estimates are recommended when budgeting.
While production practices and yields vary greatly depending on the variety selected, it was deemed that two different enterprise budgets would capture these differences. For Objective 3, an heirloom corn budget and a non-GMO corn budget were developed. The heirloom corn budget will reflect the cost and returns for varieties such as bloody butcher, blue corn, hickory king white. The non-GMO corn budget will reflect the cost and returns for white and yellow non-GMO corn varieties. In addition to the heirloom and non-GMO enterprise budgets, a traditional GMO corn variety budget is provided for users to compare enterprises. These enterprise budgets are depicted in Figures 1-3 and are available in an interactive Excel-based tool. We intend the budgets to show estimated costs and returns, but it is important to customize each budget to each farm, especially given the yield variability and lack of pricing information available. Farms have different land, different equipment, different buyers, and prices change every year, especially for unique products such as premium corn varieties. Elements seen in blue on the budgets are customizable to each farmer’s unique agronomic and economic situation. Given the complex nature of premium corn production, an expansion and overhaul of the original no-till GMO enterprise budgets was required. Now, users have the flexibility to change various machinery operations, including a conventional tillage system, reflect cover crop costs, vary storage parameters (e.g., % of crop stored, months stored, and interest rate adjustments), and vary land cost (cash rent vs. crop share). Furthermore, a fertilizer cost calculator was embedded in the budget to improve functionality. Finally, a summary table was added for the user to compare the cost and returns for heirloom, no-GMO, and GMO enterprise (Figure 4).
Since premium corn yields and prices will be highly variable, sensitivity analyses were conducted to illustrate the impact on profitability (Tables 1-2). Each crop yield is increased/decreased in 20-bushel increments, and each crop price is increased/decreased in $0.50/bu increments. It can be seen in Table 1 that net returns above variable costs do not turn positive for all prices examined until yields reach 80 bu/acre. With yields of 60 bu/ac, prices need to be above $8/bu for positive returns above variable costs. For non-GMO corn, the price needs to be above $3.00/bu for positive net returns, given the yields examined.
Budgets for niche products like premium corn varieties will vary greatly by farm and market opportunities that are available to the producer. We will continue getting feedback from producers, researchers, and local markets to adjust the Excel tool so that Kentucky producers have the most up-to-date information available to them. This tool will be available at http://agecon.ca.uky.edu/budgets.