Economics of Producing Alfalfa

Alfalfa growers make a variety of management decisions that affect profitability. These include variety selection, fertility program, control of insects and weeds, harvest method, storage, and marketing. Many aspects of production and marketing combine to affect both total revenue and total costs. Since alfalfa is a perennial crop, total costs are divided into establishment costs and annual operating costs. Establishment costs are incurred the year of establishment but can be averaged over the life of the stand. Annual operating costs occur each production year.

Many management practices affect both revenue (price received and yield) and costs (establishment and annual costs). Price depends in part on quality, which in turn is affected by establishment practices and annual production practices. Yield is also affected by establishment practices and annual production practices.

Annualized establishment costs depend on stand life. Stand life, in turn, depends on both establishment practices and annual production practices. Therefore, establishment and annual production practices are both very important. Both affect profitability since they each contribute jointly to returns (i.e., yield and quality) and to costs. Whenever possible, the  economics of each major factor has been included in the preceding chapters.

Four management practices were integrated and the effects measured in research studies by OSU. For example, one five-year study considered the effects from varieties, weed control, insect control, and end-of-season harvest method. Table 11-1 summarizes returns for selected combinations of management practices. For the research, these practices nearly replicate what might be considered best management practices.

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Using a sample budget for an alfalfa enterprise and excluding capital costs for land, buildings, and equipment, establishment costs represent over 35 percent of the first year's costs. (See Table 11-1.)  However, if the stand survives eight years and establishment costs are averaged over the eight-year period, establishment costs represent only seven percent of the costs for year eight, assuming constant annual costs. Stand life is dependent on many factors, so extending the productive stand life to as many years as economically possible requires long-term planning combined with timely execution of annual management practices. Sometimes, not following a recommended practice initially appears as a cost savings but ultimately results in lower plant population, less vigorous plants, lower yields, poorer quality alfalfa, and reduced stand life. Consequently, ignoring recommended practices may be more costly than following them.

Stand life is especially important to profitability of the alfalfa enterprise, but at some point the stand needs to be replaced with an interim crop and later reestablished. The yield pattern of an alfalfa stand over several years is difficult to estimate due to weather and other factors. Nevertheless, the stand is most productive in the early to mid years and trails off in later years. One approach is to allocate all establishment costs to the first crop year. Then total costs each year (establishment plus operating costs in year one and only operating costs in subsequent years) are divided by each year's yield to determine the marginal or added cost per ton for maintaining alfalfa another year. Marginal or added costs are high the first year due to establishment. Then the added costs of maintaining the alfalfa stand decline and remain relatively low during the higher-yield years. Finally, as annual yields decrease in later years of the stand, marginal costs increase.

Growers can track their yield pattern and know when yields are decreasing and marginal costs are increasing. At some point, marginal costs increase above the expected marginal or added revenue from each ton of alfalfa sold. Marginal or added revenue per ton is simply the expected selling price. To be profitable, the added revenue from maintaining the alfalfa stand one more year must equal or exceed the added cost of maintaining the stand one more year. Consequently, whenever expected marginal revenue (expected sale price per ton for the year) exceeds expected marginal costs (annual operating costs per ton), the stand should be maintained for another year. When expected marginal revenue drops below expected marginal costs, the stand should be plowed under.

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Alfalfa Production Guide for the Southern Great Plains, 2001
Comments and Questions:
E-mail: John Caddel

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