Dr. Michael Swanson, chief agricultural economist for Wells Fargo, the nation's largest ag lender, believes technology is widening the gap in Midwest farmers' production costs, regardless of the crop they produce. And he believes the gap will only get wider if the rate of technological innovations continues to increase.
According to USDA research, there was a wide spread between the lowest and highest soybean production costs in the U.S. in 2002. Some producers spent $10 to produce a bushel of soybeans, while others spent less than $2/bu.
“Theoretically people are supposed to be much closer together when they produce a commodity,” Swanson says, referring to the wide gap in costs.
“From 1990 to 1998, prices were so high that everybody — both high-cost and low-cost producers — made money on soybeans, according to these numbers from the USDA,” Swanson continues. “Since 1998, with the introduction of additional crops from Brazil and Argentina, that has not been the case. Now only low-cost producers are making money on a consistent basis.
“The question is, What makes one person a high-cost producer, where he needs $8/bu. to break even on soybeans, and someone else is making money at $2.50/bu.?”
Swanson believes one of the main differences between high-cost and low-cost producers is in their ability to adopt new technology.
Based on more than 8,000 financial records of ag producers across the country who are in Wells Fargo's system, Swanson found a correlation between “excellent adopters” and financial success. Excellent adopters are defined as those who adopt technology early and use it to their advantage. According to Swanson's findings, they are also the producers with the lowest costs.
“People always want to quibble with numbers. But basically low-cost producers seem to be able to put less money into the ground to get more yield than high-cost producers. And what allows them to do that we think has more to do with their skill sets in terms of management and the technology they have adopted and their ability to adopt that technology.”
Along with the cost impact of technological adoption, Swanson adds that “economies of scale” are equally important. “At any given moment, there is a range of farm sizes that give the best financial results,” he explains. “That ‘best’ size has been getting larger for a number of decades. Even great adopters of technology can't overcome being on too small of a farm.”
Swanson's findings are not the first to suggest that early technological adoption lowers costs. According to Dr. Jess Lowenberg-DeBoer, agricultural economist at Purdue University, numerous studies around the world show that appropriate technological adoption reduces per-unit production costs. “In recent years, most of the studies are in developing countries,” Lowenberg-DeBoer says. “In the U.S. and other developed countries, the ‘tech advantage’ is taken as a proven fact by most economists and hence there are few studies that focus on measuring the advantage.”
Until now, much of the existing research has focused on individual technologies in manufactured products, such as equipment, software, chemicals and improved seed. Swanson, on the other hand, expanded the definition to include business and management improvements and found a financial payback.
“Technology covers much more than nuts and bolts and circuits,” he says. “Business technique is also a type of technological innovation in terms of how you contract and market your crop, buy your inputs, raise your financing, schedule your time or whether you hire or self-employ.”
Swanson says the adoption of these and other technologies has proven to be critical to producers' financial success, according to his findings. And it will largely determine producers' long-term survival, he adds, if the rate of innovation continues to increase.
Climbing the curve
Swanson says the good news for producers is that no matter where they fall on the adoption curve, they still can move up through the choices they make about the technology they buy and when they buy it.
Swanson recommends that crop producers develop an explicit plan for adopting technology into their business, similar to what many other industries do. The plan should spell out what technologies they plan to buy over the next few years, along with the cost and potential returns.
Devising such a plan requires that producers first keep up with what technologies are available. (See “Raise your Tech Q.”) Then they must decide early on which technologies to adopt or not to adopt.
“The rate of technological innovation is ongoing and it is going to get faster,” Swanson says. “And you have to make a choice about how you are going to find out about new technology and then adopt it. Because if you adopt something in five years and everybody else adopts it in three, you are giving away that type of advantage every time.”
According to research, early adopters are typically the first in their area to try a new technology. Because they have the most time to benefit from the technology before others try it, they can see the greatest returns. However, they also face the biggest risk that a technology won't work.
For that reason, Swanson stresses that producers need to be selective as well as early in their adoption, choosing only those technologies that are appropriate and cost-effective for their operation.
“We are looking at producers through the economic filter of adopting technology based on increasing the margin of their business — that is, becoming a lower-cost or higher-yield producer,” he says. “And that is certainly a different set of criteria than being strictly an early adopter. Maybe you are a great technological whiz, but if you adopt the wrong technology just because you love technology, that is not a good business decision.”
Raise your Tech Q
Dr. Jess Lowenberg-DeBoer, agricultural economist at Purdue University who specializes in technology, offers these tips to increase your knowledge.
Invest in education. If you bring new members into your farm operation, insist that they are prepared with a college or vocational school education. Consider taking courses yourself. Remember that education is a long-term investment.
Read farm publications. Look for reports about on-farm tests of new technology.
Attend a variety of workshops, field days and conferences every year, including at least one that you have to pay a fee to attend. The “free lunch” at your supplier's annual meeting is a good indication that the technologies there are being marketed to the conservative majority.
Survey the Internet. Every day when you check the markets, put a technology topic into your favorite search engine and look at the first 10 sites that it lists.
If your neighbor is trying something new, be sure to ask him about it.
Be generally curious.
Test promising new technology on your farm, and look for the least expensive way to do it. Can you work with a manufacturer or supplier to test it on your farm? Can you work with a manufacturer or supplier to test it in your area? Can you lease the equipment the first year?
Lowenberg-DeBoer says that one of the biggest benefits of yield monitors and GPS is that they give you the potential to do field scale tests with a minimum of interference with farm operations.
“Collaborate with those who can help you make the tests meaningful,” he says. “This might be a local precision farming group, the state land grant university or an input supplier.”
What kind of adopter are you?
Adoption categories are usually defined in terms of the S-shaped adoption curve as a proportion of potential users who have adopted, according to Dr. Jess Lowenberg-DeBoer, agricultural economist and technology specialist at Purdue University. “For instance, early adopters are usually in the first 10 to 20% of potential users who adopt, depending on the shape of the curve for a specific circumstance,” he says. “They correspond to the part of the S curve on the left that is quite flat.”
The “middle adopter” or “conservative majority” corresponds to the part of the curve that rises very rapidly, Lowenberg-DeBoer explains. They are typically from 20 to 80% of potential users. “They start to use the technology when it is proven by the early adopters, and they jump on the bandwagon,” he says.
“Late adopters” or “laggards” correspond to the part of the curve that flattens out at the top and might be from 80 to 100% of potential users.
To find out which category you best fit, ask yourself the following questions.
If you answer yes to these questions, you are probably an “early adopter”:
Are you often the first grower in your area to use a new technology?
Do you actively seek information about new technologies?
Do you scan farm publications and/or ag Web sites for stories about new technologies?
Do you attend farm shows and field demonstrations looking for new ideas?
Have technology companies identified your operation as a test site for their new products? “They like to work with early adopters,” Lowenberg-DeBoer says. “They may have noticed something that you didn't about your technology adoption behavior.”
In general, are you willing to take risks if you see a potential benefit? Early adopters are often more aggressive about risk management than their neighbors are.
If you answer yes to the questions below, you are probably in the “conservative majority”:
Are you uncomfortable with new technology unless other producers in your area are also using it?
Do you want to be fairly sure of profits before investing in any new technology?
If you answer yes to the questions below, you are probably a “laggard”:
Do you often comment that “the old ways are the best”?
Do you often see technology as more trouble than it is worth?
Are you over 50 years of age? Age 50 is not what is important, Lowenberg-DeBoer explains. “But from strictly a profitability point of view, adopting new technology may not be worth the trouble if you are close to retirement.”
Is your farm different from others in your area? Is it smaller? Do you produce different crops? Do you produce for niche markets? If so, the technology may not be appropriate for your operation.