Assume your grandparents have a Conservation Reserve Program (CRP) contract for 100 acres which will expire next year.They can renew the contract for another 10 years and receive a payment of $85/acre each year, but they are wondering if it would be more profitable to put the 100 acres into hay production and have it custom farmed. Since you are taking college classes, they want you to determine the optimal decision.

Your grandparents gave you the following information to help you make this decision.

The expected hay yield is 5 tons per acre, and the long-run expected selling price for hay is $70/ton.

Variable costs of production are $120 per acre EVERY 4 years to establish a seeding, plus fertilizer costs of $50/acre each year.

You can hire a custom operator to harvest and store the hay crop for you for $25/ton.

If you take the land out of the CRP program, you will no longer have to spend

$600/year on weed control, but you will give up the $85/acre annual payment from USDA.

Questions

a.Using the information provided, generate a partial budget.Make sure to properly title the budget and show your calculations in a spreadsheet.

b.Should your grandparents take their 100 acres out of the CRP program and plant it in hay? Why or Why not?(5 points)

c.Should a land charge be included in your partial budget? Why or why not?

d.What would the expected yield have to be to make the two choices just equal in potential profit? Hint. Calculate the break-even yield--you will need to use algebra to solve this problem.

e.Would your decision change if the CRP payment price was $155/acre? Explain why or why not.