How to match break-even costs to the new crop price reality
With corn prices dropping to sub-$4 and the potential for $10 soybeans, it’s time to get creative. There is no one-size-fits-all-farmers answer, but there are numerous ways to more closely align costs with returns.
The good news is that some important inputs, such as fertilizer and fuel, are already coming down in cost. Other inputs, while not decreasing in price, are still too valuable to risk a cutback in yield. One of the best ways to cut costs can actually be a spike in yields.
We’ve called on several experts to offer their suggestions on trimming expenses on everything from the cost of money to minding the details.
Position your farm for higher interest rates, says Mike Boehlje, ag economist at Purdue University. This is increasingly important because many farmers will need to borrow money in 2014 to offset potential shortfalls.
"We’re closer to a rate increase," he adds. "It’s crucial to take advantage of fixed rates if you haven’t already done so. For some, now’s a good time to think about consolidating/restructuring loans to reduce payments.
"Be conservative about using too much cash to buy assets or pay down debt," he adds, stressing the importance of a strong cash position.
Know your cost of production. While this is hardly new advice, many producers still do not have a firm grasp of their total costs, says Danny Klinefelter, ag economist at Texas A&M University. It’s not enough just to know costs on a cash basis, which can give you an inaccurate picture of farm finances; it needs to be done on an accrual basis, he explains. "Probably only 2.5% of commercial farmers know their cost of production on an enterprise basis," he adds.
"It’s impossible to market and lock in a positive margin if you don’t precisely know your costs," Boehlje says. "When you see a profit opportunity, lock it in." Likewise, it’s tough to know just how to go about trimming costs without precisely knowing what they are, he notes.
Initiate conversations with landlords about cash rents, encourages Gary Schnitkey, ag economist at the University of Illinois.
"I’m not expecting a decrease in cash rent in 2014, however," he adds. "The rubber will meet the road on cash rents in 2015."
Because of both high-priced rent and farmland values, be cautious about expanding, adds Mike Duffy, ag economist at Iowa State University.
Economies of scale don’t improve much once an operation hits 1,000 acres, he says, and it might be better to invest in improving land to boost yields rather than acquiring more land.
One area farmers should not cut this year is crop insurance. In fact, producers with 70% to 75% corn coverage should consider boosting coverage levels to 80% or 85%, says Steve Johnson, farm management specialist at Iowa State University. That’s because lower futures prices mean less crop insurance revenue protection. Premiums won’t be released until March 3 or 4, but producers must make any changes by March 17.
If you’ve been banking phosphorus (P) and potassium (K) levels, now is the time to make a withdrawal and reduce P and K rates, says Nate Franzen, president, agribusiness division, First Dakota National Bank, Yankton, S.D. "People have been pouring it on to the max in past years," he notes.
Before you go to the other extreme, Boehlje adds, keep in mind that cutting too deep on crucial inputs can actually drive costs higher. "I’m not saying to cut back and cause a productivity
reduction, nor cut back on total nitrogen that has to be replenished each year," he notes.
Thankfully, the outlook calls for substantially lower prices on all nutrient inputs this spring.
Think twice about capital expenditures. Many farmers have upgraded equipment during recent years of strong profits, Boehlje says, so they might be in a position to go through a period of lower prices without making additional changes. It’s important to "right size" equipment to acreage, he says. The same applies to land and other fixed assets.
It’s human nature that during periods of strong profits, management in some areas can "get a little sloppy," Franzen says.
Record prices have encouraged buying some inputs without hard knowledge of their economic return. "That’s no longer an option," Duffy adds Speaking of inputs, if you fail to apply the right inputs at the right time and under the right circumstances, you might as well flush your money down the toilet—at least it’s more environmentally sound, Boehlje explains.
Management carries over into the shop, too. Make sure equipment is in the best condition possible to give you an edge during planting, crop protection applications and at harvest.
Be lean on labor. "Some operations can get by with less hired labor," Franzen says, but that means knowing per acre labor costs.
While farmers as a whole are making fewer passes over fields, some operations can still reduce up to two passes, which can substantially cut costs, Franzen says.
Sweat the small stuff. It’s not huge costs that make the difference, but small changes throughout the operation, Klinefelter says. "A 5% cost reduction over many inputs can be huge."
While the cost structure in some industries varies little from firm to firm, in agriculture, the spread is wide.
"In 2012, University of Minnesota farm record data showed that the top 20% earned $844,000, while the bottom 20% earned just $14,000," Klinefelter says. "Farmers are not a homogenous group. You can make yourself 5% better and it’s more than 5% because that level of improvement over time has a compounding effect."
For example, with variable-rate systems, "you can get real cost changes," he adds.
Push the pencil on family living expenses. "The past three to four years, a number of farm families have sped up living expenses," Franzen notes. "Now is the time to tighten the belt."
Realigning cost and returns can be a challenge, but it’s one that you must master to weather the storm.
You can e-mail Ed Clark at email@example.com.
- Mid-February 2014