Budget Planning for a Better 2016

November 7, 2015 02:21 AM
 
Budget Planning for a Better 2016

Number crunching field by field can help farmers thrive even now

As combines leave the field for the year, it’s important to start planning for next season. Be ready for challenges and opportunities to come in all forms at any time. Through careful planning, you can take advantage of this low cycle in grain prices and thrive moving forward.

One of the most crucial steps is to create a budget. Take into account field history, hybrid or variety performance and individual revenue needs.

“If you want to improve your farm’s bottom line, consider spending even more time scouting your fields and crunching your financials,” says David Widmar, partner with Agricultural Economic Insights and senior research associate at the Center for Commercial Agriculture at Purdue University. “For those looking for ways to lower their cost of production per bushel, there can be huge returns for carefully monitoring your field and financials.” 

Hopefully, you scouted and took good notes throughout the season to look back on while you plan your budget. If you didn’t, take time to write down everything you can remember to give yourself a starting point. Next year, remember to scout with a notebook to give yourself a better idea of resources and tools you need to plan for. While you put your budget together, remember to calculate fixed costs, such as your house, cash rent and labor, and variable costs, such as fertilizer, seed, pesticides and fuel.

“Right now we see fertilizer prices going down, especially nitrogen and potassium,” Widmar says. “Nitrogen and potassium are down 10% from the past year and we’ve seen them trending down the past few weeks.” 

Compared to spring 2015 prices, anhydrous ammonia is about $81 per ton lower, phosphate is $19 per ton less and potassium is $58 per ton lower, according to the Illinois Department of Agriculture. 

Widmar suspects this trend will continue until fertilizer manufacturers get a handle on corn acres. Since corn typically uses more fertilizer than soybeans, it’s the biggest driver for demand. The bigger the crop, the more demand and the greater the chance prices will rise. The inverse is true, too.

Since the 1990s, corn seed prices have gone from 8% to 15% of total expenses, according to USDA–Agricultural Marketing Service. Soybeans are similar, rising from about 6.5% in the early 1990s to 12.6% in 2014. 

From 2002 to 2015, Purdue University crop budgets show corn seed expense increased 11.5% annually and soybeans seed increased 7.2% annually.

Will the trend hold true for the 2016 season? According to Widmar, it’s unlikely. “It looks like the actual list prices will remain flat,” he says. “Be sure to look into new-customer promotions or loyalty discounts.” These incentives could match the price you paid in 2015 or, in some cases, edge lower than previous years—especially for established hybrids or varieties. New products will likely collect a premium compared to older counterparts.

Final pesticide prices are typically decided by the retailer. It can be difficult to gauge price trends, since they are dependent on location and different decision-makers. In this case, pesticides include both herbicides and insecticides. “It’s still early, but it appears prices will be flat and similar to 2015,” Widmar says. “There could be discounts.” 

Check with your individual retailers to determine the prices in your area and what discounts are available. Also be sure to talk to your agronomist about your pesticide needs. You might choose to reduce insecticides if you’re using a hybrid or variety with traits to protect against insects. If you have less weed pressure, you might be able to trim herbicide costs.

Fuel prices for 2016 could continue to trend lower through spring. According to the U.S. Energy Information Administration, propane prices for the winter season (Oct. 1 through March 31) will be 10% to 18% lower compared with this past winter. This is due to lower fuel prices and demand. Fewer farmers needed to dry grain this year, which could have impacted pricing. Diesel prices are also expected to be lower in 2016, following the trend in propane prices, Widmar explains.

“We are down about 31% compared to October 2014 diesel prices and 6% lower than they were this past spring,” he says. “The lowest prices they’ve recorded since 2010 were a couple of weeks ago. Expect to see lower prices moving forward.”

Use trends in the input market as a launching point to plan for next season. It’s important to be prepared for the worst-case, best-case and most-likely scenarios and how each will influence your operation, Widmar says.

If you’re looking to cut costs, remember it’s a field-by-field question. The only way you’ll know where you can safely cut is through scouting. Discover if switching crops, reducing traits, buying fewer pesticides, lowering nutrient rates or generating fewer trips across a field will pay off—or if a cheaper price will actually cost more in the long run. 

“Net farm income, especially for crop producers, has rapidly declined over the past two years,” Widmar says. There are three ways to increase per-acre income: higher commodity prices, lower fixed costs and lower variable costs. While commodity prices and fixed costs are often out of your control, you can use planning and intentional timing when buying variable inputs to increase revenue.  


Corn or Soybeans: Next Year’s Big Question 

In 2015, soybeans were more profitable than corn. However, the market is singing a new tune for 2016 with projected lower soybean prices, making corn more favorable.

There are many factors to consider when selecting crops, such as rotation, required inputs, commodity prices and a field’s growing capacity for each crop. Be sure to take all factors into consideration before making a decision.

For example, in 2016 budget estimates, corn prices are 10¢ per bushel lower than 2015 and soybeans are $1 per bushel lower. This 11% price drop in soybean profitability dwarfs corn’s mere 3% drop in the past calendar year.

It’s also imperative to compare per-acre costs in corn and soybeans. Certain conditions might make soybeans cost more, while others might push corn costs higher. Be mindful of input prices, particularly fertilizer, as you make crop and seeding decisions. 

You will have the opportunity to reduce costs in 2016, which is important because estimated margins in corn and soybeans are not high enough to generate economic profits without cost reduction. “Sit down and do the math,” says David Widmar, a partner at Agricultural Economic Insights and senior research associate at the Center for Commercial Agriculture at Purdue University. “We may need to think carefully about input decisions, such as high fertilizer application rates or seeding populations, that were economically viable when commodity prices were higher.”

Look for opportunities to maximize revenue through methods with which you might not be familiar. Switching crops, reducing seeding rates and changing fertilizer programs are among a few methods you can employ to increase revenue on your farm.

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