Budget Spring Input Needs

January 5, 2016 12:00 PM
 
Budget Spring Input Needs

Control production costs through mindful spending

Cut inputs and save money. The logic seems simple, but business-minded farmers know trimming costs and cutting production corners can leave you with lower yields and less efficiency. 

Grain price projections for 2016 aren’t expected to dramatically increase, so farmers are faced with doing more with less. A detailed budget and plan to make smart input purchases will help protect your balance sheet. 

Start by pinpointing exactly where you spend money. “There’s a wide variability in what operations can do in terms of cost of production,” says Bob Craven, director of the Center for Farm Financial Management at the University of Minnesota. 

Compared to estimated 2015 input costs, 2016 costs should provide some relief for farmers, says Bob Craven, director of the Center for Farm Financial Management. That’s based on projections for southern Minnesota cash-rented land.

For example, cost of production for an acre of corn can range from $3.84 to $5.45, according to farm financial and production benchmark information for 2,500 operations listed in the financial management center’s FINBIN database.

Line By Line. Land typically captures about one-third of total revenues from crop production, says Michael Gunderson, Purdue University ag economist. It represents the largest single-line expense. 

At the same time, “renegotiating rents is not fun or easy,” Gunderson acknowledges. Another big-ticket item is seed, which can represent 15% of total costs. 

“Seed and genetic companies are very reluctant to lower seed prices,” says Gary Schnitkey, University of Illinois ag economist. “Farmers need to determine if yields can be maintained while lowering seed costs.” Options can include lowering seeding rates and switching genetics.

Cost of Production Trends Lower 
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Fertilizer prices can fluctuate substantially, Gunderson notes. As you budget for next year, visit with your supplier to see if there are any discounts for purchasing by certain dates. Although that sounds good in theory, Gunderson knows some producers are under cash constraints. Is it worth getting a small operating line of credit to lock in inputs now?

“Depending on the discount, the cost of short-term borrowing may be enough of a benefit,” he says.

Avoid Kicking Cans. Smart management proved vital in profitable years, and watching expenses now is equally imperative. “Dealing with cash shortfalls now seems prudent,” Schnitkey says. “If costs are not cut and low prices continue, the financial problems associated with the grain farm sector will become more difficult.”

Projected 2016 Input Cost Direction
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