Control Costs This Spring

March 4, 2017 02:34 AM
Control Costs This Spring

Review line items to minimize expenses per bushel and improve financial position

For farmers who have seen net farm income and net worth decline during the past few years, Mark Jensen, chief risk officer, Farm Credit Services of America, has some encouraging news. You can improve your financial position by strategically bringing down your cost per bushel. Focus on big items to gain traction more rapidly.

“It looks a lot like the federal budget,” Jensen explains. “You can whittle your way around a bunch of areas, but you must solve a bigger problem.”

For farmers, that means freeing up liquidity, determining whether a farm is making money on an accrual basis and managing risk with crop insurance and smart sales. 

“Your job in a down market is to pay attention to everything, not just what is presented to you,” says Ray Massey, ag economist, University of Missouri Extension. “Look for alternatives that others are overlooking. When somebody gives you an A or B choice, step back and think of a C and a D.”

Consider your capital needs. Suppose an operation has 1,500 owned and 500 rented acres, Jensen says. The farm is solvent, but its $4.5 million net worth continues to decline. In 2016, the operation had a negative net farm income of $70,000 and its owner failed to restructure debt by the end of the year. Options could include:

  • Restructuring real estate into a new 30-year loan 
  • Selling old-crop grain inventory to free up working capital
  • Fixing interest rates across loans before rates move higher
  • Monitoring and reducing family living expenses

“Know your land cost per acre. Know your equipment investment,” Jensen says. “Don’t forget the impact of rising interest rates. Know how much rate exposure your operation has in a rising interest rate environment.” 

He also advises farmers to review crop insurance coverage with attention to provisions on revenue protection and trend-adjusted yields. Flex leases can enable farmers to pay lower rents when commodity prices are low and higher rents when prices rise, a provision that can be attractive to landlords. 

Other land savings can be attained by renegotiating multiyear leases, Massey adds. Farmers can ask their landlord to change the timing of payments to ensure cash-flow needs are met. They can also work rental rates lower by providing valuable services such as mowing and timber marketing.

Drill further into your operation by moving beyond financial spreadsheets and land base, and into the field-by-field decisions that drive profitability. 

“You have a lot more influence over cost of production than what you can market your grain at,” says Mykel Taylor, ag economist, Kansas State University. “Manage costs and returns.” 

Maximize your production efforts by using money-saving tools. Determining your fertility needs is an essential step, starting with a soil test. 

When farmers understand which nutrients their soil needs, they can avoid paying for unnecessary inputs. There might even be times you personally foot the bill for an input such as lime to ensure the crop stays healthy. “Otherwise, you’re shooting yourself in the foot,” Taylor explains.

It’s important to manage phosphorus, too, even though the yield bump will be relatively small. On the other hand, it’s best to skip secondary macro and micronutrients because the expense outweighs the benefit given the economic environment. “None of these things individually will save you big money,” Taylor points out. “But when you start adding up the little things, that may get us somewhere.”

To avoid becoming discouraged, keep the big picture in mind, Taylor advises. The outlook isn’t good for anyone in agriculture in the next two to three years. Paying attention to the details of your budget and fieldwork will ensure your operation remains competitive long after commodity prices reverse course and head higher. 

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