If farmers could turn back time to 2012, when commodity prices were high, many would warn their younger selves of what’s to come. Maybe that would lessen the pain of rock-bottom commodity prices, high input costs and an expected average $50-per-acre loss in 2016.
“We’ve all lived through $2 and $3 corn,” says Dan Basse, president of AgResource Company, a Chicago-based analytics, news and research advisory service. “What’s different now is the cost structure, which has not declined. We’re losing money for the second year in a row. These are the biggest losses since the 1990s.”
According to the University of Illinois, farmers need to reduce costs by $100 per acre in 2016 to remain in the game. Here are a few ways to reduce the four biggest expenditures—land, machinery, fertilizer and seed:
- “When it comes to buying land, unless that piece of property is strategic I don’t think you should be buying it,” Basse says. If renting crop land, he tells clients anything more than $225 per acre for class A land won’t pay off. When talking with landlords, know your price range and don’t stray from it. Straying too far could mean the difference between making and losing money.
- Machinery and other capital purchases were high from 2010 to 2013, with some purchases pushing costs to exceed $100 per acre for machinery alone. Reduce costs by holding onto equipment longer, sharing, leasing or buying used.
When you hold onto machinery longer or buy used equipment, factor in accumulated maintenance costs of approximately 14% of the list price after 600 hours and 45% of the list price after 1,400 hours, according to Iowa State Extension. Sharing machinery, for example, saves Tim Malterer and each of the five other Minnesota farmers in their LLC $20 to $40 per acre in machinery costs. (See “Share Equipment, Cut Costs” in the 2016 Machinery Guide.)
- Fortunately, fertilizer prices seem to be decreasing from their high of $200 in 2011 to an estimated $133 per acre in 2015. Shop around to see who has the lowest fertilizer prices and don’t be afraid to negotiate.
According to David Widmar, senior research associate at Purdue University and partner with Agricultural Economic Insights, fertilizer prices are down 10% to 15% compared to spring of 2015. Think critically about how much and where to apply fertilizer, he adds. “It might make sense to hold back on nitrogen some this year and not push for high yields ‘no matter what,’ ” Widmar says. “The economically optimal nitrogen rate for $3.50 corn is lower than what is was at $5 or $6. If you have soil with ample phosphorus and potassium levels you might be able to consider reducing application rates for a year.”
- Seed expenses account for 15¢ to 20¢ of every input dollar, Widmar says. In some cases, it might be beneficial to consider seeds with fewer traits or to reduce seeding rates to lower costs. This is a field-by-field decision, as some situations might require additional insect protection or higher seeding rates to maximize productivity.
Similar to fertilizer and chemical inputs, negotiate with dealers on seed cost. Don’t just accept the list price, Basse warns. For example, in corn seed, if you can negotiate your cost down $20 per unit, it can potentially decrease your costs by $8 to $10 per acre depending on your seeding rate. There’s 10% of your $100-per-acre savings plan.
Cutting back in each of these four areas can help you keep profit lines in the black until prices rebound.
One of the most important steps in financial planning is knowing your breakeven points. Find your breakeven point here.