How to Make Money in 2016

January 23, 2016 02:25 AM
 
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Try new management strategies and careful cost-cutting measures

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. For a tool to help you crunch your numbers, visit www.AgWeb.com/tools/calculators

 

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Comments

 
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Chris
Clarendon Hills, IL, IL
1/27/2016 09:31 AM
 

  While it is important to reduce costs where possible, this ignores half the equation when looking at profitability - having a proactive, strong risk management strategy. On the production side, reducing costs $5 here, $10 there is warranted, but on the revenue side, a good strategy can save/make you far more money than that. Regardless of price and yield, a good strategy will position you for success. Utilize the resources and tools available to you, educate yourself on how to leverage them to your benefit, make sound business decisions in your risk management and you'll be pleasantly surprised the results you see. It is not easy, we don't have $7 corn now, but with some dedication and the right help, you can mitigate losses and maximize profits.

 
 
DAYTON
Richard, HI
3/6/2016 11:47 PM
 

  Profit is simple math people. 30 years ago our farm was full production of cattle and grain. When we realized we were contributing the land,equipt and labor so we decided we should get 3/4 of the gross return. We still do and the way we achieved this was to drop inputs and eventually go "ORGANIC". Never looked back since. Even in bad years we still returned a profit. $200 net per acre is a poor year. Semi retired work 2 months a year and net $250,000.00 annually on under 800 scres.. Employees: 2, wife and me.

 
 
John
Salina, KS
1/26/2016 09:38 PM
 

  Park the tractors in the shed. Don't plant anything. ( the price will go up ) demand = higher prices. Go get a job at Walmart and you will be money ahead. At least you won't be loosing money.

 
 

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