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8 Ways To Stretch Input Dollars

Just as agricultural economists throughout the nation were digesting headlines like "Asia Crisis Likely to Impact U.S. Agricultural Economy" and "U.S. Farm Income: Below Record but Strong," Farm Industry News interjected with this request: Give us your best idea to stretch input dollars in 1998.

It was a request met with pauses. A few nervous laughs. Qualifiers, like "I'm sure others have said this, but," or "It's a basic financial principle." Some experts even resorted to lunchrooms to hit up their colleagues for ideas.

But in the end, all 10 economists we talked to responded with solid advice on how to stretch your dollars this year. What's more, each person had a vastly different take on the assignment - which goes to show, there isn't one right answer. In this case, there are eight.

Hire a purchasing agent

This tip came from Dr. Stephen Harsh, University of Michigan. The agent could be you, your spouse, a business partner - anyone who can call two or three input suppliers for price quotes, factor in incentive plans, and report back the best deal. During the process, inform suppliers you are comparing prices so they know they must sharpen their pencils to get the business, Harsh advises. "Think about how you buy a car. You go to various dealers and ask, 'What's your best price? Is that the best you can do?' You then tell them you are going to get other quotes. You're letting them know that the best buy is probably going to get the sale."

University of Minnesota's Robert Craven seconds this tip, adding that even if you comparison shop, you can still be loyal to your preferred supplier. "If other suppliers in the area are offering better prices, you can use that price as leverage to get your favorite supplier to lower their price," he says. But don't make price your only consideration. Most inputs come as a package that wraps in service, reliability and reputation. "For example, when you buy fertilizer, you need someone to apply it," Harsh says. "You need to know how qualified the applicator is, whether he or she is on time, and so forth."

Buy with a neighbor

Dr. Terry Kastens, Kansas State University, sees cost-saving opportunity in forming producer alliances. These are small groups of farmers getting together and buying inputs in volume to share costs and negotiate a lower price. The buying approach could be applied to everything from crop chemicals to combines. "It's a simple concept. It's obvious. But I see it happening more now."

Dr. Marvin Batte, Ohio State, agrees, particularly if it's applied to expenditures as big as machinery. And he offers a related tip to cut machinery costs: Hire a custom operator, especially if your farm is small. "I don't have a magic number," Batte says. "But clearly there is going to be some breakeven point at which it would be cheaper to custom hire than to buy your own equipment."

Purchase just in time

Take a "just in time" approach to purchasing inputs, offers Dr. Steve Blank, University of California-Davis. In other words, rather than purchasing in advance and storing the supplies on site, you delay the purchase until you absolutely need the input, to minimize financing and storage costs. To illustrate the concept on the farm, Blank uses the example of pe troleum. "Producers with on-site storage tanks may buy in bulk thinking they are saving a few cents per gallon on the purchase," he says. "But that ties up money that could otherwise be in the bank drawing interest. Then you have to consider the costs of owning and maintaining storage tanks." But feasibility will depend on the input, price fluctuations in a given year and the amount of risk involved in not having inventory on hand.

Lock in deals

An ample supply of crude oil coupled with a mild winter has tempered demand for heating oil and softened energy prices, says Dr. Douglas Jose, University of Nebraska. At press time, crude oil was $16/barrel, which is low historically, Jose says. He suggests that, given that fact, you look at forward pricing a portion of your diesel fuel needs for this summer; in other words, contract delivery for a later date at the specified price. "I wouldn't go whole hog in booking your needs to start, because a lot will depend on what happens to prices over the winter."

For now, Jose suggests forward pricing 30 to 40% of what you'll need this year and see what happens in the next few weeks. "If we continue to have relatively mild weather and low demand on heating oil and if prices soften a little more, then look at pricing another 20 to 30 percent of your needs."

Now may also be a good time to lock in term loans for capital investments in light of decreasing interest rates, offers Minnesota's Craven. He also recommends prebooking seed, chemicals and fertilizer if you can lock in a good enough price. "Say your seed company was offering you a six percent discount for purchasing seed now instead of in May," Craven explains. "If you borrowed the money now at an annual interest rate of nine percent, it would cost you only three percent in interest since you are borrowing the money for only four months. So you would still save three percent by purchasing early." To decide whether to prebook, Craven says to check with suppliers to see what prices might do between now and spring and compare that to the interest you would pay to prebook.

Leverage tax changes

Study the new tax law changes under the Tax Reform Act of 1997 passed last fall, suggests Dr. Burton Pflueger, South Dakota State University. Starting with the 1998 tax year, Pflueger says farmers will have the option of income averaging. In other words, instead of filing the income amount from the previous year on this year's return, you will be able to file your average income over the last three years, he says. The benefit? "If you prepurchased inputs in 1997, for example, it allows you to spread out that deduction to minimize the tax implications in 1998 and improve your bottom line."

Transfer risk

Dr. Ralph Hepp, Michigan State, says to buy crop insurance to transfer risk. It's guaranteed to stretch input dollars at the times you need it most. How much coverage you buy will depend on your production history and financial position, Hepp says. "Some people can handle a 30 percent hit in terms of a poor crop, but a lot of people can't."

Track and project costs

Another way to stretch dollars, according to Hepp, is to budget for inputs. If you budget, you'll stretch dollars in three ways: by not splurging on impulse purchases, by being able to finance operating needs economically in advance, and by knowing whether you can justify a capital expenditure. Hepp says even though interest rates are low right now, costs still add up. And overspending on capital items is always a danger. "Profitability should be the guiding principle in buying, not want."

To decide whether you can afford a capital expense like machinery, look at the amount of depreciation used up each year. If capital purchases are a lot more than the amount you are writing off in depreciation, one of two things is happening, Hepp says: Either you are expanding your business or spending too much money. You may need to consider other alternatives to buying new, such as repairing your old machine, leasing or custom hiring.

Dr. Larry Bitney, University of Nebraska, seconds Hepp's tip. Projecting costs will be critical in gauging effects of government's phaseout of farm payments after the year 2002, he says. It will require a thorough audit of production practices, machinery replacement strategies and buying practices to learn where you can cut costs without reducing output. At a minimum, Bitney says to track direct input costs such as seed, fertilizer, chemicals, crop insurance, irrigation and fuel. Costs should be recorded in total, by crop and by field. With rental rates up slightly, tracking costs by field will be especially important for renters to measure return on investment.

Reallocate funds

Al Brudelie, Minnesota West Community and Technical College, took a different approach to our question. He suggests that instead of trying to stretch input dollars, you reallocate them. "Sometimes you can be a lot more efficient by changing your inputs," he says. One example may be to shift dollars from a marketing advisory service to an Internet subscription. "If you have a computer, you can pay the $19.95 per month fee for the Internet and receive a lot more information than what you might get for the same money from a marketing advisory service," he says. Investing in a yield monitor is another possible reallocation, suggested by both Brudelie and South Dakota's Pflueger. The information gleaned may reveal spots in the field where you could cut back on certain inputs yet maintain the same yield.

With the recent drop in some chemical prices and the introduction of new herbicide-resistant seed, Nebraska's Jose says it may be possible to find a cheaper seed/chemical combination this year. That could be another reallocation. And with the change in the farm program, Jose suggests you reassess your crop mix and determine the relative profitability of, say, corn vs. soybeans. "I'm not suggesting everyone should grow soybeans in place of corn," he says. "But that is a way to reduce your input dollars, because soybeans require fewer inputs. And if the prospects look favorable for soybeans, then you may want to plant more soybeans than in the past."

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