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Manage costs wisely

Manage costs wisely

Farmers who focus on cost-cutting without sacrificing revenue will succeed despite tight margins

A farmer at the 2015 Farm Progress Show said it best: “It used to be we would come to the show, look around and say, ‘What do we want?’ Now it’s all about what do we really actually need?”

Yes, the checkbook is closed until further notice. Margins are tight and getting tighter in 2016, unless China’s economic engine roars to life or a drought cripples South America.

The checkbook is closed until further notice. (Thinkstock/payphoto)

Row crop farming has many wonderful aspects, but being chained to fixed costs in a restrictive, bulk commodity marketplace is not one of them. Why grow corn or beans if they won’t make money? Well, what else is there? We preach diversification, but making money growing grain was just too easy for too long. So here we are: Stuck with the prospect of growing crops in 2016 and, for many, just breaking even.

That’s why most of our stories this fall will focus on boosting revenue and cutting costs. Our cover story looks at one of the top fixed costs blocking 2016 profits: land or, more specifically, cash rent.

Farmers know cutting costs is a double-edged sword. You can’t just cut $100 per acre and see what happens. Here’s a few simple rules for 2016:

Cut nothing that will hurt yield. Yield is your income. It makes no sense to cut a $7-per-acre fungicide if it shaves 5 bushels per acre off yield. Simple math says that’s a loss (5 x $4/bushel = $20 minus $7 = $13 loss per acre). So as you look at fertilizer, seed and weed control, be careful. If soil tests find a good bank of P and K, that may be the safest place to cut.

Be efficient. To become a low-cost producer, consider which moves make you more efficient. Does every dollar spent on inputs make money? How much more efficient does your precision technology make you? Zero spray overlaps and fertilizer only where needed should add to the bottom line.

Remember maximum economic returns? Stamp this concept on the cover of your management playbook. Are you buying and applying more nitrogen than the soil needs? The economic optimum N rate is the point where the last increment of N returns a yield increase large enough to pay for the additional N. Spend only on what you need and apply it as close to when the crop needs it as possible.

No magic bullet
Talking with economists and farmers about production costs, we know there’s no magic bullet. If you own land free and clear, enjoy. Input providers are competitive and huge price differences are unlikely.

Even so, there are farmers who have put cost-cutting plans proactively into place, and now it’s a daily mindset. They started a year ago and continue to fine-tune.

One such farmer told me he began taking a harder look at his crop budget last fall. This 1,500-acre Illinois farmer, who asked not to be identified, is rethinking both fixed and variable costs.

This fall he’ll buy seed from fewer companies to get a volume discount and take advantage of zero interest programs for cash flow reasons. He sold one of two semi trucks and now rents one for harvest. He’s sold underused machinery to shave overall equipment costs. And he’s done something many farmers tell me is next to impossible — reduced family living costs.

“My wife and I sat down and took a closer look at everything we’re spending money on,” he said. “If it wasn’t a necessity, we cut it out. We’ve tried to communicate more, and we’ve probably cut 25% to 30% on family living from a year ago.”

His other advantages: a proactive banker and landowners who want to work with him.

“My banker treats my operation like he’s in it with me,” he says. “I trust my banker totally. Even if it’s not pretty, I don’t hide it from him.” He renegotiated one lease, resulting in “a hefty compromise for both the landlord and myself,” he adds. “They don’t want to have to change operators. It’s about open communication — everyone has to be open and willing to adapt if something is not working.”

This is a good game plan for survival: consider every option, cut where needed, talk through difficulties and protect income at all costs.

After all, it might be a status symbol to have two shiny semi trucks at the grain elevator, but status symbols won’t feed your family.

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