From a 10,000-foot view farm profitability seems simple – merely a balancing act between inputs and outputs. The nuances in between those two paragons of breaking even are often the deciding factor between just getting by and forging forward in the ag industry. 

University of Arkansas Extension economist Ryan Loy spent the beginning of the year talking with farmers up and down the Delta region during a series of Fryar Agricultural Risk Management workshops to help identify and then mitigate some lesser-known costs lurking in the balance sheet.

“USDA just released their projections for farm income, which looks to be about average - coming down from the last few years,” Loy said. “When you're looking at profit and loss, you have to make sure that as a producer, you understand these hidden costs. Understand your full cost of production and you can more accurately evaluate those breakeven points.”

All agricultural costs are specific to the individual farm and can be highly variable. Identifying common cost categories to watch and keeping quality records can help bring hidden costs to light.

“Records are only as good as the person who recorded them. If you're not keeping accurate records, you're only doing yourself a disservice, right? Because you're not going to understand your true costs and your true profitability,” Loy said. “If you have accurate records and you maintain them often, you can see where these cost categories are rising over time, or if they're falling over time.”

Opportunity Costs

Opportunity costs are basically any option for extra profit or cost savings a farmer may be giving up to pursue their current production or marketing strategy. If producing one crop causes a missed opportunity for planting a secondary cash crop or spending extra money on labor limits equipment and technology upgrades – those would all be considered opportunity costs.

Some opportunity costs may be recognizable, like selecting a commodity to plant at the beginning of the season only to have the price flip at marketing time. Those opportunity costs are often obvious, even if they are sometimes inevitable.

Loy pointed out that sometimes opportunity costs are harder to pinpoint, like mid- or late-season marketing challenges that necessitate commodity storage.

“Another thing to think about as well is you know, when you're producing rice or soybeans, and let's say that the Mississippi River is low again, and you need to store the commodities,” Loy said. “You have to debate how long to store each one of them because if one has a higher relative price than the other, it all comes back to the opportunity cost.”

Labor

True profitability is hard to measure without an accurate evaluation of labor, including operator labor. 

“Folks typically don't value their own labor,” Loy said. “And that is a problem because, it's not a true measure of your profitability if you've not accounting for what your time is actually worth elsewhere.”

For operations reliant on additional hired labor, local worker shortages and the rising cost of H-2A labor could both cause significant cost increases in the near future.

“Local workers right now are largely unavailable. And if they are available, they're probably not skilled labor or they're not as reliable - that’s something that I've been hearing from producers,” Loy said. “H-2A comes in and makes it more expensive to hire labor because of the adverse effect wage rate. The rate protects Americans’ wages from being impacted by immigrant labor, but it also adds a lot of cost to the producer. That's a big cost category that I think maybe some folks aren't dealing with now, but they will into the future.”

Depreciation

While farm assets like land typically retain or appreciate in value, farm equipment and machinery rarely gain ground over time. This is especially true in cropping situations where farmers make additional field passes, work in tough climate challenges or are up against especially hardy crops.

“I would say more than the extra fuel for extra field passes, the thing to consider is machinery depreciation,” Loy said. “If you're doing more field passes than you had maybe planned to do, that's going to depreciate your machinery quicker. You just need to make sure that you're accounting for interest on your equipment, loans, the depreciation, the insurance, your taxes, and the repairs and maintenance.”

For farmers in Arkansas especially, Loy said crop selection and decision making can have a profound impact on machinery strategies, with some producers upgrading equipment as often as every one to two years.

“What I've heard from many rice and soybean producers is that machinery actually depreciates quickly in rice relative to soybean,” Loy said. “And anecdotally, they said the reasoning behind that is rice is extremely rough, and it eats through the aluminum on the combines, and on the hoppers, and the augers and everything in between.”

Input Fluctuation

“What we've seen in the last few years is the importance of timing of when you book your input costs,” Loy said. “When everybody's trying to get their inputs, price is going to go up, right, that's supply and demand.”

Input price is an easy cost to address – higher prices mean less profit. But booking time, especially in Arkansas, has more of an impact than producers might think.

“The Mississippi River hasn't helped with that. While fertilizer prices and input inputs overall have been coming down, the other issue to consider is, what are the river levels going to be and is that going to increase the freight rate to get my fertilizer to me?” Loy said. “It's the timing of when you book your inputs relative to those complications.”

Interest

Interest rates, while not the highest in history, are climbing enough to produce some unwelcome flashbacks for farmers with long memories. For young producers especially, Loy said interest rates are a cost that can creep higher than perceived.

“If you go to get an operating loan, a young farmer is not going to be able to get an operating loan at the prime rate,” Loy said. “They're going to get probably a 10% interest rate on their operating loan or more right now. That has a lot of implications as to what you're going to plant and how you're going to plant it.”