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Know your costs to prepare for unknown

Kevin Schulz Mature ears of corn
WHAT’S THE COST? Farmers need to know their productions costs, and not only for their entire farm, but also for each parcel of land, to get a good picture of the true value in their operation.
Keep in mind the 20-80 rule when managing farm expenses.

Every growing season presents its own set of unknowns, such as weather and markets, and then sprinkle in the unexpected influences, like COVID-19, and it adds up to turmoil for farmers. Still, Jack Davis, South Dakota State University Extension crops business management field specialist, says farmers can prepare themselves for what lies ahead by taking control of their management situation.

Davis says the first step is to know your numbers.

“Not only financially but also production-wise, and what works and doesn’t work on your farm,” he says during an SDSU Extension Crop Hour webinar. Going along with knowing your production numbers, Davis stresses the importance of understanding what part of your operation is making you money, and maybe more important, knowing what is not making you money.

Focus on costs

In addition to knowing your numbers, Davis stresses the importance of knowing your strengths, and not being afraid to ask for help where it’s necessary.

“If you’re not comfortable doing price risk protection, and if you’re of a decent size, I think it pays to hire it out,” he says. “It sure helps, especially if it’s not something you want to do, and you’ve ended in the lower side of the markets over the years.”

If you aren’t comfortable on the marketing end, Davis advises crop farmers to take a long, hard look at costs. He recommends implementing the 20-80 rule, where farmers control 20% of the items that give them 80% of the results. Two top areas to monitor are fertilizer and seed.

Davis believes spending time managing those top direct costs can see farmers lowering input costs without sacrificing yields. “Yes, marketing is important,” he says, “but production at less cost is where most producers will make it up.”

Cash rents are another area where Davis suggests farmers really put pencil to paper. “You just have to know what each farm is doing for you,” he says. “That really becomes a personal choice, and it is a tough one. Because if you give up acreage that you feel isn't being productive, then your other acres have to pick up those fixed costs.”

Stave off impulse to buy

Farmers have been good at controlling capital purchases, Davis says, during the recent downturn of the past four or five years.

“Some may need to still hold off on that,” he says. “So be careful as profitability returns.”

He says the first thing is to rebuild liquidity and then invest for efficiency and operations. “Sometimes farms are asked too much of the business,” Davis says, “so be careful in managing your time and make sure it’s fully employed, and you’re only asking what the farm can provide to you.”

Admitting prejudice from growing up on the sandy soils of central South Dakota, Davis says implementing conservation practices will pay dividends for farmers.

All Crop Hour webinars are available on SDSU Extension’s Crop Hour 2021 YouTube channel.



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