Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina, Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.

Our lender wants us to have a more detailed budget and do quarterly reviews with them rather than a projection once a year as we’ve done in the past. How should we prepare for these reviews? Preparing a budget has been a useful tool for us in the past, but is updating it four times a year necessary?

Stout: If you prepare a detailed budget before your crop year starts, then quarterly adjustments should not take nearly as much time and should be valuable to both you and your lender. Each quarter you can update the budget as you have actual expenses to replace the projected expenses. If you have presold any crops, you can also update the expected revenue the same way. If you use a spreadsheet, you can replace the line item projection with actual expenses as they occur, so it will be continually updated. 

This can also help you estimate a projected breakeven price, which will be helpful in determining at what price you are willing to start pricing your commodities. If you have livestock and feed your corn, this is more complicated, but it is valuable information to have updated frequently.

Zhang: Unfortunately, due to lower commodity prices, the financial stress at the farm level and for ag lenders has been rising. That is likely the underlying reason for your lender’s request. ISU Extension has several finance-related decision tools on the Ag Decision Maker website at  extension.iastate.edu/agdm, in particular File C3-15 on cash flow budgeting. 

It is reasonable to talk with your lender to see whether it is possible to do a biannual budget update as opposed to quarterly. But the key is to pay closer attention to your production cost per acre for the whole farm, and figure out the working capital situations and how things could change. For example, with any federal interest hikes or lower land values, your financial ratios, such as the current ratio and debt-to-asset ratio, could change. 

In this low-margin time, it is even more critical to manage the production costs and take advantage of marketing tools.

Miller: For most row crop operations, an annual review should be sufficient because that ties in with the one-year business cycle. However, some farm enterprises have a shorter business cycle, like backgrounding cattle or finishing hogs. For those operations, a budget should be reviewed more frequently.

Find out from your lender what they want to review most closely. Some farmers will spend more than they initially planned on fertilizer or chemicals. If they do it several years in a row, the lender might want to know about it sooner rather than later. Remember, those extra expenses will change your breakeven price, and the lender wants to make sure you have a plan for covering the extra costs. 

If past overspending happened with family living expenses, that might also trigger a desire to check on budgets more frequently.

Variable-rate application is becoming more common. There’s data map software available to evaluate each acre and it recommends where not to apply seed, fertilizer and weed control on the acres that don’t show a good return. Is this a good idea, even on cash-rent ground?

Plastina: Variable-rate application makes perfect sense from a conservation and environmental perspective, and it can be a good source of seed and chemical cost savings, depending on the topography, soil profile and nutrient availability on a particular farm. 

However, as any other cost-saving technology, variable-rate application comes at a price. According to the “2019 Iowa Farm Custom Rate Survey,” Ag Decision Maker File A3-10, the extra charges for GPS use to program software analytics, the use of seed shut-offs, and variable-rate seeding can add up to $7.95 per acre. If expected seed and chemical cost savings are enough to offset the extra costs associated with using variable rate, then the technology makes sense from an economic perspective for owned or rented land. 

A final aspect to consider is the impact of variable-rate application on the operation’s cash flow: It might be easier to finance seed and chemical purchases than custom work.

Stout: The data map software is available, but you need to have the technology on fertilizer application equipment, the planter and the sprayer to make a return on investment. We have used variable-rate P and K fertilizer and lime for over 20 years and find it extremely valuable to apply nutrients where they are needed, regardless of whether it is cash-rent or owned ground. 

For nitrogen applications, some applicators have the technology to change rates based on a sensor determining need for additional N on the go, but it may need calibration on each hybrid. Otherwise a prescription can be written calling for different N rates based on past yield or soil organic matter. 

Some planters have multi-hybrid technology so that two different hybrids can be planted based on a prescription based on soil or yield potential differences, often loading the planter with a racehorse hybrid and a workhorse hybrid. 

On a sprayer, again some herbicide rates can be changed according to the recommended rates based on organic matter. There are experimental sensors on sprayers that would just spray postemergent products where there are weeds, but I haven’t seen that in a commercial market yet. 

Miller: In southern Iowa, we frequently have a lot of variability in soil types within each field. Some soils are not structurally capable of growing 200-bushel corn. So why should you dump all the money into inputs for 200 bushels when the most you have ever gotten is 150 bushels?

We are often fooled by what the yield was “on the ridgetop,” and think that if growing conditions are ideal, the rest of the field can perform the same. That may not be true if the soil types are different. 

If you think you need to raise 200 bushels (or more) of corn on every acre to justify the cash rent you are paying, you are possibly paying too much for cash rent. It becomes doubly painful when you dump excess inputs on top of the high cash rents. At least with a variable system, you are not overpaying for inputs.

For additional perspective, cut up an aerial photo of the field, separating the high-yielding areas from the low-yielding ones. When you compare those pieces, you are apt to see that the “fringe areas around the outside of the field” are actually bigger in area than the high-yielding center of the field. That means you are overpaying for inputs on most of the field.