Given farm revenues in 2016 budget projections, costs must be reduced to have positive returns. Cost cuts of $100 per acre will be used at the target. Cuts of $100 per acre would result in $19 per acre of net farmer income, levels that are relatively low and do not provide much margin. A $100 cost cut implies total cost reductions of 12% for corn and 17% for soybeans. These are very large cost reductions.

Cost cuts of $100 can be achieved in a variety of ways. Experts at the University of Illinois used a sample farm budget for 2016 and reduced costs by $100 per acre. Here's how:

Focus of cost cuts

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In the example, the majority of non-land cost cuts were made to fertilizers, seed, and machinery depreciation. These three costs accounted for 71% of cost increases between 2006 through 2013 (see farmdoc daily September 16, 2014). These three costs plus pesticide costs account for 67% of non-land costs for corn and 61% for soybeans. Cost costs in these four areas must occur if sizable reductions in non-land costs are to occur.

Price increases could be same as $100 cost decrease

Higher commodity prices could have the same impact on net farm income as cost reductions. A corn price of $4.65 for corn and $10.75 for soybeans results in the same income as $100 in cuts. The $4.65 corn price and $10.75 soybean price are close to projections of the long-run averages (farmdoc daily February 27, 2013). At these prices, income would be $19 per acre, a relatively low level, suggesting that costs need to be reduced even if prices approach projected long-run averages.

Read more about cutting costs from U of IL farmdocDaily.