Farm Progress

There's a lot of pressure to cut costs these days. While many are talking about variable costs, it's probably better to take a good hard look at fixed costs like land and machinery.

Tyler Harris, Editor

January 20, 2017

4 Min Read
IT TAKES TIME: At the recent Fremont Corn Expo, Brent Gloy, Purdue ag economist, noted about 40% of a farmer's costs are variable and 60% are fixed. "We're never going to solve a budget problem of this magnitude on 40% of our costs. What's got to change is fixed costs. It's hard. You can't just fix your equipment costs overnight. It's going to take time.”

For many farmers, 2016 will go down as another year of lower net farm incomes and tight margins. But just how bad was 2016 really? Brent Gloy, professor at Purdue University's Department of Ag Economics who also farms in southwest Nebraska, notes, "There were some positives in 2016."

According to Purdue University data in Indiana, in 2016 the average cost of production for corn declined $50 to $60 per acre, fuel prices declined 30%, fertilizer prices declined 20%, and interest rates were still low. "You add it up, and there were some positive things," Gloy says. However, "We've got more work to do on the cost side."

There's a lot of pressure to reduce costs these days, and when it comes to cost-cutting, many farmers focus their attention on inputs like fertilizer seed, and chemicals — variable costs. However, Gloy notes these costs are already coming down, and when it comes to cost-cutting, it may be a better idea to focus on fixed costs, like machinery and land.

"For a typical farmer, 40% of the costs are variable and 60% are fixed," Gloy says. "We're never going to solve a budget problem of this magnitude on 40% of our costs. What's got to change is fixed costs. It's hard. You can't just fix your equipment costs overnight. It's going to take time."

The first and second largest categories of fixed costs are land and machinery, respectively.

Cash rents coming down
Gloy notes expected return to farmland as a percentage of cash rent was 18% in Indiana in 2016. "That's way too low. That's saying people are planting that crop and have a budget that's covering 18% of that land. They're subsidizing the rest of the cost out of their own equity," he says. "To be sustainable, that needs to change, and the data suggest that it is."

Cash rents declined 11% in Indiana in 2016, the largest decline in 30 years. As cash rents continue to decline across the Corn Belt, but commodity prices also remain low, Gloy notes it's a good idea to consider alternative leasing options that can be a win-win for the landowner and the tenant.

For example, a flex lease can provide the landowner and the tenant some stability, allowing the farmer to pay lower cash rent in times of lower commodity prices, and allowing the landowner to make a fair profit when prices increase. "It's a way to provide the tenant with a little lower base rent. And if things go well, they pay a little more in the good times, so it gives some stability and shares the risk and reward a little differently," Gloy says. "Are there alternative lease agreements to look into that will be a win-win for you and the landowner? Its' trying to find those win-win solutions."

Managing machinery costs
On the other hand, managing machinery expenses is a little more challenging. Data compiled from the Kansas Farm Management Association by Michael Langemeier of Purdue and Gregg Ibendahl of Kansas State University demonstrates a wide variation in machinery investment between farms in eastern Kansas from 2008 to 2012. The average crop machinery investment per acre was $227. However, the average for the 39 farms one standard deviation below the average was $83 per acre in machinery investment, while the average for the 43 farms one standard deviation above the average was $429.

And Gloy says there's likely a similar pattern across the U.S. "What we're seeing is there's no magic answer for machinery investment per acre. Any farm you go to, you're going to see something different," he says. "I think everybody needs to take a good look at what they're doing and determine whether it's cost-efficient or not. There are a variety of ways to get the same result whether doing it yourself or not. You need to look at what's efficient to you."

The best solution is probably different for each operation. This might mean custom harvesting or custom applying, hiring a custom harvester or sprayer, or it may mean equipment sharing. "We're past the point where it's easy to find savings. When you talk about equipment, you're really trying to find the best way to reduce costs while still remaining efficient," Gloy says. "The first step is to get a handle on what your current configuration costs you and then thinking about how you might make changes that meaningfully reduce your costs."

 

About the Author(s)

Tyler Harris

Editor, Wallaces Farmer

Tyler Harris is the editor for Wallaces Farmer. He started at Farm Progress as a field editor, covering Missouri, Kansas and Iowa. Before joining Farm Progress, Tyler got his feet wet covering agriculture and rural issues while attending the University of Iowa, taking any chance he could to get outside the city limits and get on to the farm. This included working for Kalona News, south of Iowa City in the town of Kalona, followed by an internship at Wallaces Farmer in Des Moines after graduation.

Coming from a farm family in southwest Iowa, Tyler is largely interested in how issues impact people at the producer level. True to the reason he started reporting, he loves getting out of town and meeting with producers on the farm, which also gives him a firsthand look at how agriculture and urban interact.

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