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Coping with high costs, low prices

Coping with high costs, low prices

It's a challenge to find the optimum input levels

By Ted Bay

Managing crop input costs began moving to the front burner as commodity prices continue their decline.  Recent agricultural headlines advise the need to "scrutinize every input." The response to my presentation on scrutinizing input costs at a March 2014 marketing meeting was not favorable. "Do not encourage lowering inputs to save money; lowering inputs equals lower yield!"

The cost of determining optimum input levels is very high.

This admonishment identifies the basic challenge every farmer faces: If I reduce inputs, how much will I reduce yield.  This problem has been described by Paul Mitchell, UW-Extension cropping systems economics specialist, as the challenge of farming a flat function.  "Function" is the response curve for crop yield to inputs, which often look like the graph, showing grain yield increasing as inputs increase, up to the point where yield no longer responds to added inputs.  According to Mitchell, "underuse of inputs is often obvious but overuse of inputs is often invisible," lost in the flat region of the response curve.

As grain prices continue their decline, farmers are talking more about input costs with the caveat, "something has to give here." Usually first on the list is land rent. Everyone, landowners and operators, are facing a learning curve on managing this major input cost. The lag in rental rates following changes in commodity prices puts landowners and operators on different pages when looking at the same picture.  Effective communication is key to discussions on land rental rates.

Input levels of seed, fertilizer, and pesticides are the expenditures an operator has the most immediate control over, but often with unclear optimum rates.  If we are short on inputs we see it; short nitrogen and we get yellow corn, shorting phosphorus brings purple leaves, short pesticides and we see weeds, insect damage or diseases.  How do we know we have hit the optimum input level or put on too much?  The answer is, we don't know.

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Many resources are available to help narrow the range on input levels.  UW-Extension nitrogen recommendations for corn give a range of N rates that are within $1/acre of the maximum expected return.  This means a farmer can choose the N rate at the lower end of the range to save costs without significantly reducing net returns. We have the same considerations for seeding rates. Some seed companies can provide guidelines for the financially optimum planting rate for their hybrids depending on the yield potential of your soil. Crop insurance yield histories provide an indication of yield potential. Extension research can provide insight on the payback of pesticides such as fungicides that have shown limited returns in some applications.

The cost of determining optimum input levels is very high. University research and on-farm trials can provide guidelines to help narrow the range of input levels that can maximize net return, or if we have to face it, minimize losses. When input costs are not met by grain prices usually the first to go is labor and management (family living). The next is return on fixed costs of machinery and equipment. Some farmers have been reflecting on how long they can go before needing a significant machinery investment allowing them to forego this fixed expense.  If these fixed costs are actually in loan payments they cannot be ignored in the short term.

What's left? Explore the possibility of sharing equipment to avoid or reduce some fixed costs. If necessary this could include selling some equipment and share operations with a neighbor. The goal is to reduce fixed costs per acre, in effect spreading costs over more acres.

We may not be able to cut our way to profit but trimming in some areas may help significantly.

Bay is the Extension crops and farm management agent for Grant and Lafayette counties.

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