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Extension > Agricultural Business Management News > When profit margins are tight it is time to evaluate crop input costs

When profit margins are tight it is time to evaluate crop input costs

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By Don Nitchie, University of Minnesota Extension Educator, Ag.and Business Management, March 2014.

It is important to continually evaluate production costs for crop and livestock production. With recent lower crop prices than we have seen in several years and historically high input costs, this will be much more important than ever. If you have available data to benchmark your major input costs to your peer farms, you will realize there are significant opportunities to improve your profit margin based on the variability of primary input costs from farm to farm.

Three major direct costs that have grown to make up major portions of current corn production budgets should be scrutinized if crop profit margins remain slim or negative in the next few years. There is enough variability among producers and field to field, that there are opportunities to be capitalized on. Yes, there may be a few cases were the cost data is skewed by some unique arrangement for sharing costs or not all paid for in cash but, major trends and significant variability are apparent. To illustrate this point 2012 data from FINBIN for the SW Minnesota Farm Business Management Association (SWMFBMA) is utilized. The 2013 data will be available in March, 2014.

Seed. While there are many new seed technologies and trait advantages on the market, there was significant variation from the low profit farms to the high profit farms in the SWMFBMA in 2012. These new technologies are impressive and probably some are yet to be fully proven in a production environment. Seed costs ranged from 17% over the median (middle) field for low profit farms to 24% under the median for higher profit farms representing a range of $46.00/acre. If greater seed expenses resulted in much greater cost savings, i.e. chemicals, or yield gains-then the cost difference was worth it. Under less generous profit margins, the return for each added dollar in seed cost deserves examination to see if it produces more than one dollar in added returns.

Fertilizer. There are several producers with access to ready supplies of hog manure who have reduced their commercial fertilizer costs--although we also see some producers paying for the fertilizer value of hog, dairy or beef feedlot manure. So, in some cases this may not be readily apparent in FINBIN data but, this will continue to be refined over time. Regardless, during 2012 fertilizer expenditures attributed to corn varied from a high of 49% over the median for low profit farms to 43% under the median farm, for higher profit farms. This represented a range of expenditures of $139.00/acre. Certainly fertilizer pricing opportunities vary which can greatly impact final costs per acre. In 2008-09 this was definitely the case. If ever there was a time to; soil test and only apply agronomic rates as well as consider using variable rates based on soil productivities and precision placement -the time is probably here. Again, the benefits of a practice or fertilizer technology need to outweigh the costs.

Cash Rents. Much is always written, studied and talked about on this input cost. We all have heard the stories about extremes beyond the recorded data. It is a continual challenge to achieve or maintain an adequate or expanded land base for a desired size of operation. Despite the emotions and feelings often attached to land, we do have to sometimes look hard at the cost as if it as just another input cost. In that sense, we can compare one acre to another but, to us individually at our specific location, not all acres are the same. First they vary tremendously by soil productivities, drainage, location and field efficiencies or size and shape for machine operations. With recent increases in land prices and rents, all of these productivity factors deserve a hard look on a farm by farm basis when profit margins are tight. It is understood, that some family farms will be farmed for a long time, regardless of current rental rates. However, in 2012 Rents paid varied from 73% greater than the median for low profit farms to 66% less than the median for high profit farms. This represented a range of $275.00/acre. Certainly, there are issues besides price and soil productivity often included in certain rent negotiations over several years. Hopefully, relationships do and should matter. However, economically for your cost of production and profitability situation; cash rent levels, soil productivity, drainage and location make a huge difference. For a cash rent level to remain viable it has to produce profits for the tenant and landlord over the long haul. If not and rent levels do not adjust, there will probably be a frequent turnover in tenants and maybe even owners.

Seed, Fertilizer and Rent are three major annual direct costs of corn production which vary significantly from farm to farm. This variability represents management opportunity from benchmarking comparisons. Re-visit and scrutinize your production systems, practices and the efficacy of products available and sold to you. Work hard to make each dollar spent earn more than one dollar in return. Often, it is not just scoring a "homerun" in a single big cost item or a high selling price that makes a producer successful over the long run. It is usually doing a little better in numerous cost, selling, yield and management categories. So, while you are at it, review benchmarks even beyond the big 3-5 direct input costs. You may discover several that could add up to numerous savings with no loss in production. Compare your data using FINBIN data at the Center for Farm Financial Management at the University of Minnesota.

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