by Linda Burbidge
Originally published by Dakota Farmer at farmprogress.com
In production agriculture, we are often called to be a “jack-of-all trades.” You need to manage your livestock, be an agronomist and a mechanic, handle your records, and know a bit about human resources if you intend to hire employees.
These are just a few of the tasks required to keep your business moving forward, but there’s only so much time available to manage all of them. My advice to farmers is to focus on the things they excel at and hire out the other tasks to someone more qualified.
Research studies using benchmarking and farm information have consistently shown that effort spent on cost management has a far bigger impact on profits than managing cash prices. I’m not suggesting that marketing should be ignored.
Certainly, having a marketing plan is still important, but it won’t be strategically significant if you don’t understand your cost of production. In a period of low commodity prices, it will be easier to cost-cut your way into a profit than to market your way out of excessive costs.
This makes sense when you consider the factors within your control in your operation. In marketing, you can’t control futures prices or basis. The most significant factor you can influence is the timing of when to price your commodities.
On the production side, you have more control over input usage, prepay timing and cost of some inputs.
Also, understanding your cost of production makes it easier to recognize profitable sale prices. Is $6 per bushel a good price? The answer depends on how much it costs you to produce that bushel. Without knowing the cost of production, you are gambling on whether the commodity you are producing is going to have value.
Understanding your production costs will help you identify opportunities to trim costs, renegotiate contracts or refinance if necessary. Interpreting basic financial ratios can reveal areas where your spending might be out of line, and benchmarking against other farms or your own historical financial data can provide further insight.
Cutting costs
Aim to cut back on these four common costs:
1. Cash rents. These should reflect production potential. There is significant pressure to pay the going rate, regardless of productivity. Anyone involved in production agriculture understands how acres can vary from field to field based on soil type, topography and other factors. Again, I’ll get on my cost of production soap box, if you have historical production records to show the landowner — including yields, inputs and profits — you might be able to renegotiate based on production potential.
2. Inputs. In the era of precision ag technology, most understand the benefits of variable-rate spreading and spraying. These can impact the cost of fertilizers and chemicals, which are typically among the top five expenses on a farm. What might not receive as much attention are areas with salinity or fertility problems. Reducing or eliminating inputs over these areas might be more cost-effective. Long-term planning can also help you prepay or secure inputs at a lower cost.
3. Overhead costs. Items such as utilities, farm insurance, vehicles and machinery can be targeted for reduction. Machinery and equipment are common areas where farms overspend. High-profit years tend to lead to increased equipment purchases, but that might bring a farm business to the point where the investment in machinery per acre is too great to be managed during low- or negative-profit years. Ask the difficult questions around wants versus needs where machinery is concerned.
4. Interest costs. These might not have made this list two years ago. However, with the recent rise in interest rates, they are worth mentioning now. Paying attention to loan terms and strategically managing the length of time operating loans accrue interest can pay you back in reduced costs.
In addition, the interest costs associated with storing grain are often overlooked. While you wait for a higher price, the grain sits in the bin, and your operating loan continues to accrue interest. Forgone interest should also be considered. Revenue from grain sales could be used for other interest-bearing investments.
Burbidge is Farm Management Education Program instructor at Dakota College at Bottineau. The program provides learning opportunities in economic and financial management for those in farming and ranching. Visit ndfarmmanagement.com.