Nothing about cutting costs is easy, as farmers are well aware. They’ve been on a quest for the past few years to find the best deals on seed, fertilizer and other variable expenses. Lowering input costs as much as possible without sacrificing yield provided the best possibility to make a profit, or at least break even.
But, with higher input price forecasts for 2019 and trade disputes casting a cloud over commodity prices, cost-cutting is about to get harder.
“I don’t have a silver bullet for you. The easy decisions are over with,” says Mike Boehlje, professor emeritus at Purdue University’s Center for Food and Agricultural Business.
Fifty-five percent of the respondents to Purdue’s latest survey of large-scale producers said their biggest concern was controlling costs.
While farmers should never stop looking for the best deals on inputs, he argues it’s time for farmers to take a long, hard look at their fixed costs, especially their land and rental expenses.
“You need to know where the money is on every field you’re farming,” he says. “You might have to say to a landowner: ‘I’ll rent this one here, but I can’t afford that one at that price.’ Some landowners will believe your numbers; some won’t. The toughest decision you have to make is what property to hold onto and what to let go.”
FIELD PERSPECTIVE. Farm Credit Services of America chief credit officer Tim Koch agrees. He says that a lot of farmers are still focused on overall profitability, and they would benefit from examining the economics of each field.
“If you get down to field by field, I think producers would be surprised with the different cost structure of those,” Koch says. From that perspective, savings on variable costs like seed and fertilizer have less of an impact than changes to fixed costs. “Farmers have worked for a long time to get access to different farms to grow their operation. Sometimes rent negotiations mean you have to walk away from a farm and shrink your operation.”
RENT IMPACT. Farmland values remain relatively stable because of low inventory and interest rates. Landowners like to receive at least a 3% return on their land’s value, and stable values make them less likely to lower rental rates, even if their tenant struggles to turn a profit at current commodity prices. In places like Iowa, where land values are on the rise, many landowners believe they’ll be able to find a tenant who’s willing to pay what they’re asking.
The conversations may be tough--a good relationship with the landowner helps--but Koch says bringing costs in line with the current commodity price environment is imperative. “Sometimes, those are very emotional decisions, and they’re not easy. I subscribe to the ‘live to fight another day’ mentality.
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