Minding Ag's Business

The Quest to Cut Costs Gets Harder

Katie Micik Dehlinger
By  Katie Micik Dehlinger , Farm Business Editor

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 landowners: '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."

Farm Credit Services of America chief credit officer Tim Koch agrees. He says a lot of farmers are still focused on overall profitability and 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 said. 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."

Farmland values remain relatively stable due to low inventory and interest rates. Landlords like to receive at least a 3 percent 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 that's willing to pay what they're asking.

The conversations may be tough -- a good relationship with your landlord 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."

For a deeper look at why cash rents are unlikely to decline, even in this tough commodity price environment, please read "Cash Rent Conundrum" here: https://www.dtnpf.com/…

(AG)

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