Even though you swear you've cut production costs to the absolute bone, you may need to slash even more. Ag economists and ag lenders say reducing costs is the surest way to compete in today's farming.
“The key is to know where you stand compared to other producers,” emphasizes Terry Kastens, Kansas State University economist. “One way to do this is to join a farm business association that summarizes and compares costs for similar-size and similar-enterprise operations. That will help you see whether you are above or below average on costs.”
Kastens, along with fellow economists Kevin Dhuyvetter and Heather Nivens, conducted a 10-year (1992-2001) study of records from six Kansas farm management associations. They looked at various management factors to determine their effects on profitability. Those include tillage, planting intensity (how intensively each acre is farmed, such as frequency of fallowing, single- or doublecropping, etc.), percent of crop acres rented, yields, costs and prices received.
“Cost management had the greatest impact on profit,” Kastens reports. “Next, in order for relative importance in improving profitability, were an increased percent of crop acres rented, planting intensity, yield and adoption of less tillage.”
Prices received (marketing) was the only factor where there was no statistical difference between high- and low-profit farmers.
“The main message here is to focus first on cost reduction, and then work on the other factors in their order of importance,” says Kastens.
It's easy to call for cost reduction, but where can a farmer make further cuts these days?
“The three areas where we see the greatest opportunity are in machinery, soybean herbicides and land costs,” says Dennis Boyle, ag lender with Amcore Bank, Sterling, IL.
“With machinery, there's probably still too much pride-of-image, both in size and in newness,” Boyle notes. “That tends to be more associated with lower-profit farmers.
“There also are some lower-profit farmers who seem to have more machinery than needed for their acreages. Some 600-acre producers have about the same machinery costs as those with 2000 acres.”
One way to reduce machinery costs is to do less tillage, Boyle points out. “Many farmers reduce tillage without hurting yields.”
In regard to soybean herbicide costs, Boyle questions whether it makes economic sense to strive for 100% weed-free fields. “At today's soybean prices, it takes 6-7 bushels of beans just to pay for the typical herbicide costs.”
Boyle, like KSU's Kastens, suggests that farmers consider joining farm business associations to determine how they compare cost-wise with other farmers on total costs of production as well as on specific cost items.
“Some of our customers are in the Illinois Farm Business Farm Management Association,” says Boyle. “One producer saw that he was above average on fertilizer costs and is working to reduce those costs. Another customer noted that he exceeded the average on herbicide costs and is trying to bring them down. They both will be more competitive as a result.”