December is the time of the year to enjoy the holidays, but many of us also do year-end balance sheets, income statements and look at next year's cash flow. This will be fun for most of our clients as they look at gross dollars per acre and profit per acre for 2005.
Cash flow planning for next year won't be as fun because 2006 will be challenging. Fuel and fertilizer costs are at the top of everyone's list of concerns. Even in 2005, before the rise in diesel fuel costs, some of our clients in Nebraska spent $100/acre on diesel for irrigation. If diesel fuel stays above $3/gal., irrigation costs will be more dramatic next year.
Fertilizer and fuel costs are an increasing share of total costs, even in non-irrigated areas. Included in this article is a USDA chart of 2004 fertilizer and fuel costs for selected crop or enterprises. Notice wheat, corn and soybeans top the list with fertilizer and fuel totaling 15-21% of total costs. Add to that increasing cash rent, machinery, labor, interest and other costs and 2006 looks scary.
Variable costs on Illinois grain farms are projected to be $55/acre higher for corn in 2006 than in 2002, according to a recent University of Illinois (U of I) Extension study.
“Variable costs for soybeans will be $20/acre higher in 2006 than in 2002,” says Gary Schnitkey, U of I Extension farm financial management specialist. “That's a cost increase of 33% for corn and 19% for soybeans over the four-year period.”
A central Iowa client who buys all inputs, including fuel, from the same co-op for one of his farms indicates the total bill for a half section of 50-50 crop rotation of corn and beans has increased from $30,000 to $50,000 in the last three years. That's a 66% increase. However, his yields and price per bushel have also increased dramatically, so costs are only one side of the equation.
You can't manage what you can't see and/or visualize, so the first step is knowing where you're at and taking a critical look at each practice — tillage, crop rotation, technology and application rates — and make decisions based on what's best for your operation. Always going the route of least cost may not be the right decision. With today's technology in seed, equipment and other areas, the goal is the best bottom-line return to labor and management.
Nearly 70 years ago my father was the first in his community to use hybrid seed. If he had looked only at the price tag on the bag rather than what it could do for his bottom line he would likely not have used it. In that regard, things have not changed.
Often people ask me if I'm recommending a shift in crop rotation for 2006. There are no simple answers. Each situation is different based on storage, workload, bushels to handle, timing, soil type and a litany of other issues.
We have developed a cash rent feasibility analysis spreadsheet that is a useful tool. The spreadsheet is available on our Web site (www.russellconsultinggroup.net) along with instructions for use.
Before you use this tool to plan for 2006, I would encourage you to use this spreadsheet to see how 2005 went on a farm-by-farm basis. The results can be very revealing, plus it can be a useful tool in negotiating cash rental rates. My experience is that some farms are overpriced, which needs to be brought to your landlord's attention. Others are very profitable and you need not bring those up for discussion.
Next, you are ready to look at 2006. The bottom line of the online spreadsheet shows return to labor and management, so you could even add another line subtracting labor costs. Our client base averages $26.33/acre, but the range is $9-110.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 24 states. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.