Machinery and other input costs determine profits more than prices, say Kansas growers Terry Kastens, his son Dietrich and brother Gary. Terry's part-time job as Extension ag economist for Kansas State University has helped him to scrutinize the balance between costs and profits.
The Kastens plug in price vs. inputs numbers right and left for their corn, wheat and sorghum farm in northwest Kansas outside Atwood.
While conducting statewide ag econ seminars, Terry sees strong opportunities to lock in solid corn prices. “Marketing corn and wheat is almost easy now,” he says. “If you have sufficient rainfall or irrigation, you can go out three years and price corn in the high $3.90s or low $4 range.”
But even at that level, the profit potential can be in jeopardy if inputs are not managed as well or better than prices, he says.
These 100% no-till growers have upgraded their machinery and technology to match their farm's 20-in. annual rainfall (no irrigation). Corn yields average below 100 bu./acre, so cost management is a must. And it starts with equipment.
New equipment includes a John Deere 24-row planter. It features automatic row shutoff to prevent overlapping. “We don't want to waste seed, fertilizer or time,” says Dietrich, noting that the shutoffs will reduce over-application by about 8% on some fields.
In addition, a Deere 4710 90-ft. variable rate sprayer shuts off boom sections based on a GPS map. “The boom control cost us about $10,000, and we paid for it the first year because of the savings in chemical application (on a large volume of acres),” says Gary.
The automatic boom shutoff control saves about $1.22/sprayed acre, Dietrich adds.
They use Deere StarFire 2 GPS auto-steer with a 4-in. dynamic accuracy. “We considered RTK but decided that the 4-in. was sufficient at this point in time,” says Gary.
The high-tech equipment enables them to cut their machinery and input costs. “We figure a 15-20% advantage over what we might have seen a few years ago,” says Terry. “With the more advanced equipment, better labor management, planting the right hybrids and other factors, we are seeing better returns.
“That's the secret to being more profitable. You have to determine how much you can put into a crop as efficiently as possible to get the most out of an acre,” Terry says.
Machinery costs top the Kastens' list of input control. In one of Terry's K-State economics presentations, he and Dietrich highlight data from the Kansas Farm Management Association Enterprise Analysis. Based on research with K-State Agricultural Economist Kevin Dhuyvetter, Terry points out that in the 2002-2004 period, more than 100 farms with more than 350 acres of dryland corn had total corn inputs of about $234/acre. Of that, machinery costs surpassed $70/acre.
More importantly, the most profitable third of farms had machinery costs that were more than $42/acre lower than the bottom third of farms. This category alone explained nearly 40% of the difference in profit across the farm groups, says Terry. Differences in the other cost categories across the two farm groups explained most of the remaining differences in profitability, with revenue differences barely mattering.
In comparing 2001 machinery costs per acre to those expected for 2008, research by Dhuyvetter, Kastens and Aaron Beaton shows that overall farm machinery costs totaled $83.29 in 2001, compared to $111.94 projected for 2008. Fuel costs in 2001 made up 11.4% of that, compared to 24.3% in 2008, reflecting the steep increase in fuel prices.
REPAIRS IN 2001 were 18.3% of the cost, compared to 16.6% in 2007. Labor was 27.9% in 2001, compared to 25.4% in 2007. Equipment depreciation was 24.2% in 2001, while it was 22% in 2007. Interest cost was 14.2% in 2001, compared to 12.9% in 2007. Insurance and shelter costs were about 4% for both years.
Agronomy management can mean everything. “We do extensive soil sampling,” says Dietrich, noting that sampling at the same locations over time is especially important to see how soils are changing due to management.
“With our no-till program, we hope to improve the ratio of nitrogen (N) per pound of yield in corn.” Instead of 1 lb. N/bu. of yield, enhanced soil sampling is helping the Kastens lower that ratio to a 0.8-lb. rate without fearing the risk of insufficient fertilizer or excessive mining of the soil, says Dietrich.
Hybrid selection is critical in squeezing out the best performance. Hybrids proven on a particular farm and in regional test plots normally help the Kastens obtain that performance.
He says land costs are the biggest concerns most growers will continue to face, in light of higher grain prices.
Knowing when to lock in land costs, seed, fertilizer, fuel, herbicide and other inputs can be as tricky as pulling the trigger on a crop sale price. Volatility is the norm, the Kastens say. “The wild card is your input costs,” stresses Gary.
“You need to know how much you can put into a crop to make it pay,” says Terry. “Year after year, growers will find that their input costs determine profits a lot more than the prices they receive.”