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Controlling input costs can be risky
I did the first of this year’s Marketing in a New Era (MINE) workshops Wednesday of this week. My partner was Roger Wilson from the University of Nebraska. Roger is a specialist in crop budgets. He did the computer simulation part of the workshop. My assignment was to present basic market information to prepare the farmers in the audience to run the simulation game.
The banker who sponsored the meeting requested that we have some information on controlling input costs along with the marketing basics. To prepare for that topic I prepared spreadsheets showing my estimates of breakeven costs for 2014 soybeans and corn. Variable costs per acre were pretty easy because I purchased seed, chemicals and part of the fertilizer before year end.
The fixed costs of land and machinery were much more of a guess. Machinery costs are pretty low for my operation because I have not purchased much new equipment since I retired in 2004. For my 220 acres of row crops, I keep equipment purchased and depreciation to $6,000 per year. For purposes of trying to be realistic, I include cost of $100 per acre as somewhere in the ball park. Custom application charges are on top of that.
Land cost is another story. I include $205 per acre as a cash rent cost. This is based on a word of mouth rental rate from the fall of 2013. Since I still rent some land, neighbors who regularly rent a lot of land do not share their current rental rates with me. I rent from members of my family on a 60/40 share basis. I still feel that is a more workable rental agreement that cash. At the very least, it automatically adjusts for yields and prices.
Adding to the confusion about rental rates is the fact that land values are changing. A friend who is close to the land market told me this week that land that would have brought $10,000 six months ago is now bringing $8500. My cost of production spreadsheet shows why this is the case. Using the figures mentioned above, the cost of growing corn in dry land eastern Nebraska is at least 50 cents per bushel more than the current new crop bid. The cost of growing soybeans is still higher than the new crop cash bid, but not by very much.
All of the above probably does not answer the banker's request for a strategy of reducing input costs. Following the meeting, one of the farmers in the audience asked if I have any good marketing information on controlling energy costs. The meeting was at Spalding, Nebraska. Ninety percent of the crops are grown under center pivot irrigation. Adding irrigation costs to the budgets makes my cost of production numbers irrelevant because we rely on rainfall. In my farming operation, I try to purchase a year’s supply of diesel fuel on a dip in prices. This is a lot like timing the grain markets. Sometimes, the strategy works. Sometimes it does not. At the very worst, at least I have fuel to burn to grow the next crop.
Trying to reduce the fertilizer, chemical and seed costs is risky at best. Some on farm research has shown that planting populations can be reduced without hurting yields. On the other hand, several years ago I did a study on reducing herbicide rates. The results were disastrous. Reducing herbicide rates proved to be a bad practice.
In my opinion, estimating break even costs is a necessary management tool. It is not a good marketing tool. Farmers have different combinations of income and expense. Input costs depend on management decisions. Break even prices depend on yields which will not be known until harvest. Evaluating these factors is what make farming interesting and challenging.