Reducing Expenses to Turn Loss Into Profit
Ask Allen Graner the secret to farm profit, and two words sum up his reply: Manage costs.
After 42 years of reviewing farm records for participants from the north-central region of the North Dakota Farm Business Management (NDFBM) program, Graner has seen firsthand the tried-and-true management tactics of farmers who are profitable year in, year out.
“An aptitude that has proven itself over time is a person’s ability to realize what makes up the farm business,” says Graner, one of 16 FBM instructors across the state. “It’s that person’s understanding of simple expense items like overhead costs. It’s an understanding of what it costs to grow an acre of a certain crop. It’s the ability to identify what costs are within your control and then to manage those costs.”
The 82 farmers from the north-central region of the state’s FBM include livestock producers and farmers growing mainly corn, soybeans, wheat, barley, canola, and sunflowers.
Profit in the Worst of Times
The records show that some producers remain profitable even in the worst of times. For instance, in the low-price year of 2015, the high-profit 20% of participants had a net farm income of $183,000. The low-profit 20% lost $124,000, and the average of the group netted a profit of $20,000.
Farm size appears to have little to do with profit. The high-profit farmers had an average of 2,724 acres, while the low-profit group had an average of 2,800 acres each. A breakdown of profitability fingers cost containment coupled with efficient management as the primary driver of farm profit.
For example, canola grown on cash-rented acres yielded 1,930 pounds per acre for the high-profit 20% of producers. The yield for the low-profit growers was 1,437 pounds per acre, a difference of 500 pounds. Yet, per-acre direct expenses were lower for the high-profit group, despite higher yields. Their costs came to $252 an acre; the low-profit growers paid $294 an acre for a reduced yield.
“The high-profit group had lower seed costs, lower fertility costs, and lower chemical costs,” says Graner. “Even their land costs were slightly lower. The high-profit producers paid $47.59 an acre for cash rent, while the low-profit farmers paid $53.79.”
“It’s always good to ask yourself, ‘Am I timely in putting in my crop?’ ”
An analysis of spring wheat on cash-rented land showed similar cost differences between high-profit and low-profit producers. The high-profit producers had a net return of $96 an acre, while the low-profit growers lost $32 an acre.Direct per-acre expenses for the low-profit growers came to $257, while the high-profit group paid $197 per acre in direct expenses.
The cash-rental rate paid by both groups had little to do with the differences. It was the cost containment in other expense areas that made the difference.
“The cash rent paid by both groups was right around $50 an acre,” says Graner. “The high-profit producers simply did a better job of controlling other direct expenses. They also had slightly lower overhead costs.”
Four Ways to Cut
The high-profit producers in Graner’s group found ways to trim costs and fine-tune management in at least the following four areas.
1. Cash rent.
Negotiating with landowners a cash-rental rate that reflects the production potential of a field can maintain rates at levels allowing the renter a profit margin.
“Many farmers have a mind-set of renting land for the going rate regardless of its productivity,” says Graner. “But not every acre is the same in its ability to produce a crop. One producer I work with does a good job of controlling costs for cash rent by offering landowners a rate he’s willing to pay based on the productivity of the land. Not all farms are the same.”
2. Fertilizer and chemical applications.
Analyzing records to track input costs and net returns on individual crops and fields gives an understanding of the financial investment and the potential for profit. Applying inputs at levels corresponding with production potential allows opportunity for profit.
“I have some producers who depend on precision ag technology to fine-tune fertilizer placement,” says Graner. “That lets them apply fertilizer at rates based on land quality. Certain parts of fields have fertility or saline problems that won’t allow these areas to produce well. Reducing or eliminating inputs in some places can reduce costs.”
3. Seed purchases and planting times.
Selecting varieties best suited to buyers’ needs helps marketability. Choosing varieties matching site-specific growing conditions can help stabilize yield, thus reducing per-acre production costs.
Timely purchasing of seed based on long-term planning helps ensure availability of seed varieties best suited to your needs.
“Making cropping decisions a year in advance and purchasing seed well ahead of planting lets you secure the varieties that you want,” says Graner. “The best varieties are always in short supply near planting time.”
Planting timeliness goes a long way, too, in getting optimal returns from per-acre investments in seed and fertilizer.
“It’s always good to ask yourself, ‘Am I timely in putting in my crop?’ ” says Graner. “I always tell my Farm Business Management participants, ‘You have one shot, one ideal window of opportunity to get the crop planted. If you’re out of step with timeliness, you can’t buy that time back.’ ”
The high-profit producers in Graner’s group tend to maintain lower overhead costs than the low-profit farmers. Overhead costs include whole-farm costs for such items as utilities, farm insurance, machinery leases, and equipment depreciation. Equipment purchases can increase overhead.
“A big problem I have seen resulting from the recent high-profit years comes from farmers’ equipment purchases,” says Graner. “In some cases these purchases have increased their overhead costs to a significant level. Now they have to figure out whether or not they’re overequipped to a point where some machinery is not being fully used.”
Overall, finding ways to reduce costs on a farming operation boils down to a daily process of asking hard questions.
“Determine whether or not the amount you’re investing in a given crop or piece of land is meeting your expectations for its outcome,” says Graner. “Figure out where there are areas that might respond to cost cutting. The high-profit producers are those who do a good job of managing expenses.”
For the 82 participants from the north-central region of the North Dakota Farm Business Management program, four cost categories comprise 57% of all cash farm expenses.
Fertilizer accounts for 17% of all costs. Chemical inputs claim 14% of costs. Land rent makes up 13% of the total, and seed costs are responsible for 13%.