The current economic reset is in full gear with commodity prices retracting in the crop and livestock sectors and of course, the energy field as well. Along with others experts, I concur that a cost-cutting strategy needs to be the top priority for producers. Some experts suggest up to $100 per acre, but regardless of the actual dollar amount, 10-30% is a prudent target for which to aim, over a period of time.
First, a strategy to cut costs is a series of incremental steps and may not occur immediately. If one examines current commodity prices, levels are similar to the 2006 to 2009 time period, before the apex of the super cycle. Looking back through records, the costs from that time period could provide a good benchmark by which to measure reductions for today’s costs. While challenging, cutting costs to the 2006 to 2009 levels may very well be necessary for long-term profitability. The super cycle inflated variable and fixed costs which makes reducing costs a priority for today.
Recently, I conducted several, small focus groups with producers. During the sessions, I asked the producer participants to act as farm consultants and make recommendations for cost reductions. When considering cuts for your business, I believe this is a valuable exercise. Expanded below are some of the reductions they suggested.
First, one obvious areas of reduction is fuel and energy costs. Depending on the size and scope of the business, reduced fuel and energy costs could generate significant savings. Of course, fuel and energy savings and options will vary for each farm business.
The next area may not be a popular one, but it is one of the most important: family living cost. It is true that the more we make, the more we spend, but do not avoid examining this large expense area for potential savings. One of the best strategies to use is developing a personal budget. It may be necessary to include the family in this process as participation may lead to better cooperation. Then, allocate the budgeted amount out of the business and most importantly, commit to that budgeted amount. As a caution, be careful not to utilize credit card debt to fill difficult voids. A budget for family living allows you to cover the necessary expenses and does not leave the business exposed to varying, large withdrawals.
Next, this is not a year to skip soil testing. Analyze your fields and identify those that will best respond to various inputs. Of course, some relief may come in reduced fertilizer costs. Nevertheless, good agronomic practices such as application of lime or sulfur, reduced tillage that builds up organic matter, among others may boost yields to increase revenue. Whatever the method, be creative because increasing efficiency is the best way to reduce cost and hopefully, increase revenues, too. On the livestock side, feed may be cheaper. The use of sound forage testing and good nutritional practices can add to the bottom line in a suppressed market.
In attempting to cut costs, use your resources. The perspective of mentors, peers or lenders can be helpful. Additionally, include an outside perspective on your advisory team. This different viewpoint may be another way to shave one or two percent off costs or add to revenue.
Well, this is a starting point in the cost-cutting process, as suggested by producers. Granted, this is a tough process which requires time, examination, and inevitably, some hard choices. However, developing a strategy to cut costs strengthens both short-term and long-term sustainability. Next time, we will explore more ways to increase the bottom line through reduced costs. Stay tuned!
For more from Dr. Kohl, follow his "Road Warrior" blogs.