On a recent webcast for agricultural lenders, I received an interesting question, “Is there any hope for reduction of crop input costs including cash rent expense?” Well, this certainly is pertinent for today’s economic times. To better answer this question, we need to examine some of the latest FINBIN data from University of Minnesota’s Center for Farm Financial Management. The Center’s Director and my good friend, Bob Craven, recently presented this data at a meeting in Mankato, Minnesota. Including thousands of farms across multiple states, this database represents above average managers who maintain quality financial records.
In short, the answer to the lender’s question is yes. Reductions will continue to come and in a number of categories. According to the FINBIN data, cash rents for corn farms were down approximately $15 an acre last year. Additionally, when comparing rent paid per acre in 2015, higher profit farms paid an average of $63 per acre less versus low profit crop farms.
Recently, I applied the first round of fertilizer on our farms in Virginia. I was pleasantly surprised to find a significant decrease in the cost. Fertilizer costs on the database farms were down over $20 an acre from 2014 to 2015 and are projected to be down another $14 per acre this year. When comparing 2015 costs to 2013, there was a 31 percent reduction in fertilizer prices over that time period.
Other areas of expense relief are fuel and drying costs. As compared with the peak years of the great commodity super cycle, costs were approximately $25 less per acre, or a difference of 43 percent. Relief in seed costs for 2015 were small, only $5 to$10 per acre. However, crop protectant and chemical costs were actually up slightly. Overall, for farms participating the in the FINBIN database, actual 2015 total costs as well as those costs projected for 2016 were down nearly $120 per acre when compared to 2013.
In analysis, the University of Minnesota team compared the net returns of corn farms, separating them into low, middle and high ranges. When compared, the differentiator between the highest and lowest returns was a combination of expense control and yield per acre. Corn yields were up 14 bushels per acre for the higher 20 percent of farms and total expenses showed over a $200 per acre difference between the high profit and low profit farms.
In answer to the lenders question, expenses are declining on both crop farms and on livestock farms, as well. The key is to employ a powerful combination, which in the case of FINBIN farms is cost control and increased yields. Specifically, the top 20 percent of FINBIN farms generated $139 profit per acre while the low 20 percent had a negative $163 profit per acre. That is a difference of over $300 in overall profitability, which is significant for any operation.
In summary, costs are adjusting. However, in order to successfully weather the economic down cycle today’s producers must use a combination of different tools. The FINBIN data shows us that one of those combinations is expense control along with increased yields. Of course, this combination requires increased efficiency that only comes from an executed, strategic plan. Undoubtedly, expense control is critical and will be a significant factor in whatever combination leads to the overall profitability and sustainability of your farm business.
For more from Dr. Kohl, follow his "Road Warrior" blogs.