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Wednesday, February 05, 2014

Matching Your Crop Budget With Your Marketing Plan



 

It has been a long time since you calculated your breakeven cost of production.  Remember that?  Unfortunately, that calculation will have to be made this year, and the sooner the better.  You should not make any commodity sales if you don’t know your breakeven costs, because it may be the difference between losing a little bit of money this year and losing a lot of money this year.  The earlier the better for the breakeven calculation, because it may help guide the amount of money you pay for crop inputs.

 

Most Cornbelt farmers will find their breakeven cost of production higher than they expected, and higher than they can afford in a year when commodity prices are several dollars per bushel less than those “good old days.”  With a market in transition from high prices to lower prices, your marketing plan may have more impact on your crop budget than it has ever had.  If the market is not willing to pay you to make a profit, or at the least break even, cost management at the start of the growing season has to be a priority.

Access to farmland has probably already locked in your highest cost.  At this point in the year, few land owners are going to be amenable to reducing cash rental rates.  So that cost is known and may be aching like a mashed thumb.

“Except for fertilizer, components of direct costs are not expected to decrease without altering input decisions, says University of Illinois farm management specialist Gary Schnitkey. He adds, “Even given possible direct cost reductions, further reduction in costs likely are needed, most likely coming from machinery costs and cash rents.”  But with rent set and equipment in the machine shed those costs will have to be addressed next fall or winter.

 

The direct costs you can manage now are basic crop inputs of fertilizer, seed, pesticides, drying, storage, and crop insurance.  For a central Cornbelt farm those per acre costs have risen from $197 in 2006 to $405 in 2012 for corn, and $97 in 2006 to $198 in 2012 for soybeans.  Schnitkey says, “For both corn and soybeans, fertilizer and seed were the categories with the largest increases.”   But he says for the coming growing season, “In 2014, fertilizer costs for corn in the $140 to $150 per acre range are possible, compared to $200 per acre in 2012.”

 

For seed, seed corn costs have increased by 1/3 over the past 5 years and soybean seed prices have doubled.  Schnitkey believes those may stabilize, “Seed companies may slow the rate of increase in seed prices and farmer may purchase less costly hybrids and varieties.  While increases may slow, large decreases in seed costs are not expected.”

 

Pesticide expenditures have varied, in part from price variations, and in part from the need to control specific pests.  Schnitkey says your 2014 pesticide bill will be uncertain, “What level of pest pressures will exist in the future is difficult to predict.  However, emergence of weeds resistant to glyphosate likely will increase pesticide costs.”

 

While storage costs have been relatively stable at $7 for corn and $4 for soybeans, the cost of drying is more variable because of the moisture of the grain being harvested and the size of the crop.  Crop insurance costs have risen, primarily from the higher value of the crop being insured.  While there may be a slight drop in premiums in 2014, there are ways to reduce the cost of crop insurance, other than reducing the level of coverage, which Schnitkey does not recommend this year.

 

For the initial inputs, Schnitkey says, “Except for fertilizer, price decreases for inputs will not likely lead to decreases in direct costs.  Farmers may need to evaluate input decisions.  The value of higher cost seed hybrids and varieties will have to be questioned.  Fertilizer rates will come under scrutiny.  Each Insecticide and fungicide application will have to be evaluated.”  And he adds, “The lower commodity price environment will place pressure on moving to lower cost inputs, lowering rates, or eliminating applications.  This occurs because lowering commodity prices increases the bushel response needed to break-even.”

 

In other words, your marketing plan will require more bushels to be sold if breakeven prices are higher.  Will you have those bushels to sell at the end of the year or should input costs be adjusted downward now?

 

Summary:

Breakeven price calculations need to be at the top of your priority list for today.  Knowing that price will not only allow one to know whether a grain sale was profitable or not, but will also allow one to make any adjustments on inputs at the start of the crop year.  Those may include a lesser fertilizer application rate, a lower-priced hybrid, a change in crop insurance, or another adjustment in the cash outflow from your operation.

Posted by Stu Ellis on 02/05 at 03:31 AM | Permalink

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