During the last 10 years, the economic environment that U.S. farms faced has been extremely variable. During the 2009-2012 period incomes and net returns increased with a peak occurring in 2013-14. Production costs rose with the increasing income and began to decline in 2013, however not as rapidly as revenue declined. Farm profitability declined due to the narrowing margins for grain production. The question for farmers is: “What management strategies to follow that consistently produce profits?”
First let’s look at what works for some real farms. Paulson & Lattz, agricultural economists at the University of Illinois, have used Illinois farm data to separate Illinois farms into profitability cohorts, thirds, as well as time periods 2010-12, higher prices, and 2014-16, lower prices. They found a few management strategies that consistently produce higher returns.
The high profit farms produced more gross revenue per acre than either of the other two groups through a combination of slightly higher yields and price per bushel for corn and soybeans. Both yields and prices were 5-7 percent higher. None of the farms strove for the highest possible yield but rather the most profitable yield. During the 2010-12 time period, the high one-third farm group had $112 more return to land and operator than the middle third group. High profit farms had nearly the same per acre direct costs of production as the middle third farms in 2010-12 but $6 less in 2014-16 and lower per acre machinery costs, depreciation and repairs, $17 lower in 2010-12 and $10 lower in 2014-16. The high profit one-third farms had lower per-acre overhead costs too, $8 less in 2010-12 and $18 less in 2012-16.
The relative importance of revenue versus costs for higher profits also varied during the two time periods. For the higher profit one-third farms, higher revenues contributed more during 2010-12 and lower costs contributed more to higher returns in 2014-16 compared to the other farms in the comparison.
Thus the “take home message” from this data set is twofold. Capturing higher revenue during times of rising commodity prices is more important than managing costs. However, farm operators must not lock in costs during these good times that can’t be reduced when prices decline. During times of declining commodity prices, controlling costs is more important.
Now that we are in the period of tight profits and cash flow, here are some suggestions for managing in the tough economic environment:
• Cost control—Evaluate inputs to ensure there is a positive return to their use. For instance, soybean seeding rates might be reduced with little change in yield but much lower cost. Review nitrogen (N) application rates to ensure you are using the correct rates and not adding insurance N. Look for feed sources that are less costly and provide the same nutrients. Can you work with neighbors to jointly buy inputs like seed to get discounts? Would it be cheaper for you to hire someone to plant or combine those fields a long way from the main operation? Is some of your rented ground no longer worth the cost?
• Renegotiate cash rent rates—This can be hard to do since property taxes have risen of late but one way to manage this negotiation is to include flexible lease provisions in case of high yields or prices.
• Reduce capital spending—Most farmers have already done this. But if the purchase reduces costs it may be a good purchase. Otherwise repair machinery.
• Reduce family living—Family living rose during the good times in agriculture but now family budgets should be reviewed. The nice-to-have items will likely be dropped in favor of the must-haves such as health insurance. Review cell phone plans, satellite TV, the Sirius subscription and any automatic payments.
• Increase revenues—If you have unused or minimal use assets, such as the extra semi, consider renting them to someone else. Make sure you capture all variable costs first and some or all fixed costs of the asset.
• Increase non-farm income—Many spouses already work off-farm to get benefits, health insurance, but everyone in the farm operation may have to do so too.
Some of the above suggestions could take some very serious conversations and open communication within farm families, but the viability of the farm is at stake. The farm must be able to pay its own way and provide family living. — Robert Tigner, UNL Extension agricultural systems economist
