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Reducing Cost: The Question Is Where

The grain industry is a low-margin business that rewards lowcost producers, particularly in today’s economic environment. With no major price fix on the horizon, profitability in 2019 will be driven largely by cost adjustments.

Many producers already have addressed variable costs. Further – and more impactful – adjustments likely will come from fixed costs, which can pay dividends for years to come, even after commodity prices improve. However, these aren’t easy changes; they can involve tough decisions about equipment and land. Family living expenses also need to be evaluated. While each family has to make its own decision about what is necessary, this is an area that can have a significant impact on profitability.

Fortunately, most producers have multiple solutions for aligning their costs to today’s price environment. Identifying the best solutions starts with a solid understanding of an operation’s current costs and how adjustments could improve cash flow and liquidity.

Variable costs

The per-acre cost of seed, chemicals, fertilizer and fuel are relatively consistent across operations. Typically, input costs account for 35 to 40 percent of a producer’s expenses. Differences between operations are more pronounced in the areas of machinery repairs, supplies, labor, real estate taxes, crop insurance and utilities. Not only are these costs dependent on the makeup of an operation, they also are more likely to be overlooked. This can be an expensive oversight; they generally account for an additional 10 to 15 percent of all expenses.

Fixed costs

The main factors separating high-, moderate- and low-cost producers are cash rent, real estate payments and machinery and equipment payments. Many grain producers will find that lowering fixed costs is their most effective option for addressing cost structure in 2019. A good rule of thumb is to limit fixed costs to 35 to 40 percent of gross farm income. In today’s environment, 40 to 45 percent is common for many operations.

Family living

Think of family living expenses as all your non-business expenditures: food, medical care and health insurance, household supplies, clothing, personal care, child care, gifts, household utilities, personal vehicles and related costs, personal property taxes and insurance.

This is a major variable in farm budgets. Families with off-farm income may not use any of their gross farm income for family living expenses. Ten percent or less is the ideal for those who depend on gross farm income for all or part of their family living.

Small differences matter

In a low-margin business like grain production, large volumes of money pass through your operation, so even a small percentage means big dollars.

It is critical that every producer understands his or her own cost structure to determine potential areas of adjustment. As these examples show on the next page, the difference between profitability and potentially crippling losses is often just a few percentage points of savings in one or more categories of expenses.

 

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Frontier Farm Credit serves farmers, ranchers, agribusinesses and rural residents in eastern Kansas. For inquiries outside this geography, use the Farm Credit Association Locator  to contact your local office.