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.
