Time To Cut Back On The Extras For 2014

One farmer says break-even won't be as enticing with $4 corn. Make sure the extras actually pay off.

Published on: Nov 8, 2013

David Erickson sees this winter as an opportunity to trim the fat.

The Altona farmer wagers that most have been operating with some extremely lush margins the past few years. With analysts predicting average corn prices below $5 for 2014, that's likely to change.

"This will provide us the opportunity to examine and reduce or eliminate unnecessary expenses," Erickson notes.

First off, don't overcommit, especially on long-term debt. If a machinery purchase is necessary, look to handle it in small bites or try to pay cash if possible, Erickson says.

University of Illinois ag economist Gary Schnitkey concurs that farmers will do well to dial down machinery purchases as profit margins thin. During this period of profitability, Illinois farmers were spending on average more than $100/acre on machinery, according to Farm Business Farm Management data. Schnitkey notes prior to 2006, the average was between $40-$50/acre.

Time To Cut Back On The Extras For 2014
Time To Cut Back On The Extras For 2014

Re-evaluate extras
Lately, sales reps have had an easy time pitching their products. With these extreme crop prices, 1-2 bushels pretty well paid for most "extras."

Erickson reminds farmers that $4 corn may require 3-4 bushels to pay for the same sort of extras. When approached with such opportunities, he recommends carefully weighing the possible return against the cost.

"This market should cause us to question our thinking on break-even in the future," he adds. "In the coming years, will we be willing to put that money in a break-even opportunity rather than pay down debt?"

That said, Erickson reminds folks that basic agronomics and livestock management practices are not "extras."

Investment opportunities
Even with lower prices on the horizon, Erickson and Schnitkey say this is nothing like the downturn of the 1980s.

First off, Schnitkey says most famers were very responsible during this period of profitability. Many paid off debt and built healthy cash reserves. Farm family living costs increased only marginally, Schnitkey adds.

If reduced profitability creates hesitancy, what's the best use for those cash reserves? Schnitkey says drainage is still a terrific investment.

"Especially on wet farms, we still see really good payback on drainage improvements," he adds.

As long as farmers don't have to take on significant long-term debt, land is still a great place for cash, Schnitkey says.

"Land is still a real asset," he adds. "Those are good to have when we're unsure about inflation."

Speaking of land, Erickson and Schnitkey do not anticipate a reduction in cash rent. That said, Erickson notes many landlords likely left cash on the table once the 2012 drought had fully played out. However, Erickson expects the high end of cash rents will soften a bit in 2014.

Schnitkey says growers should be careful to avoid picking up new rental ground at the high end of the spectrum.

"Those higher cash rents won't cash flow with $4.60 corn," he says.