2015 delivered a tough growing season for many Illinois farmers, and lower soybean prices to follow. For incomes to increase in 2016, either commodity prices need to rise or farmers need to cut costs.
“Looking at where commodity prices are now, farmers’ costs need to be $100 less in some cases just to break even. They need to focus on their cost structure and see where they can afford to make cuts,” says Gary Schnitkey, Ph.D., professor of agricultural and consumer economics at the University of Illinois. In the kickoff episode of “Profitability Matters,” Schnitkey explains how growers can make the most of the current economic situation, and he offers advice to cut costs up to $100 per acre.
• Net incomes are projected to be very low for 2015, due to lower commodity prices.
• In these times of low prices, farmers need to focus on their cost structure and make significant cuts to have a positive 2016 income.
- We need to look at where commodity prices are right now–$9 or below for soybeans. If these prices continue, many farmers’ costs need to be $100 less just to break even. While this seems high, it is a feasible goal.
- Farmers’ first line of defense is crop insurance—make sure to have your policy in place.
- Spread out grain sales throughout the year to capture more average prices rather than risking the lows.
- Farmers should look at their highest costs to determine where to make reductions.
- The highest cost is cash rent, at an average of $290 per acre.
- It’s a risky strategy to keep cash-rented land at prices that are too high to be profitable because prices might take several years to change.
- Consider variable cash leases when negotiating rents. These make for lower base rents and landowners will share in higher crop revenues if they occur.
- Fertilizer is the second highest cost, at an average of $148 per acre. Farmers should soil test and be sure to apply the right amount to their crop.
- Farmers will likely limit machinery purchases, leading to slow reductions in depreciation costs.
- Prices of crude oil have come down, indicating that fuel and fuel-related costs may decrease.
- Changing pesticide practices and future pest pressure could reduce pesticide prices.
- Read Schnitkey’s original article here to see his step-by-step breakdown of $100 cost reductions.
More profitability advice to come
Schnitkey is working alongside the Illinois Soybean Association on an upcoming project, “Identifying the Management Strategies of Highly Profitable Farmers.” The 2016 project will identify the soybean producers who have been the most profitable, and will then identify the practices these farmers use, including production, marketing and cost control strategies. Stay tuned for more news on this project in 2016.
If you have questions on budgeting for 2016 or on Dr. Schnitkey’s work, visit his work on FarmDoc and stay tuned for more episodes of Management Matters.