Today’s tight margins are leading to a lot of conversations about reducing the cost of production for long-term success. Our financial officers and customers open these conversations in similar ways – by identifying costs within a producer’s control. The resulting strategies, however, are anything but similar.
“We’re trying to tailor solutions to their operations,” says Justin Septer, vice president of our Ottumwa office in southeast Iowa. “The art comes in spending time with our producers and identifying specific solutions.”
As noted in a previous blog, farming has entered an “agriculture efficiency cycle” that offers both challenges (projections of falling farm incomes) and opportunities (growth for the well positioned). In this second installment, our financial officers highlight some of the business practices and cost-cutting measures that could benefit producers.
Calculate your ratios
While operators readily know their input costs on a per acre basis, fewer tend to know their fixed costs per acre, a ratio that accounts for expenses related to land, equipment, even real estate taxes. Added into the mix of other critical ratios, fixed costs per acre give producers a fuller, more detailed picture of their operating costs. Eric Lantis, a financial officer in our Columbus office in northeast Nebraska, said fixed costs per acre serve as one of the starting points for all his conversations about production costs.
Sharpen your record keeping
Times demand that producers know their break-evens to the penny. If that extra application of herbicide will make a difference in your margin this year, you need to know that, says Sandy Priest, a financial officer in our Broken Bow office in western Nebraska. Some of the best record keepers enter every purchase they make and track it by enterprise. That doesn’t work for everyone, Priest says, but producers should aim to be more precise and more thoughtful in whatever record-keeping system they use.
Nail down family living expenses
Average living expenses for farm and ranch families hit $100,000 in 2012, according to data collected by Nebraska Farm Business. While one family might decide this is too much, another family might be able to justify every expense as necessary. The important thing is to fully account for family living costs so you can decide what is too much or just right for you. Many financial officers have stories of customers who consistently miscalculate their living expenses, in some instances by half the true cost. One such producer is working to eliminate “fluff” and has delayed some improvements to the operation. Living expenses still are more than twice the producer’s original calculation, but they are coming down through more intentional and deliberate purchasing decisions.
Control equipment expenditures
Equipment dealers might be knocking $60,000 off the ticket price of a new combine, but that doesn’t necessarily make it a good deal, says Tami Campbell, a financial officer in our Grand Island office in central Nebraska. Farmers understand the reality of the situation and, if they’re struggling to service debt, aren’t buying equipment. If an old piece of equipment breaks down and the cost of keeping it operating is too great, they tend to shop for used rather than new. Some producers also could benefit from refinancing equipment loans to lower their payments with a longer term.
Read Driving Down Costs to Remain Competitive: Part 1