Home Ohio Country Journal Budget management crucial in times of tight farm margins

Budget management crucial in times of tight farm margins

The Ohio corn and soybean harvest is full throttle and, in general, yields are at least fair to good, though prices have plenty of room for improvement.

A great farm is more than just great yields — it is also about the details of balancing the budget. It is often in times of tight margins and low prices that successful farms are forged.

Matt Davis, vice president of agribusiness at Farm Credit Mid-America, has seen plenty of examples of farms that manage those tight margins well, and those that do not. So what are the traits for success?

“It starts with developing a crop production plan that fits the farm — putting together the right crop mix, selecting the right crop inputs, determining the appropriate rates and then applying them at the right time. We also want to know what the market is offering so we can determine our best chance for success and achieving a satisfactory return on investment,” Davis said. “Each field is different so we may have a max yield approach, a minimum costs approach or a combination thereof. I think it is important that we don’t sell our product until we know our full and accurate cost of production. But, if you think about it, we don’t sell acres we sell bushels. I think we need to go one step further and determine our costs on a per bushel basis.”

Determining a farm’s per bushel cost estimate is a challenging, but extremely important part of a successful operation that should serve as the foundation for a marketing plan. This cost estimate needs to be carefully considered to include all of the farm’s expenses.

“The other piece is making sure we capture all our costs and not just our variable costs. We want to make sure we capture those fixed costs we don’t think of quite as often like taxes or living expenses,” Davis said. “The last step is putting it all together in a written marketing plan. Marketing is very emotional and it is easy to deviate from a plan if it is unwritten.”

During times of strong returns for the farm, living expenses can increase to levels not sustainable during the tight times.

“It is important that we balance our family living expenses. Everyone’s needs are different depending on the size of the family, the age of the family and the lifestyle desired. There is no one single answer,” Davis said. “The key is knowing what those costs are so we can budget for them. Larger homes, second homes, RVs, those types of things can be great during the good times, but if we don’t budget for those during lean times we could pinch our resources.”

In terms of the budgets for corn and soybeans, the forecast for production costs for Ohio field crops are flat to slightly lower in 2018 depending on the crop and the profit picture remains poor, much the same as in 2017, according to Barry Ward, the Leader of Production Business Management for Ohio State University Extension.

“Variable costs for corn for 2018 are projected to be $322 to $397 per acre depending on land productivity. Lower nitrogen fertilizer costs will likely be offset by somewhat higher fuel, chemical and interest costs,” Ward said. “Variable costs for 2018 Ohio soybeans are projected to range from $195 to $211 per acre. Wheat variable expenses for 2018 are projected to range from $161 to $189 per acre.”

Even with the potential for slightly lower expenses, market prices will likely have trouble keeping up.

“With continued low crop prices expected for 2018, returns will likely be low to negative for many producers,” Ward said.

According to Ward’s budget figures, projected returns above variable costs (contribution margin) range from $176 to $350 per acre for corn and $193 to $371 per acre for soybeans (assuming fall cash prices of $3.75 per bushel for corn and $9.60 per bushel for soybeans). Projected returns above variable costs for wheat range from $130 to $244 per acre (assuming $4.80 per bushel summer cash price).

Ward’s returns to land for Ohio corn (the gross revenue minus all costs except land cost) are projected to range from -$46 to $116 per acre in 2018 depending on land production capabilities. Returns to land for Ohio soybeans are expected to range from $22 to $190 per acre depending on land production capabilities. Returns to land for wheat (not including straw or double-crop returns) are projected to range from -$46 to $61 per acre.

Ward estimates that the total costs projected for trend line corn production in Ohio are $778 per acre.

“This includes all variable costs as well as fixed machinery, labor, management and land costs. Fixed machinery costs of $130 per acre include depreciation, interest, insurance and housing,” Ward said. “A land charge of $187 per acre is based on data from the Western Ohio Cropland Values and Cash Rents Survey Summary. Labor and management costs combined are calculated at $76 per acre. Returns Above Total Costs for trend line corn production are negative at -$155 per acre.”

Ward’s estimated total costs for trend line soybean production in Ohio are $566 per acre, including fixed machinery costs at $108 per acre, a land charge of $187 per acre, and combined labor and management costs of $54 per acre.

“Returns above total costs for trend line soybean production are also negative at -$81 per acre,” Ward said.

In terms of wheat, the total costs Ward projected for trend line production in Ohio are estimated to be $541 per acre. This includes fixed machinery costs of $126 per acre, a land charge of $187 per acre, and labor and management costs combined at $40 per acre. Wheat returns are also negative at -$179 per acre.

These projections are based on Ohio State University Extension Ohio Crop Enterprise Budgets. The newly updated Enterprise Budgets for 2018 have been completed and posted to the Farmoffice website at farmoffice.osu.edu/farm-management-tools/farm-budgets.

These budgets can serve as a guide to compare an individual farm’s real costs and income potential, and also as a useful template for determining per bushel costs, a marketing plan, and ultimately, the long-term success of the farm.