For Release April 27, 1999

Where Do You Cut Costs?

by Chuck Otte, Geary County Extension Agent

Everyone has seen and read that farm income for 1998 was way down compared to 1997 and 1996. And I’ve listened to economists try to explain how it isn’t really as bad as it looks. But it still doesn’t change the fact that many crop producers are looking at 1999 trying to determine how to produce grain crops at a lower cost than they did last year.

Cash grain prices were down last year, and while most analysts are saying that prices won’t go much lower, nobody is saying that they’re about to bounce right back. So how do we lower our cost of production? Cost of production is a nothing more than total costs divided by total production. There are lots of production cash costs that we can trim back, but all too often we start losing yield. So the question then becomes, "What costs can be trimmed without hurting production or increasing per bushel cost?"

The answer is going to be different for every producer because everybody does things just a little different. I tend to just look at the cash costs for production of that crop, i.e. the variable costs. There are certain fixed costs that you will have regardless of what crop, if any, you produce so we’ll just ignore those for this discussion. The first place you need to start is with your own records from last year. Determine how much you spent in different categories and then divide by acres and bushels to determine your costs. If you are just working off of average figures you could be shooting yourself in the foot!

However, I will refer to some of those K-State Farm Management Association average figures to give you some comparisons and some direction to start looking for places to save money. One expense item that kept coming up in the top three or four was interest on operating money. In analyzing production costs for wheat, corn, soybeans and grain sorghum (all dryland) interest ran pretty consistently in the 9% - 13% range. While you can’t do much about that this year, it would be a goal to get that down to no more than 10 to 12%.

Most of our comments will be for crops other than wheat as we’ve pretty well put our money into the wheat crop for this year. Not surprisingly, fertilizer was the number one or two cost in most crops. The first step to controlling fertilizer cost is soil testing. A few dollars spent on soil testing can save a lot of money in unneeded fertilizer expenses or produce more bushels from correcting a deficiency not otherwise seen. One of my concerns in soil fertility is spending a lot of money on micronutrients that may not be justified. If you are adding lots of extra elements to your fertility plan try leaving at least 1/3 of the field without all those micronutrients to see what happens. Be very cautious about reducing nitrogen and phosphorus rates. Before doing that, let’s get a good soil test and then make sure to take into account legume and manure credits.

Machinery repair is often a large expense item and is usually the inverse of depreciation. Producers with high depreciation usually have low repair expenses and visa versa. If you have small acreages of certain crops you may want to hire a neighbor to harvest the crop, thus saving you the extra expense. Seed and herbicide are the other two that are often major expenses. Once again, just cutting expenses without thinking may hurt your cost of production. Look for generic alternatives in herbicides and examine weed populations to make sure you address your real competition. Cutting back seeding rates, or using bargain priced or bin run seed can also hurt your production. Reducing input costs is a good idea, but hurting your production is counterproductive!


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