I came to a cold realization this week as I was figuring my crop budget for the year ahead. If wheat drops to $5/bu for the 2014 crop, I'd better start cutting hard on costs…now.
Some costs you just can't get rid of. Soil sampling, fertilizer, seed, fuel, and harvesting are all irreplaceable and are pretty hard to squeeze in any given year. The cost of chemical is going up, which will make bargain hunting on product even more crucial and generic labels more appealing. Replacing a few spraying operations with cheaper tillage is also more enticing (at the expense of reduced residue).
No matter how you cut it, making money at $5 wheat still is walking a very fine line, unless you consider cutting crop insurance coverage.
We're still wandering through the desert of one of the worst droughts in history with still no end in sight. We've therefore taken a much more conservative approach to our crop rotations here on our farm in west-central Kansas. Many fallow fields that ordinarily would be planted to milo this spring will be going back to wheat again this fall. Opting for a wheat-fallow-wheat rotation rather than traditional wheat-sorghum-fallow has reduced our risk exposure appreciably.
Because of our reduced risk, this could justify some cost-cutting on our crop insurance expense.
This raises a thorny issue about crop insurance. What if the lean times stay lean for a number of years and $5 wheat (or less) becomes the norm again? We frequently read about the dangers of being overexposed with risk on production costs and debt when grain prices drop and the ag economy cycles into recession. Will crop insurance be an expense we can continue to justify in the future?
For some farmers, crop insurance plays a central role in their crop rotations. I recently attended a seminar in Burlington, Colo., where a Colorado State University agronomist encouraged high-intensity cropping to maximize grain production via four-year rotations instead of less intensive wheat-fallow or wheat-summer crop-fallow. He immediately was peppered with questions from the audience of how this practice cash flows. He finally admitted privately that the only way for a high-intensity rotation to work, like wheat-corn-millet-fallow, is with the heavily subsidized crop insurance program.
But with crop insurance premiums rising, will this risky practice of high-intensity cropping make financial sense in the future? If premiums continue to rise, more farmers invariably will see it as an expense to shrink on their balance sheet.
Bearing in mind that it's the low-risk farmers reducing their coverage, this can't be good for the future of crop insurance if they continue to exit the program. There will be fewer and fewer low-risk farmers funding the failures of high-risk farmers, putting the program on a path of unsustainability.
Would asking Congress for more money to keep this program solvent be the prudent thing to do considering our nation's financial condition? Consider, also, the negative attention from main stream media that crop insurance is receiving, and the long-term future of crop insurance doesn't look promising.
If we want to control cost and keep the program viable for both high-risk and low-risk farmers, serious changes need to be made – particularly with restricting the high-intensity rotations that RMA currently allows. Otherwise, we're burning down our own house…and low-risk farmers are taking the cue and leaving.