Farming is a gamble. Buy your seed, fertilizer, chemicals and fuel; get fields planted; and hope weather, equipment, the grain market or other uncontrollable circumstances don’t deal you a bad hand.
But Jon Scheve has learned to even the odds. By using activity-based management to measure costs against potential profit, his chips are much more secure.
Activity-based management uses past production activities and costs as benchmarks to adjust current activities and goals. Scheve, who farms with his father in Beatrice, Neb., uses activity- or cost-based management to pinpoint his cost of production before he starts making any corn or soybean sales. And he contends that budgeting input costs isn’t that hard.
“I think farmers can estimate their inputs not only for the coming year, but for the next three years,” says Scheve, who’s also a commodities consultant with Superior Feed Ingredients, Waconia, Minn. “On our farm, we look at the costs from the last three years to make estimates.” He finds costs are fairly steady or increase at consistent rates.
For example, Scheve says his seed and chemical costs increase an average of 3% to 5% annually. “For corn, I estimate seed costs at $70 per acre. Chemicals are another $70 per acre,” he explains. “So, with a 5% increase estimate per year, it means a $7-per-acre cost increase [0.05 x $140 = $7]. Assuming a 175-bushel-per-acre yield, it’s less than a 4-cents-per-bushel-per-year cost increase.”
Scheve uses anhydrous ammonia on his corn. “It costs about $70 per acre to apply,” he says. “For every $100-per-ton change in fertilizer prices, it shifts the price about $11 per acre. So assuming the 175-bushel yield, this would mean a 6-cents-per-bushel cost swing. In addition, for starter fertilizer, we figure 3 cents per bushel per move in costs per every $100 change in fertilizer costs.”
He says machinery costs are based on per-hour or per-acre costs. “We analyze all of our machinery leases or purchase prices down to how much it costs to operate each tractor, planter, combine or other equipment per acre or hour,” he says. “Historically, this expense is flat or needs to be adjusted only slightly on a three-year plan.
“We compare this to custom rates in the area and try to budget that type of number to cover unexpected repair costs. We treat our machinery as a separate profit center on the farm. We don’t have to use our own equipment. We could hire out everything we do.”
Scheve says although fuel prices are down, they are a low percentage of overall operation costs. “For our farm, a 50-cent change in fuel prices equates to about a 2.5-cents-per-bushel change in production costs.”
The bottom line
Based upon his input estimates, Scheve has these per-bushel cost ranges for his corn budget: Machinery costs likely won’t change for the next year or two; seed and chemicals will likely increase 4 to 8 cents; fertilizer would range from −10 to +20 cents; and fuel plus or minus10 cents.
“Our total input cost range would be 50 cents, based on −20 to +30 cents per bushel,” he says. “It could be narrowed by “10 to 20 cents if I purchase fertilizer earlier in the year.”
He measures that against a 52-week trading range of December 2016 corn futures, which in mid-June was from $3.60 to $4.40 per bushel “With a budget that has a potential range of about 50 cents and a market that has the potential to move over 80 cents, I think it’s clear why it’s better to plan ahead,” Scheve says.
John McNutt, a CPA with Latta Harris in Iowa, says activity-based management goes with activity-based costing and budgeting.
“If a farmer has good accrual financial records, which show what it costs to raise corn, soybeans or other crops and livestock, that gives him a lot of power in marketing for a profit. He’s not selling to fool himself; he has a clear view of his production costs.”
For instance, if a reasonable corn price is available, a grower may know he or she has room to spend an extra $10 per acre on fertilizer to boost yields. “But if he doesn’t already know his current input costs, then makes a wild guess and buys more fertilizer, he might already have that added $10 in his costs,” McNutt says.
Farm management software can assist farmers with activity-based management. “Whether a farmer uses such software or not, it requires a lot of work and can be time-consuming. But by keeping good records on past and current inputs, it’s not rocket science,” he says.
Danny Klinefelter, Texas A&M economist, encourages use of activity-based management. “This means looking at both the cost of and returns to specific attributes, practices, locations and enterprises. With margins being compressed, the winners are going to be those who know their strengths and weaknesses, which are reflected in very specific costs and returns. This not only improves decision-making, it also improves timing — knowing not only what to do, but when to do it. Both of these, I believe, will become critical to the long-term sustainability of farms, and it will happen sooner than we expect.”
Stalcup writes from Amarillo, Texas.