Farming in 2016: Cut costs, be flexible

Farming in 2016: Cut costs, be flexible

How low can you grow in 2016? (part one of two)

In eastern Iowa, Randy Mather lowered his cash rent 10% for his 2015 crops and hopes for another reduction for 2016.

"I rent some ground from family members, and we set our family rental rate annually. A year-ago December we dropped the rental rate 10%," says Mather. "When I am setting rental rates, I am concerned with what I can sell my crop for. I do know selling 2015 corn is going to be 40 to 50 cents cheaper than 2014 corn."

Related: The right way to attract new land

Iowa farmer Randy Mather lowered cash rent costs 10% in 2015 and hopes to see another such reduction for 2016. Photo by KC McGinnis.

The key for Mather and other farmers is to cut costs to survive the next few years on corn under $4 a bushel and soybeans under $9. The problem is fixed and variable costs: 10 years ago, the last time prices were this low, cash rent in Iowa was about half what it is today.

Grain prices could jump next year or the year after, but economists looking at long-term price cycles and supply-and-demand fundamentals see low prices continuing.

On the plus side, farmers entered this low-price cycle with low debt loads and cash in the bank. The trick will be maintaining cash flow, managing debt and keeping a cash balance in these lean times.

Cut costs now
"Generally, corn prices below $4 will cause losses given the current nonland costs and average cash rents. Similarly, soybean prices below $9 will lead to losses," according to University of Illinois ag economist Gary Schnitkey, as reported in U of I's farmdoc Daily.

To avoid losses, Schnitkey says farmers should strive to cut costs by $100 an acre, which he admits would be an unprecedented reduction. In addition to lowering cash rent, reducing fertilizer and pesticide applications can save money, but this adds risk later of having to rebuild soil nutrients and control increased pest pressure on crops.

In cost cutting, cash rent is often the starting point because it is the largest per-acre expense in the crop budget, and lowering those costs will have an immediate impact on the bottom line.

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In Iowa, cash rent for row crops ranges from $250 to $300 an acre; in Illinois it is about $295. On a 200-bushel corn yield, that is about $1.25 to $1.50 per bushel of the cost to produce that corn. In 2006 Iowa farmland rent was about $155 per acre.

The hard part is actually getting rent lowered. Mather is more fortunate than others in that his landlords are family members who also farm, so they know the economics. That makes the annual negotiations a bit easier, but most farmers do not have that advantage.

"Landlords do not want rent to go down, but we have to start shrinking expenses someplace, and that is one of the places where it is probably going to start," says Kent Ruppert, a farm financial adviser in Maquoketa, Iowa, just south of Dubuque.

"What I have seen in general is about a 10% reduction going into the next year. That is what local farmers are discussing or trying to accomplish. I have seen, in some areas, a $20 to $30 [per acre] reduction," he says.

Related: Manage costs wisely

As we have written many times, the task of negotiating lower rent is made easier if farmers maintain a good working relationship with their landlords. That includes regular meetings to discuss economics, yields, revenue and input costs. 

"Land is a negotiable part of this process," says Carl Zulauf, ag economist and retired Ohio State University professor. "For many landlords, if you present a persuasive case to them, you can move them."

In addition to lowering rent, Zulauf advocates setting up what he calls "flex-rent deals," whereby the farmer and landlord agree on a base rent that includes revenue, yield or other targets. When the targets are met or exceeded, a premium is paid to the landlord.

"Farm management people for years have talked about flex rent. It's a very useful dialogue and something to consider going forward as it would add a fair amount of risk sharing to both the farmer and landlord," he says.

Part two: Lower fertilizer, fuel costs may provide some relief

TAGS: Soybean
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