Farming in 2016: Lower fertilizer, fuel costs may provide some relief

Farming in 2016: Lower fertilizer, fuel costs may provide some relief

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

Did you miss part one? Cut costs, be flexible

In part one of this series we told you how farmers were tightening their belts and lowering costs in anticipation of thin 2016 margins. Beyond fixed costs like land, it's time to look closer at fuel, fertilizer, seed and chemicals. Most of these cash inputs can be trimmed with smart purchase planning.

Diesel prices have tumbled with the collapse this year in crude oil prices. Propane costs have come down amid plentiful supplies. However, Illinois Farm Business Farm Management advisor Kent Ruppert says while lower fuel costs are important, they only account for savings of about a few cents per bushel.

"Every line item has seen scrutiny, and many are cut to the bone," says Indiana farmer Nick Frey. Photo by Grant Thompson

To illustrate, Illinois economist Gary Schnitkey compiled a farm cost table that shows fertilizer costs at about $130 an acre for corn and $35 for soybeans for a central Illinois field. Seed is about $120 an acre for corn and $76 for soybeans.

The timing on buying fuel and fertilizer can cut costs.

"Diesel prices fell to six-and-a-half year lows on the wholesale market, and supplies should be good this winter," says Bryce Knorr, Farm Futures senior grain market analyst. "Prices could also go lower if dire forecasts for $10 to $20 crude oil prove correct."

The best time to buy typically is the summer after planting, and during the early winter following harvest and the fall application season, says Knorr.

Knorr warns that supply chains for these products can encounter local disruptions, "so growers should avoid the temptation to be bottom pickers."

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The one input where patience may be needed is propane. Supplies are huge, but heating demand normally keeps prices higher during the winter. Look for costs to weaken into late spring and early summer unless crude oil stages an unexpected turnaround. Otherwise, smart farmers have already cut input costs, says Ruppert.

"There are some minor costs in that equation that could be put off, such as upkeep on land or buildings. But as far as general fixed costs, those are pretty much locked in," he says.

Related: Great machinery deals are tempting, but crunch the numbers first

In Indiana, corn and soybean farmer Nick Frey agrees. "Every line item has seen scrutiny, and many are cut to the bone. We continue to make fertility applications based on soil testing, but little extra."

Farmers, as a group, have been helped by entering this period of low prices with low debt loads. Acquisitions of land and machinery have been restrained. When purchases are made, it is often for used equipment, says retired Ohio State ag economist Carl Zulauf.

Iowa farmer Randy Mather says he will upgrade one of his three tractors, some of which are 20 years old, with a good used one. Frey says he's added equipment that could pay off during lean times.

"We did buy a tile plow and invested in grain handling and storage," adds Frey. "Although it doesn't seem like the best time for dispensing cash, we felt that storage and drainage are going to lead to a lot of risk mitigation and opportunity in these lean times."

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