Your mission: cut fixed costs

A profitable farm depends on how well fixed costs are managed, says farm management expert

Brent Gloy, a U.S. agriculture economist, has three messages for Canadian farmers.

Get fixed costs under control, reduce fixed costs and take steps to cut fixed costs.

Gloy hammered home his fixed cost mantra in February at Crop Connect, an ag industry conference held in Winnipeg.

Canadian growers should learn a lesson from south of the border, he said. With grain and oilseed values in the tank, many U.S. farmers are suffering because they paid $300,000 for a new tractor or $8,000 an acre for land five years ago.

“There are a lot of farmers feeling a lot of financial stress,” said Gloy, who runs a service called Agricultural Economic Insights and farms in southwestern Nebraska.

“They made bad decisions when times were good and now they’re going to pay a price for those questionable decisions.”

Grain prices are stronger north of the border thanks to the 75 cent Canadian dollar, but this is not a time for complacency. Gloy said it’s the perfect time to take a hard look at production costs.

“If (the) exchange rate were to change … your fixed costs are what’s going to hurt you. Be very careful about building your fixed costs in this environment,” said Gloy, who was formerly an agricultural economist at Cornell University.

“You’re all on the same (global) cycle. Exchange rates may make it feel different right now, but the reality is the world has added a lot of acres.”

Wheat is a perfect example. Russia and Ukraine are producing more wheat than ever, driving up global stocks and pushing prices down.

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“We grow a lot of wheat on our farm. Right now it is horrific, economically,” Gloy said.

“In most cases we’re getting to the point where revenues barely exceed marginal costs.”

He said fixed costs are around 50 percent of total costs on U.S. grain farms.

Estimates suggest fixed costs are a smaller percentage in Western Canada. For example, Manitoba Agriculture estimates the following crop production costs to grow spring wheat:

  • Operating costs, such as seed and fertilizer, are $192.30 per acre.
  • Fixed costs, land investment, machinery depreciation, ma-chinery investment and storage are $122.17 per acre.

Fixed costs for most crops represent about a third of production costs, said Darren Bond, Manitoba Agriculture’s farm management specialist.

However, Bond agreed with Gloy’s position on equipment and land.

“How a producer manages fixed costs often decides whether they are profitable or not. It is a huge factor,” he said. “I think that’s where the most ground can be made for cutting costs.”

Although the cost of seed, fertilizer, fuel and pesticides may be larger than fixed costs, most producers know the prices and are good at managing operating costs.

As a result, potential savings on that side of the ledger may be marginal, Bond said.

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Manitoba Agriculture estimates show that land represents 18 percent of total costs on the average farm, while equipment is 12 percent.

However, there is no such thing as an “average farm,” and there’s tremendous variability from farm to farm in the amount of money tied up in land and equipment.

Producers with a new fleet of equipment will have substantially higher depreciation and debt than producers running 20-year-old tractors because equipment prices have jumped in the last five years.

“Four wheel drives to air drills, sprayers and combines have all seen prices increase,” Bond said.

“That’s where we see the fixed cost side has really gone up.”

Getting a handle on fixed costs doesn’t mean farmers should stop buying equipment or land, Gloy said.

However, more time should be dedicated to the economics of combines, tractors and farm expansion.

“Look at the people (U.S. farmers) who got themselves in trouble. What did they do? They blew their working capital,” he said.

“Fixed costs are the hardest to get down. They take the most effort to figure out, in part because they’re hard to estimate…. If you have another hour of your time and you can spend it anywhere, spend it on this.”

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