Know your costs zone by zone to stay profitable

Lacklustre crop prices have many growers looking to reduce costs, but they need to be careful not to trim areas that keep their cost of unit production down, says Markus Braaten of AgriTrend.

“If we’re changing our fertility program in such a way that we are actually reducing our yields in parts of these fields where we have the potential to grow them, we actually drive that cost of unit production up,” Braaten said.

He said some costs are fixed to cover the same amount of acres, such as fuel, herbicide and often seed.

“Typically what happens when we get into situations where we are trying to find dollars, we might save ourselves some dollars per acre and cost ourselves tens of thousands of dollars on a farm level, simply because we turned our fertility down too much,” Braaten said.

During a December presentation at the Farm Forum Event in Calgary, Braaten said it’s useful for growers to understand the cost of unit production of every bushel they grow, including the variability of the cost of unit production across their fields.

“Given the fact that we have varying field potential and we’re rolling out with a flat rate kind of fertility program, our cost structure is static,” Braaten said.

“It’s the same, but we’re amortizing that cost over different bushels, so it’s important to understand what that cost structure is by zone.”

He said farmers sell everything by the bushel, so if there is a cost of unit production in areas of the field that is outside of the ideal range, then growers may be losing money on every bushel they grow in those areas.

“It’s not unusual for us to have parts of the field that are never going to produce enough wheat or corn or canola to ever be profitable given today’s commodity pricing and expense structure,” Braaten said.

He said growers should either reduce inputs or even abandon less productive parts of their field to increase their profitability because these inflate the cost of unit production of the entire farm.

“Maybe we should be looking at abandoning parts of the field that we understand has significant limitations that I can’t overcome,” Braaten said.

“It’s just purely a matter of, ‘I’m not going to spend money in parts of the field where I don’t anticipate any kind of return.’ ”

Growers have historically managed for the average, which means they have been drawing down the fertility in areas that grow more than their field average yields and increasing the fertility in areas that tend to grow less than field average yields.

Growers should instead reduce inputs in areas with a high cost of unit production and invest them where there is a greater yield potential.

“We can take advantage of that and tweak on our fertility program a little bit, turn it down in those parts of the field where our productivity is compromised and take advantage of some of that fertility that is there,” he said.

“And conversely we can turn up the fertility in those parts of the field where we have just better inherent yield potential. And again, a greater likelihood for a return on investment is going to come from those parts of the field that have better inherent productivity.”

Braaten said that when low commodity prices prompt growers to reduce fertilizer costs, they should begin in areas that have a high cost of unit production. However, they should be careful not to reduce inputs in growing zones that lower the cost of unit production of their farm because this will be detrimental to their returns, he added.

“I’m using the same amount of fuel to roll over each one of these acres, I’m putting the same amount of herbicide on every single one of these acres,” he said.

“Often times I’m putting the same amount of seed on each one of these acres, so I need to make sure that I’m not compromising on things that are actually driving productivity.”

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