Wednesday, June 17, 2015

A few details might help...

FJ's Paul Neiffer has an obligatory interview on what expenses to cut to make your budget work. It is wonderfully vague. He suggests:

  1. Living expenses
  2. Farmland and machinery
  3. Inputs
I have to say, this column does not break much new ground. I mean, have none of us thought about those categories that make up ~90% of our budget? But rather than just criticize, here's where I would aim the axe. And I am.
  1. Professional services: Cripes, most of us have ag and business degrees. Software has made everything from accounting to analysis learnable with reasonable effort. Stop paying for people to do stuff you can do yourself.
    • Accounting. Learn QuickBooks. You might actually begin to understand more intuitively how you earn a living. It is liberating to not ask someone what to do with every dollar. To those who claim that accountants earn save more than they cost, then pay them on commission rather than per hour. If you are worried about doing your taxes, try TurboTax and remember all the IRS asks is that you don't lie - not that you are exactly right. Besides IRS budget cuts means your odds of an audit are vanishingly small. Be honest, you'll be OK.  It is not rocket surgery.
    • Crop consultants: get off your backside and look at your own fields. Besides the threshold points for spraying something expensive get pretty high when corn is $3. Your fields won't wither if you skip grid sampling for 4 years. You'll be surprised how much advice you've been getting to spend more money was simply to justify advisor fees.
    • Market advisors: the rule about passive marketing that is slowly emptying Wall Street also applies to commodities.  The average is not to be despised. Sell 1/12 every 12th of the month (or a date of your own choosing). Seriously.
  2. P and K: Keep the pH right and draw down some of the over-application you've done the last few years. You know how hard it is to raise the K test on a field. It also goes down as slowly. The only way fertilizer will get a market signal is if we say no. The handwringers at the university cannot talk rationally about this due to strong conflicts of interest and blame avoidance. But they are on tenure - you are not.
  3. Refinance: you may have missed the absolute bottom, but if you can roll long and mid-term debt into one mortgage with longer amortization, you may buy time and working capital. We are still near record low rates. 
  4. Additives: from seed coatings to fungicides - leave out everything except what you absolutely know you need: grass and broadleaf control. Remember the rule of "extras": if they really work, they are guaranteed. Apply at pesticides at 75-80% label rates. Yeah - I know you CAN'T do that and get the chem rep to give you a check, but it makes real money. Oddly, it is probably better for the environment as well. We may have a short window in rootworm and certainly corn borer before they make a comeback. Check for silk-clipping to plan next year's insecticide. Use residuals on corn, with as-needed glyphosate. Get the resistant broadleaves in corn - you can't leave them for soy.
  5. Seed: go conventional corn. Drop 3-4K/A seed rates - the curve is really flat at 36,000. Try half-rate rootworm insecticide on some. Tune your planter, plant more carefully and cut soy seed rates. Shop harder and know how much yield every trait needs to earn to pay for itself. Make offers for seed, instead of asking prices. Share price info with friends.
  6. Labor: for cash grain farms, you may be paying for year-round labor when you need 12 weeks. I realize you'll have to mow your own roads and your machinery won't be washed as often, but permanent help is rapidly becoming a luxury. I appreciate loyalty to employees, but you have to put a real dollar value on that emotion. Besides, I think there may be a sudden rise in the number of just-retired neighbors looking for SS supplements.
  7. Machinery: this is obvious, but hard to do anything about. Adjust your "maximum-hours" threshold - 3000 hours on a well-kept tractor is not what it was 20 years ago. However, if you need to lighten up, get that stuff sold tomorrow. Remember, if you cut back on labor, you may not need as many tractors.
  8. Rents: here is the curious thing. While most will fixate on $50/A from a landowner, this may be wiser to recoup elsewhere. And always remember, if your competitors expect to solve their cashflow problem via rents instead of slimming down their own expenses, opportunities arise. It happened in the '80s. Make this the penultimate target. Fight the farm-size fixation by making sure all fields pay their way. Nobody likes to give up ground, but if you do, don't burn bridges. If you don't think this slump will last long, find a way to cut elsewhere to hang on to ground, but make that decision out loud to make it real.
  9. Family living: accountants jump on this first, but it has gradually become a much smaller percentage of overall expenses. Making your family miserable for $5000/year when you could just stop the fungicide could yield a better life result. Do NOT cancel a modest vacation unless you have exhausted the above remedies. You will need your brain and family team at full ability, and downtime is a necessary ingredient. Living expenses are not money wasted in most cases.
We have confused doing what we are told with doing what really helps. The first step to managing this profit squeeze will be to reassert some of the self-reliance that worked in previous downturns. Things will not be perfect. But perfect is something we can't afford anymore.

Our ship could soon be in extremis, I suggest. The usual recipes for changes may not be enough. Breaking old habits and patterns can mean the difference in outcomes. Keep in mind that any outside help, like handouts from the government, should be bonuses, not lifesavers.

There are solid reasons to strongly disagree with these recommendations on one point of another. But the need to generate your own should be obvious to all but the wealthiest producers.


Anonymous said...

Some real good advice for Farmers at every stage. No matter how good profits are/have been you still have too keep an eye on the expense line. I fully agree in not cutting out vacations as I always feel re-newed after a holiday and never have regreted any dollars spent on holidays/family time. Glad too see incoming making a come back .regards-kevin

Anonymous said...

Good details! Plenty of the broad categories to cut but devil is in the details. Will be some pain along the way but better little now than lots later! Steve H.

Anonymous said...

Also glad to see you posting again. Tom T