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Managing Higher Input Costs Consider adjusting yield goals, land rent arrangements By Gary Moran, Tracy Sayler Most northern crop producers are probably looking at $5 to $15 per acre increases in fuel, fertilizer and repair costs for 2006, substantially increasing costs of production. These increases mean producers need to look at all production practices to find places to cut costs, says Dwight Aakre, extension farm management specialist at North Dakota State University. Aakre anticipates a 20% increase in fertilizer costs, on average. Most of the increase is in higher nitrogen costs, but other nutrients will cost more as well. Aakre notes that nitrogen fertilizer production is increasing faster than demand, which at some point should temper price increases, and maybe even result in lower prices. Prices will remain high at least through 2006, however. Fuel costs are estimated to be up about 25% (see table for estimate of additional cost of field operations at various diesel price levels). Cost of repairs is estimated to be up about 10%, a result of both higher prices for repairs and the probability that higher input costs will slow down equipment replacement. Additional Cost of Field Operations Due to Higher Diesel Fuel Price
2. The second column shows the estimated fuel costs per acre based on an approximate price of diesel fuel at the time the latest custom rate survey was conducted. 3. The remaining columns show the additional fuel cost per acre at different prices per gallon. Find the column closest to the price in question and add that amount to the average custom rate shown in the circular “Custom Farm Work Rates on North Dakota Farms, 2004.” Probability of Crop Yields for Burleigh County
Probability of Crop Yields for Cass County
The increase in direct costs of production for spring wheat amounts to about $10 per acre in the southern Red River Valley, or about 25 cents per bushel. Soybean direct costs are estimated to increase about $4.35 per acre, or 13 cents per bushel. The lower increase in direct costs for soybean, mostly a factor of lower fertilizer costs for soybeans, could encourage more acreage going from wheat to soybeans, says Aakre. Also, producers have a good chance of recouping the 13 cents per bushel unit cost for soybeans in marketing, but finding an additional 25 cents per bushel for wheat will be more difficult. Higher input costs give growers good reason to question fertilizing at levels to produce much higher than average yields. But on the other hand, Aakre said, growers should not overreact and cut fertilizer inputs too far. Skimping too much on fertilizer will almost guarantee a mediocre crop, he says, and revenue from a mediocre crop won’t meet higher costs of production. Grain prices are not likely to change much up or down, so producers need to make up higher production costs with higher yields or lower costs. Producers need to evaluate past practices and analyze marginal costs and returns. Traditional marginal analysis that says profit is maximized when marginal cost equals marginal revenue is great in theory, he says, but not so easy in real life. A producer can’t assume that the input-output relationship (ie, increased inputs will mean increased yield) is known because of yield variability – it’s really not possible to know in advance what yields will be because of weather and other factors during the growing season. Thus, growers should consider past yield history in establishing yield goals and nutrient requirements. See yield probability tables for Burleigh and Cass Counties in N.D., with Burleigh data based on yields in that county from 1982-2004, and yields in Cass from 1983-2004. There is a 50% probability of getting an average yield – about 48 bushels per acre of hard red spring wheat – in Cass County, for example. The probability of getting 56 bushels per acre is only 20%, while the probability of getting at least 40 bushels per acre is 80%. When input costs are low, or when crop prices are high, shooting for a high yield goal might be a good decision. But when input costs are high, backing off 10% on the yield goal may make sense, says Aakre. There are other production costs to be evaluated, including early season fungicide applications on wheat (the need for which can vary by variety), pre-harvest Roundup applications on wheat , micronutrients on soybeans, foliar nitrogen application to boost wheat protein, and Roundup Ready versus conventional soybeans. Negotiating land rent
Land rent is the largest component of total production costs, says Aakre, yet less than one-third of rented acres are re-negotiated each year, and land rents seldom go down (see table of average cash rents for four N.D. counties from 1989 to 2005). He says there are some areas where lower cash rents would be justified, but the fact is there are always upward pressures. Perhaps the best chance is to negotiate a flexible plan so the land owner assumes some of the risk but also has a chance for higher rent income in good years. This type of arrangement may prove helpful for land owners as well, looking to attract land renters. Unlike a crop-share lease, landowners aren’t subject to self-employment taxes under a flexible-cash lease. And, like a fixed-cash lease, the tenant doesn’t have to keep track of the landowner’s share of expenses. Nor does the landowner have to make grain marketing decisions. An alternative might be a “Base Rent Plus” arrangement – base rent plus a rate per bushel above the base yield (see flex rent and base rent plus examples). Consult with a business attorney or tax specialist for more information. Also see the following online sources of information: Ohio State University flex-rent backgrounder -- University of Nebraska information on flexible cash leasing -- http://ianrpubs.unl.edu/farmmgt/ec829.htm Colorado State University bulletin Flexible-Cash Crop Lease Agreements bulletin -- Kansas State University land lease decision making tools and forms -- www .agmanager.info/farmmgt/land/lease/default.asp Iowa State University free lease forms -- |
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