2008 Crop Year: Another Record Breaker?

But don’t forget, your expenses could be as well

By Andy Swenson, NDSU Extension Service Farm Management Specialist
and Betsy Jensen, Ag Commodity Instructor, NCTC-FBM

The 2007 crop year was a record profit year for many farmers, even though many commodities were sold prior to the major rallies. When creating budgets and cash flows for the 2008 crop year, it appears that 2008 will be another record breaker.  Can lightning really strike the same place twice?

Despite all the headlines of record profits and high commodity prices, the expense side of the equation cannot be forgotten.  Andy Swenson, NDSU Extension Service Farm Management Specialist, projects that total direct cash costs per acre will increase, on average, by about 30 percent. The increase in total direct and fixed costs will average about 20 percent per acre.  “For 2008, the increase in costs is stunning” says Swenson.

“Fertilizer, seed, crop insurance and fuel lead the cost hit parade, with fertilizer prices about 50 percent higher. Seed costs, particularly for small grains, have also increased.” 

With all of the increases in expenses, it also increases the risk of a major loss.  Your investment in just the basics; seed, fertilizer, chemicals, and fuel, is substantially higher than in previous years. What will a hailstorm on July 20 do to your cash flow?  Will your bank increase your line of credit to accommodate the higher input costs?  Despite the rosy outlook for 2008, the need for budgets and cash flow planning is greater than ever.  Always remember that to increase your profits, you usually end up increasing your risk as well. 

NDSU has regional crop budgets available on their website, and the Center for Farm Financial Management at the University of Minnesota has Finbin, a collection of historical financial data to get you started.  Although both sources can steer you in the right direction, it is important to recognize there is no such thing as an average farm.

The MnSCU and North Dakota Farm Business Management programs analyze whole farm and individual crop enterprises on a yearly basis.  In 2006, there were over 125 “Wheat on owned land” enterprises analyzed in the Red River Valley and the direct expenses per acre ranged from $81.55 to $162.21.  Remember this is owned ground so no land investment is included in those numbers. The repair bills on those wheat fields ranged from $4.53 to $27.86 per acre. Fuel and oil expenses ranged from $7.05 to $18.77.    There is an average farm somewhere out there, but the range of numbers is much wider than most farmers realize. Similar results can be found for every area of the state, every crop enterprise, and for every expense.   When you use generic averages instead of your actual, personal expenses, you could be making a dangerously wrong assumption.   

Another common error when creating cash flows and budgets is confusing the “price needed to cash flow” with the “cost of production.” The cost of production does not include your family living expenses, or your principle payments.  The cost of production numbers make is possible to compare a 35 year old farmer just starting out with land and machinery debt and 4 kids to feed, to a 65 year old nearly retired farmer with little debt and no kids at home.  Clearly their cash flow needs are dramatically different, but knowing the bare bones cost of production can help determine if your farm has some weaknesses that can be fixed.  Both numbers are important to know, but when comparing numbers, make sure to compare apples to apples.

“Projected returns are the best that I have seen in 17 years of preparing crop budgets” says Swenson.  “All crops should be profitable, except for oats and rye.” Of course Mother Nature also has a small role to play in 2008 profitability, but she is uncontrollable. The 2008 crop year should be profitable, and spending some time to create budgets, cash flows and marketing plans will help protect your large investment in the 2008 crop. 

Crop Budget Information Online

Finbin: www.finbin.umn.edu  

NDSU budgets:  www.ag.ndsu.edu/crops/finance.html

SDSU budgets: http://econ.sdstate.edu/Extension/otherlinks.htm