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Turning a Profit It takes above average yields, keeping control of production costs and making the most of marketing opportunities By Gary Moran Area crop producers will face production costs more than 10% higher in 2005 compared to last year, mostly because of higher fertilizer and fuel expenses, according to crop budgets prepared by Andrew Swenson, extension farm management specialist at North Dakota State University. Turning a profit and finding a crop rotation that is both agronomically sound and profitable may be a challenge. Projected budgets indicate that spring wheat, durum and canola show a return to labor and management of minus $10 to minus $30 in most of North Dakota’s nine crop budget regions (the budgets can be found online at www.ext.nodak.edu/extpubs/ecguides.htm). Edible beans and sunflowers are projected to show the best return. NDSU points out that acreage limitations exist for dry beans under the 2002 farm bill: the general rule is dry bean acres cannot be planted on base acres. If a farm or producer has dry bean history, dry beans can be planted on base acres, but government payments on those acres will be forfeited. Malting barley is close to breaking even only in the western regions and in the south central region. Although it may be more risky, winter wheat shows either a profit or a small loss in all regions outside of the Red River Valley. Oats and rye are lowest in the profit picture with projected losses ranging from $30 to $70 per acre. However, Swenson points out, these projections are based on averages, using average yields from 1997 to 2003 with the low and high yield years omitted. Obviously, not every operation has an average yield. Some do a lot better than average. Others do a lot worse. What can producers do to “beat” the projections and turn a profit? Some operators will, with a combination of above average yields, keeping control of production costs and making the most of marketing opportunities. Swenson says revenue is the most volatile and the hardest to predict, being a function of both yields and price. Price in particular is largely a guess, but yield often hinges on the unpredictable as well. But, getting an above average yield is the first step to doing better than gloomy profit projections. Then marketing can make a big difference, but getting a better than average price might be easier said than done. Producers need to be alert and prepared for opportunities to capture upturns in the market. He says the two things that appear most important to profitability of the total farm operation are crop selection and marketing. NDSU farm management specialist Dwight Aakre points out that while the calculated crop budgets are based on average market prices, the 2004 crop year saw high premiums paid for high protein wheat. Wheat at 15% and higher protein could get a premium of over $1 per bushel. The next marketing year might not be as high, but there is always a premium for high protein wheat, he says. The input side of the equation can also be variable. Fertilizer is the highest single input cost, and high prices for fertilizer make soil testing essential to make sure application rates are not higher than necessary. David Franzen, extension soil scientist at NDSU, says it is important to get more efficiency out of nitrogen applications. Especially with no-till, the easy way to apply nitrogen is to broadcast urea and hope for timely rains. However, there is a risk of volatility, and crop residue may tie up some of the nitrogen. Producers may need to figure out a way to get nitrogen sitting on top of stubble into the soil so it can benefit the crop. Even with conventional tillage it may be necessary to take steps to get urea into the soil as soon as possible. It takes both time and money to apply nitrogen at planting time, Franzen says, but it may pay off in greater nitrogen efficiency. Especially in a year with high fertilizer prices and tight margins, soil testing is very important, Franzen says. He also reminds producers to take advantage of any nitrogen credits from legume crops like field peas or soybeans. This may amount to an equivalent of 40 pounds of nitrogen per acre, and it will not show up in a soil test. He cautions that, especially in years when it is difficult to pencil out profits, products that purport to be “miracle” fertilizer applications appear on the market. Nitrogen and phosphorus are what do the job, he says, not overpriced formulations. In particular, micronutrients are an input that is rarely needed and just represent an unnecessary expense. Whole farm approach Ron Dvergsten, administrator of Minnesota’s Farm Business Management program, says an overall attitude of looking at where money is being spent in the operation is vital. This includes keeping the number of tillage operations to a minimum and taking a good look at fuel and machinery costs before going out, considering if a method other than tillage might cost less. The three major inputs – fuel, fertilizer and machinery – are all costing more this year, he says, and growers need to develop the habit of spending money only when it can provide a good economic return. This habit might include looking for the best value and prepaying for inputs when a favorable price can be locked in. Analysis of management program records show that profitable farm operations have higher yields than less profitable ones, but they actually spend less per acre on inputs, Dvergsten says. Good overall management means keeping costs down without sacrificing yield, he says. Swenson also stresses the importance of attention to details. Farmers who do well tend to have good yields while applying inputs wisely, he says. Timeliness of operations is especially important – get the crop in on time, and when harvest ready, get it off quickly. He also stresses the importance of timely application of chemicals and scouting crops carefully so any needed applications can be applied when they will do the most good. Aakre says there is not much that can be done about machinery costs in the short term, and that if timeliness is a concern it might pay to use custom work to get seeding done quickly or to preserve higher quality at harvest. Commodity prices and yields are extremely difficult to predict from one year to the next, says Swenson, and when estimating your own crop budgets, it is critical to evaluate crop insurance and consider the financial downside risk, as well as the upside potential of crop rotation and management decisions. Tips for Managing High Fertilizer Prices
–U of M Extension Soil Scientist George Rehm, NDSU extension soils specialist David Franzen Estimating Your ’05 Breakeven Price George Flaskerud, North Dakota State University extension ag economist, says that breakeven price varies by region and by farm. However, it can generally be calculated by dividing total cost (farm and family living expenses) by average or expected yield to arrive at a per-bushel-yield price. Flaskerud gives the following examples for wheat, corn, and soybeans. The estimates include a “survival price” and an “acceptable price.” The survival price is an estimate of income needed to recover farm and family living cash expenses, excluding farm program payments. The acceptable price accounts for indirect costs as well, including interest paid on land and equipment, depreciation, and other overhead expenses. He bases total cash costs figured under the survival price, and total economic costs under the acceptable price, on assumptions used by NDSU to establish crop budget projections for 2005, which can be found online at www.ext.nodak.edu/extpubs/ecguides.htm. In these estimates, Flaskerud uses a figure of $20/acre for family living based on an estimated average of $40,000 and average cropland of 2,000 acres. The cash cost accounts for owned and rented land and assumes 70% of land is rented. Of course, these are only estimates and averages to be used as examples to formulate your own calculations. See baseline farm cost estimates in the NDSU crop budget projections. The table of crop price information from NDSU can be used as a guide in setting price expectations, preparing budgets and cash flow projections for 2005 production. The short-term planning prices should not be used for planning capital purchases or expansion alternatives that extend beyond the next production year, since current supply/demand conditions may not be an accurate indicator of future trends. The long-term planning prices should be used in evaluating alternative plans that affect the farm business for more than one year. The long-term planning prices were derived from annual average price forecasts made by the Food and Agricultural Policy Research Institute (FAPRI). The U.S. price estimates reported in the 2004 Baseline Briefing Paper, November 2004 were adjusted, using historical relationships (10-year Olympic average), to reflect North Dakota farm gate prices. Historical prices are reported for reference. Prices for 2004 are averages to date. The historical crop prices were obtained from North Dakota Agricultural Statistics. Example, Breakeven Price for Wheat, Northern Red River Valley Survival price:
Acceptable price:
Short-Term and Long-Term Agricultural Planning Prices For North Dakota, NDSU Extension Service
Mktg Year Spring Durum Oats Feed Malt- Oil Non- Corn Soy- Canola Flax- Winter Dry Alfalfa Other Rye Pota- (bu) (bu) (bu) (bu) (bu) (cwt) (cwt) (bu) (bu) (cwt) (bu) (bu) (cwt) (ton) (ton) (bu) (cwt) 1999-00 $2.85 $2.58 $0.90 $1.39 $2.13 $6.56 $13.50 $1.59 $4.19 $7.50 $3.79 $2.49 $13.90 $43.00 $29.00 $1.44 $5.60 2000-01 $2.79 $2.48 $0.86 $1.37 $1.86 $6.06 $11.30 $1.65 $4.23 $6.55 $3.31 $2.25 $12.60 $46.00 $31.00 $1.31 $5.45 2001-02 $2.76 $2.89 $1.63 $1.47 $2.03 $9.39 $11.70 $1.87 $4.05 $8.80 $4.29 $2.39 $20.40 $50.00 $35.50 $1.55 $6.00 2002-03 $3.74 $4.01 $1.68 $1.89 $2.92 $11.60 $13.80 $2.16 $5.32 $10.60 $5.77 $3.54 $14.30 $70.00 $49.00 $2.69 $6.25 2003-04 $3.57 $3.93 $1.33 $1.95 $2.78 $11.30 $15.70 $2.37 $6.62 $9.90 $5.88 $3.01 $16.10 $58.00 $41.00 $2.12 $5.45 Historic avg. $3.14 $3.18 $1.28 $1.61 $2.34 $8.98 $13.20 $1.93 $4.88 $8.67 $4.61 $2.74 $15.46 $53.40 $37.10 $1.82 $5.75 2004-05 $3.35 $3.83 $1.11 $1.50 $2.41 $11.96 $17.74 $2.17 $6.02 $11.40 $7.35 $2.87 $23.61 $63.89 $46.35 $1.96 $5.03 2005-06 short-term $3.35 $3.70 $1.24 $1.65 $2.20 $12.70 $17.20 $1.90 $4.60 $10.00 $5.50* $3.05 $17.50 $55.00 $36.00 $1.80 $5.00 2006-07 $3.41 $3.75 $1.32 $1.81 $2.46 $11.57 $16.66 $2.05 $4.60* $10.09 $5.25* $3.09 $2.08 2007-08 $3.48 $3.82 $1.35 $1.81 $2.47 $11.80 $17.00 $2.07 $4.71 $10.30 $5.25* $3.14 $2.12 2008-09 $3.55 $3.90 $1.37 $1.81 $2.47 $11.98 $17.25 $2.08 $4.86 $10.45 $5.25* $3.21 $2.16 2009-10 $3.60 $3.96 $1.38 $1.81 $2.47 $12.09 $17.42 $2.09 $4.92 $10.56 $5.25* $3.26 $2.20 2010-11 $3.68 $4.04 $1.39 $1.82 $2.48 $12.22 $17.59 $2.12 $4.94 $10.66 $5.25* $3.33 $2.24 Projected long- $3.54 $3.90 $1.36 $1.81 $2.48 $11.94 $17.19 $2.09 $4.82 $10.41 $5.25 $3.21 N.A. N.A. N.A. $2.16 N.A. Breakeven Wheat Prices by Region of ND, 2005 Crop
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