4 ways to manage fixed costs

NRCS photo A farmer applies anhydrous ammonia to a field. In an economic downturn, those farmers who can lower their fixed costs will be in a better position, says Evan Hahn, vice president of credit and agribusiness at Farm Credit Mid-America.

LOUISVILLE, Ky. — Farmers who can lower their fixed costs — land, equipment and labor — can better survive economic downturns.

“It’s very important in times like this, when we see commodity prices moving lower,” said Evan Hahn, vice president of credit and agribusiness at Farm Credit Mid-America.

“As variable costs have moved down, albeit not as quickly as people hoped for, those with higher fixed costs will take longer before they can experience profitable levels.

“The longer the operator has higher fixed costs, it will eat into their working capital and cause other operational issues for them.”

Hahn shared four ways to manage fixed costs.

Keep Accurate Records

“If farmers keep really good records on a field-by-field, or acre-by-acre, perspective, then they can identify those areas where fixed costs may be higher or out of line,” Hahn said.

“Once they can do that, it will help them make decisions to lower their fixed costs. Whether that’s adjusting rents, adjusting owned acres, adjusting their equipment mix or looking at their labor.”

Find The Right Equipment Balance

“This is an ideal time for farmers to analyze equipment utilization,” Hahn said.

“If a piece of equipment hasn’t been turned on or hooked up in over a year, it probably isn’t crucial to the operation. Liquidating these underutilized assets can help reduce costs.

“However, make sure that equipment sales do not adversely impact the overall efficiency of your operation. The key here is to find the right balance. Aim to have the equipment you need to get the job done efficiently, but not be so over-equipped that assets sit idle.”

Assess Land Profitability

“Whether rented or owned, every acre is unique,” Hahn said. “Some will be more profitable than others.

“When looking at land costs, begin with an honest assessment of the profitability of each acre. Review past farm records to determine if rented land is covering at least the variable costs plus the rent payment.

“Armed with acre-by-acre numbers, you’ll be better prepared to negotiate rental rates with landlords to ensure your operation remains profitable as commodity prices lower.”

Look At Family Living Expenses

“Part of the labor piece on a grain farm is family living,” Hahn said. “At times it’s a difficult area to address.

“One option we’ve offered to customers, at times, is to cut a check out of their farm account into their personal account every month. They can use that to manage family living cost and try to get an idea of what that truly is to see if adjustments need to be made.”

Erica Quinlan can be reached at 800-426-9438, ext. 193, or equinlan@agrinews-pubs.com. Follow her on Twitter at: @AgNews_Quinlan.

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