Management strategies in low-income times

EAST PEORIA, Ill. — Corn and soybean prices for this marketing year are projected below the 20-year average, but expenses aren’t following the trend.

Strategies to help farmers navigate the current economic conditions were highlighted at the recent Illinois Farm Economics Summit presented by the University of Illinois farmdoc team.

“Corn and soybean production is a commodity-based business with very little ways of differentiating oneself in the marketplace. Among the ways to differentiate are non-GMO soybeans and food-grade corn,” said Gary Schnitkey, U of I professor of farm management and Soybean Industry Chair in Agricultural Strategy.

“Our data would show that those are more profitable than commodity-based. The problem is those premiums come and go.”

The data also indicates marketing with on-farm storage has a positive return “from both the storage side and basis improvements, as well as some drying costs,” Schnitkey said.

“Obviously, the big problem with this is if you don’t have on-farm storage now, there’s a considerable outlay for that and if you have a lot of on-farm storage, you might not be sitting in this room now and instead be in a truck line.”

Transitioning to organic is another option for farmers looking for new markets with a premium.

“Organic does have more returns. The issue is it’s more difficult. If everybody goes into it, those premiums would go away and it would just be a commodity again,” Schnitkey said.

He then offered a trio of strategies to consider in tougher farm economic times.

Low-Cost Producer

The first strategy to consider in a low-price climate is being a low-cost producer through efficiency.

According to Farm Business Farm Management data from high-productivity farms in central Illinois from 2013 to 2022, the financial advantage between the highest-profit grain farms, the high third, and lower-profit grain farms, the low third, is: $41 for land, $40 for power and equipment, $36 for crop inputs, $15 for labor, $10 for building and $14 for other savings. That’s $156 per acre the highest profit farms save compared to the lowest-profit farms.

“The other thing that we notice comes from Precision Conservation Management looking at prevention practices that have environmental conservation impacts and their returns,” Schnitkey noted.

“The same producers that apply above university nitrogen recommended rates also typically have higher pesticide costs and more tillage passes, all of which raises costs,” he said.

“I would say that being a low-cost producer is an attitude. Particularly when we’re in the environment we’re in now, lowering nitrogen rates could lower yields a bit. We don’t want to maximize yields. We want to maximize returns.

“We continue to see the university-recommended rates that are in that 180 pounds of nitrogen per acre typically having the highest operator returns — not necessarily the highest yields, but the returns more than offset the benefits in terms of higher yields.

“A nitrogen application rate is the most important N management decision for determining profitability. Nitrogen application timing becomes more important in lower commodity price years.”

The PCM higher profit fields in lower-income years moved away from fall-applied and higher N rates relative to the final yield to more application nearer to planting and lower nitrogen rates.

“You can say the same thing for phosphorus and potassium rates and keeping those within the soil test levels. My guess is most soils in this state are well above maintenance levels, and this would be a good year to reduce those,” Schnitkey said. “Reduced tillage passes also tend to be more profitable, particularly in lower-return years.

“Consider delaying capital purchases, particularly for machinery, which most people are already doing, primarily because of tax implications. Also, prioritize purchases that have the potential to increase revenue in the future including tile, farmland and on-farm storage.”

Reassess Rental Strategies

When talking about land rental strategies, farmers have to have a marketing approach and how the farm is going to attract potential new landowners.

“If you want to rent more land, there has to be a way of having a marketing approach,” Schnitkey said.

“Having a farm résumé and sales pitch is a great idea. How does this farm differ from other farms? How much will or can the farmer pay for cash rent farmland? The average farmer return over the last 24 years is $100 per acre.”

Schnitkey noted a philosophy he’s heard from farmers.

“‘The farm will break even in most years and waiting for the high-return years.’ That would be years like 2007-2008, 2010-2012 and 2020-2022,’” he said.

“Here’s the problem. When will the high-income years happen again? It could be next year, it could be six years from now or 10 years from now.

“Problem 2, profits are extremely low now and projected to continue. So, what we have is a very good financial position and now we’re going to see it come down.

“What are you going to do with high-rent farmland? If you’re on an established farm with a stable land base and have a small portion, say 10%, is high cash rent farmland, why are we doing this? Why do we keep doing this?

“If you’re a younger operator relying on more rented land with high cash rents, how long can this go on waiting for that next higher return?

“We expanded the farmland base with more rented land in the 1990s. With cash rents where they’re at right now, many times that’s not generating positive cash flow — we likely have to think of other ways of growing that operation, whether that’s on-farm businesses or something else, but some other way of generating cash.”

Government Payments

Schnitkey recommended that farmers take every available government payment, including Agriculture Risk Coverage or Price Loss Coverage and crop insurance.

“I would suggest you stick with federally subsidized products. Most farmers are taking Revenue Protection at a high coverage level, and think about adding Enhanced Coverage Option because this year the subsidy levels are going to go from 44% to 60%. That’s going to cut the cost of those products roughly in half. That’s not a game changer, but you might want to take a look at it,” he said.

“As those ad hoc federal payment programs come on board — and there’s a very good chance they will continue — take them.

“There are also farming practice payments for soil health and from Natural Resources Conservation Service. Take those as they become available. They’re another source of revenue.”