How to Create a Reliable Input Budget
January 24, 2020
Just a few years ago, planning for next year’s crop didn’t really begin until this year’s crop was in the bin. Today, however, farmers are more likely to start thinking about crop inputs, budgets and adjusting crop management plans much earlier in the year.
Maintaining well-designed and frequently updated input budgets are important to the sustained success of any crop operation. As such, managing these budgets has become something of a year-round endeavor for farmers. It also poses an opportunity for taking full advantage of trusted banking relationships.
Managing crop inputs to minimize risk generally begins by establishing a good understanding of production costs and marketing strategies. With this basic foundation, you have a clear view into the investment you made while raising your crop, as well as the return that investment is likely to generate.
One of the trickier parts of establishing an input budget is getting a handle on variable costs. Seed, fertilizer and chemicals are three such expenses. Below are some thoughts you may consider as you and your banker work together to calculate expected costs.
Fertilizer costs are the only of the three variable input costs that have declined overall in the last five years. Diammonium Phosphate (DAP) prices, for example, went from just over $600/ton to around $425/ton between 2013 and 2017. The decline in potash prices was even sharper, going from an average of $578/ton in 2013 to $318/ton this year, according to University of Illinois agricultural and consumer economist Gary Schnitkey*.
Costs will likely be slightly higher throughout 2018, but Schnitkey expects them to remain at similar levels for the 2019 crop year. Fertilizer is a volatile industry, however, so local market conditions could create fluctuations farmers will want to plan for when preparing 2019 input budgets.
In the last four years, seed costs have remained fairly stable in much of the Midwest, and that’s likely to continue into 2019, Schnitkey says. Though they almost tripled between 2006 and 2014, prices between $115 and $120/acre have been common in the years since.
One variable to watch when gauging seed costs is both U.S. and world acreage projections. Heading into 2018, for example, U.S. acres were projected lower, but world numbers were relatively unchanged. Since seed costs tend to follow planted acreage fairly closely, slightly lower projected acreage likely means slightly lower to steady seed costs through the coming year.
Pesticide costs have increased steadily since about 2000, rising around 4 percent each year from 2000 to 2012, then leveling off between $60 and $70/acre from 2012 to 2016, Schnitkey says. After an increase to just over $70/acre in 2017, he expects pesticide costs to remain the same for the 2019 crop year.
One major factor impacting pesticide costs is herbicide resistance. In certain areas of the country, farmers will be pressured to explore alternative chemistry and different products to control weeds. If you’re in an area where there’s a lot of herbicide resistance, expect higher pesticide costs.
We can help!
Only after establishing projected expense and revenue numbers can you plan for any major changes that may need to be made in the next year. If you’re buying equipment, adjusting your land base, integrating new technology or adopting different production systems, your budget will need to accommodate the added investment. Involve your lender in the exploration of these enhancements, upgrades and changes sooner rather than later. The earlier he or she knows what's ahead, the better for avoiding unexpected revenue erosion.
Bank Iowa ag lenders work with Iowa farmers to develop comprehensive historical pictures of their farms' financial performance, as well as identify and monitor key performance indicators for their operations. By examining variable cost trends like those above and staying close to the farmers who are working hard to improve their operations, our lenders help hundreds of farm businesses across the state cut costs and improve financial performance each year. And they can do the same for you. Contact your nearest Bank Iowa ag lender today.
* Schnitkey, G. "Historic Fertilizer, Seed, and Chemical Costs with 2019 Projections." farmdoc daily (8):102, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 5, 2018.
Brian Carolan is senior lender for Bank Iowa, Iowa’s second largest family-owned financial institution. He can be reached at email@example.com. To learn more, visit www.bankiowa.bank. Member FDIC.]