In 2021 America’s farmers are facing the dichotomy of expected higher revenue (primarily from retail increases) coupled with higher input costs (mainly from fertilizer and feeds). No one is completely certain how this post-pandemic(wishful thinking?) year and new administration’s policies will affect consumer purchasing and farm labor costs. It could be shaping up for a year of profit declines that demand creative cost-saving strategies.
To make the most in this uncertain economic environment, you’re likely combing your 2021 budget and looking for ways to reduce expenses. As you review your budget line-items start by asking yourself three questions about each expenditure:
- Is the expense/investment important to my long-term goals?
Think of important expenses/investments as items that are fundamental to your enterprise’s short-term cash flow but also long-term viability. Don’t just cover today. Looking ahead, what type of business do you want to have built in 15-20 years?
Feed and stock may fall into this category for immediate cash-flow purposes, but so do longer-term investments in equipment or infrastructure upgrades that provide ongoing benefits, especially if you are looking to sell or hand over your operation to a new generation. Keep a long-view of the horizon.
- Is the expense controllable?
Some farm expenses are beyond our control – or at least seem so. Inputs like fertilizer, fuel, utilities, and power represent variable but seemingly uncontrollable costs. You can’t do much to change the price at the pump. But while you might not be able to impact their cost, often you do have the ability to affect your consumption.
- What’s the timeline of the expense’s effect?
Understanding the return timeline, especially for major expenses, is critical. Some cost-cutting measures are quick fixes with immediate effects like reducing seeding rates or fertilizer use. But others have a slower return and can accrue savings over time.
Here are eight ways you might be able to save on your farm’s expenses in 2021:
- Re-evaluate seed traits and sourcing. If you plant row crops, consider if you really need the latest high-tech (and high cost) hybrids. While additional traits can provide yield protection, they don’t contribute to yield. Often sticking to just one or two traits is sufficient to maintain a profitable yield without paying for the latest genetic releases. And if you’re opting for simpler varieties, shop your seed sourcing. You may find notable cost savings from an alternative supplier. Do the homework.
- Negotiate or reconsider high cash rents. If you’re facing steadily increasing rent costs on particular fields, re-evaluate if those fields are truly worth the cost. Could you find a less expensive alternative or even do without the field and maintain your margins by saving the production costs? It’s a dramatic change but it could offer both short-term savings and long-term gain as you look for other land lease options.
- Emphasize equipment maintenance. Capital investments can be significant in both cost and impact. When you commit to an investment in new equipment, you need to get the most out of its lifespan. Extend your equipment’s longevity by establishing and following a strict maintenance program. This is easier said than done during busy seasons, so make a plan you can stick to.Fuel-powered equipment maintenance is an obvious necessity, but farm equipment maintenance also includes crop drying and storage, animal house tightness, ventilation cleaning, and insulation. Inspecting and servicing motors and belts at regular intervals will keep this essential equipment performing at its peak efficiency longer and extend its cost amortization over time.
- Improve your conservation management practices. Improving your management practices of crop residue, integrated pest management, and irrigation or livestock water could reveal hidden savings opportunities on labor, fuel, and equipment without dramatically impacting your farm system. There are a wealth of online resources and regular workshops covering topics on no or low-till strategies, cover cropping, and irrigation conservation or on-demand livestock water. Contact your agronomist, local Extension agent, or U.S. Department of Agriculture’s National Resource Conservation Service (USDA-NRCS) office for more information on optimizing your conservation management approaches. As a bonus, many of these programs are eligible for cost-sharing (see #6).
- Control your energy costs by converting to solar power. Solar power systems have come a long way in the amount of power they generate and their longevity. Solar power offers the dual benefit of utility savings and a potential revenue source by selling back to the power grid. Put your livestock barns and outbuildings to work controlling variable utility costs and potentially adding a new revenue stream.The infrastructure investment of a solar power system may seem out of reach until you consider all of the solar incentives for farmers. First, they are depreciable, so you can write them off just like any new heavy equipment. Second, they are a cost-shared expense. The majority of installation costs are often covered for you from USDA REAP grants, federal Investment Tax Credit, NRCS EQIP and other local or municipal incentives. And if you’re not facing a steep tax bill this year or next, remember that the Investment Tax Credit can be rolled over to future tax returns.Ag Solar specializes in farm-based solar power systems. We have a team of experts dedicated to navigating the array of local and industry-specific financial incentives for you. Their expertise will help maximize your return on this forward-thinking investment with payback periods as short as three to five years.
- Investigate cost-share programs for large investments. The USDA, FSA, and NRCS offer many shared expense programs that could make farm improvements more attainable. Both NRCS’s EQIP and CSP offers are updated with the annual U.S. Farm Bill. When considering farm improvement projects, check with your local agent to see what offers you might be eligible for. Better yet, set a time each year to meet with your local representatives to review new and changing program offerings. You may find a payment partner for needed infrastructure improvements.
- Refinance balloon or expiring loans. Interest rates are about as uncertain as commodity markets. If you have loans coming due in the near future, it could be beneficial to lock in rates before they change. Consult your tax advisor for write-off implications but there’s no sense spending a dollar to save 25 cents. Check with your lenders regularly to see if your loan position could be improved and ask if they offer rate change notifications.
- Scrutinize inputs. Anything you buy onto the farm is a hard cost. For row-crop farmers, nitrogen fertilizer is likely one of your highest-cost inputs. The expense coupled with a plant’s limited ability to uptake nitrogen makes it a profit sinkhole. Optimizing your nutrient management could benefit both your bottom line and local water quality (see #3 for NRCS programs). You also may want to consider new or alternative cover crop rotations to offset input costs, especially nitrogen.Above all, revisit the maximized return rates for your crop’s nitrogen and other nutrient needs. Applying beyond these levels is costly to you and the environment for no demonstrated return.
Unpredictability seems to be common for business these days. Surviving and even growing despite uncertainty depends on controlling the controllable. Finding cost efficiencies on the farm takes a combination of creativity and commitment but can pay significant dividends. Stable cash flow and incremental profit are possible for those who are persistent.