A couple years ago, I attended a short course on a statistical analysis package for Excel. At the end of the course, James Richardson, the Texas A&M University professor who wrote the program, worked the class through an exhaustive farm budgeting example. The final step involved using the program to recommend an optimum crop mix given the example’s assumptions.
I was dumbfounded when the program recommended a crop rotation of two years of corn followed by one year of soybeans. This was already the standard rotation in the area of Iowa where the example’s inputs originated. However, this fact did not bias the program’s assumptions — two years of corn followed by one year of soybeans is simply the most profitable crop mix there.
I did little to hide my astonishment, but Richardson reminded me farmers are smart and intuitively understand cost of production issues. He was right. I see the evidence every day working with my crop insurance clients and the tens of thousands of producers we represent at National Sorghum Producers. Feeding, fueling and clothing the world requires brains.
That being said, even the brightest minds can benefit from comparing notes from time to time, especially in this farm economic downturn. Through our NSP farm management consulting business, Elite Ag Management, I helped a group of producers do that at the end of January during an extensive cost workshop on the Gulf Coast.
We started off with about 40 producers. Armed with a spreadsheet that included lines for every cost from cellphones to seed, we discussed and argued over each financial aspect of production for four crops — corn, cotton, sorghum and wheat — in four regions. The exercise took eight hours, but by the end we had rock-solid crop budgets for an area covering more than 20 million acres of cropland.
A colleague and I spent the entire next day crunching numbers. We dissected the budgets in a number of different ways, building bar charts to compare crops across regions and regions across crops, and developing matrices to illustrate sensitivities and break-even levels at various costs, prices and yields.
We reconvened with the producer group on the third day. No surprise: The results were not pretty. Few cropping situations showed positive returns this year. After reviewing the numbers, my recommendation concurred with these producers’ intuition: pick the best “bad” option and try to hold down costs where possible.
You may not have eight hours to spend arguing about costs of production, and I completely understand. As Richardson This year, make the best of the bad pointed out, farmers understand most of these cost factors already. But in margin environments like the one we are in today, bouncing ideas around a roomful of peers can be very helpful.
Many good producers in the room that first day wondered if they had thought of everything possible to hold costs down. Another needed ammunition for business discussions. He told me everyone he works with needs to understand the gravity of the current farm financial situation, and showing them his numbers alone was not going to be persuasive enough.
Costs are hugely important, particularly this year. You do not have to spend eight hours straight, but you do need a good understanding of all the factors involved. Start at the kitchen table or the coffee shop. Discuss strategy and concerns with others. After you emerge, smiling, you will look back from the current farm economy and be glad you did.
Chris's columns appear in Kansas Farmer magazine monthly. You can view this column published in the online edition here.