With input prices skyrocketing, many farmers are looking at their budgets and finding places to cut corners. The market environment is adding to uncertain times ahead, and Eddie Stout, Vice President of Ag Lending at First National Bank of Ft. Smith, Ark., said things are not going to ease up just yet, but with careful planning you can offset some of the challenges.
How will input prices continue to challenge farmers' bottom line profit?
"Right now is an unusual circumstance. Commodity prices are retreating right now at harvest. The fuel and fertilizer and seed prices are all reflective of the increased commodity price. For instance, corn right now is trading for $5.56. I'd say 90 days ago it was close to $8. Everything remaining relative, as income price increased, commodity price increased, but when money's already been spent on the crop and commodity prices come down the profit margin shrinks substantially. There'll be a void where the current price is unless and there are some farmers who hedge their crops,” Stout said.
He noted that in the area, probably up to 50 percent of farmers will keep their bottom line stable, but people who depend on the cash market will lose more the cheaper corn becomes.
“Corn is the base for everything. It is the base ingredient in all feed. Ideally, as commodities and fuel gets cheaper, the price on the retail side gets cheaper, ideally.”
But we all know that’s not always the case. Stout cited feedlots as a way to see the effect corn has on other prices.
“For instance, let's say that there were some guys who put 1,000 head (in the feedlot) at one time, weighing 700 lbs. Then they pull them off in 150 days. Right now live cattle are trading for $1.06 and it takes them 150 to 180 days to get them to the optimal weight, that first 90 days paying $8 a bushel for corn, the cost of gain was $75.
When they are weighing 1,250 lbs. and the price of corn has dropped, so has that cost of gain, which is going to drive the fat cattle down. There is a period of time that the profit margin will be very stressed.
“The cheaper corn gets, the cheaper the cost of gain, the cheaper the cash market has got to be. Right now a 550 lb. steer or bull calf costs $1.15/lb. But so does a 700 lb steer.”
Stout stressed that area producers must take advantage of the 200 lb. per gain they could recognize if they held them longer.
“But to hold them, you’ve gotta have the grass or the feed. Then producers must ask, “Is the juice worth the squeeze?”
Stout says maybe. With feed at $280 per ton, he asked, “do you take your money now? The cheaper corn, the cheaper cost of gain, the more feedlots are willing to pay for them, but unfortunately, vice versa is true as well.
What advice do you have to manage inputs and costs?
“Drive that tractor another year. Basically. Common sense would tell you if you were paying $1.50 per gas and at the same wages now you’re burning $4 gas, we need to burn less. Maintain the status quo right now. Farmers will be forced to, especially as far as equipment.”
How can farmers best manage their books to stay on top of inputs v. outputs?
“As far as records, (farmers must) keep the very best set of records they possibly can, and when they approach a lender and want an analysis done on a three to five year track record, develop some trends to show how input costs have increased, but income hasn't. We can find things in history that are relative to where we at now. But we all must be on very strict budgets, and stay on it. People just have to dig in and get by another year. A lot of times farmers upgrade equipment out of self defense out of taxes and get the benefit of the depreciation. I don't think they can stand that this year. There'll be other losses that will offset opportunity, and it could be actual losses. Farmer’s expenses will increase enough that they won't show a profit anyway. But, as the old saying is, "grin and bear it.””
We always do.
