Farm Horizons, May 2008

Use lessons learned in 2007

Myron Oftedahl
Hutchinson Coop, Lester Prairie

The year 2007 is now history, taxes are done, we know if the farm made money, but what information can we gather about 2007?

As I look at the returns from the South West and South Central Farm Business Management Programs I see that net farm income rose 29 percent from 2006. Income from government payments decreased 46 percent, so more of the farm income came from the farm operation itself.

When we break down net farm income into profitability groups, the average group’s net income did rise about 26 percent over 2006. Meanwhile, the high profit group saw a similar percentage increase to the average group, but represented a significant increase in actual dollars as compared to the average.

The high profitability group showed net farm income of $400,000. At the same time, the low profitability group actually lost about $10,000 for 2007.

However, this extra income was not all profit, because at the same time cash expenses increased 14 percent for the average farm over the previous year.

If we look at individual enterprises, we can begin to see where some of the increased expenses occurred. In corn, if I look at the five major cash expenses, I see that rent increased by 8 percent, or $10 an acre, across the average acre for 2007. Fertilizer costs increased by 11 percent, or $8.70 an acre. Corn chemical costs went down for 2007 by $1.06 an acre, due to more use of herbicide technologies such as glyphosate or Liberty tolerance, and drying costs decreased by $6.33 an acre, due to drier corn at harvest. Seed costs followed fertilizer and rent and increased by 11 percent, or $6.48 an acre.

To summarize – corn, rent, and fertilizer costs were higher than ‘06, although fertilizer costs were tempered for those producers who had applied fertilizer in the fall of ‘06 for the ‘07 crop. The seed cost increase is primarily due to more use of seed traits such as Bt, Herbicide technology, and corn rootworm resistance.

Soybeans demonstrate similar numbers, with the increase in rental costs and seed cost increases. Soybean seed costs increased by 8 percent over ‘06, and chemical costs were also higher, probably due to more use of fungicides and some aphid and spider mite control.

Dairy enterprises had a banner year in 2007. Cow numbers were up slightly, with production staying virtually the same. However, the average price received for milk was $13.36 in 2006, and $18.64 in 2007. This was offset by increased expenses, just as in the crop enterprises. The cost of producing 100 pounds of milk increased from $12.89 in 2006 to $15.66 for 2007.

Hog and beef producers were doing OK until the last two months of 2007, when high corn and concentrate prices kicked in and used up any profits that the enterprise had generated.

Both hog and beef producers lost money when compared to 2006, unless the producer had locked in sufficient feed and concentrate for 2007 and had control of the feed costs.

Many hog producers saw some very large death losses, due to a severe disease outbreak.

What is ahead for 2008? As WCCO says, “That’s a good question,” but I can safely say that we will see higher rents again, much higher fertilizer costs, in some cases, fertilizer costs may nearly double.

I haven’t touched on fuel costs yet, but fuel costs will continue to be a concern, and I would expect to see further increases for 2008. I think seed costs will continue to climb as acceptance of seed technologies increases, and as these technologies are used on more acres.

I expect to see higher chemical costs on both corn and soybeans in 2008, because of the higher cost of glyphosate, and the increased marketing emphasis on fungicides, etc. Sure, it is easier to justify the fungicide cost because it only takes one or two bushels to pay for it, but does the research show that it is a sound investment or is it a hope and a prayer?

Livestock operations are going to be very tight for profits, due to the huge increase in feed costs. Hogs and beef, in particular, because the prices received have not risen enough or at all to compensate for the increased costs. I think dairy will be about average, because milk prices have softened some, as compared to 2007. Livestock producers will need to watch for opportunities to protect feed costs.

The year 2007 showed us a very wide spread between the low profit producer and the high profit producer. I think that this will continue in 2008, and there could be an even wider gap between the two groups.

It will be essential for producers to contain expenses, while maximizing income. As the volatility continues, we must remain vigilant, it is too easy to relax when we have good commodity prices. All of a sudden you may find yourself spending a lot more money on this crop than you had planned, and if anything changes, you could be in the red in a hurry.

The year 2007 should have taught us that we can make a profit with volatile prices, and I think that we need to take those lessons into 2008 and turn it up a notch.

Now is the time to pay more attention to your operation, not relax. If you need to replace a piece of equipment, this was probably a good time to do so, but if you had to borrow all of the money to do so, then maybe it isn’t a good idea.

The year 2008 is not the year to keep up with the neighbor; it will be a year to control expenses, maximize income, and control debt.

Have a profitable 2008!

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