BURLEY — Input costs have been tracking commodity prices for the last three years and that’s a good thing.
“For the last three years there has been a decrease in farm production input costs,” said Ben Eborn, University of Idaho regional economist. “That’s a huge, huge blessing at a time when commodity prices are not going up.”
According to the U.S. Department of Agriculture, U.S. farmers spent about $170,000 on average to raise crops and livestock in 2016, down from an average of $200,000 in 2014 when farm income also peaked. Since then, U.S. farm income has fallen to nearly half.
Idaho farmers are doing better than their counterparts thanks to a strong livestock sector, Eborn said. But if the dairy industry woes deepen, Idaho crop producers will begin to hurt also.
Hay growers are feeling the pinch of low milk prices and large hay stacks in stagnant hay prices. With the whole world overloaded with feed grains, corn and grain prices are not expected to improve.
Eborn expects to see corn prices range between $4 and $3 per bushel throughout 2014 and perhaps for several more years unless a major weather event severely reduces stocks.
“It’s a very, very straight line,” he said of the futures market charts. “I don’t think we’ll break $4 (per bushel) any time soon, maybe not even ($)3.80. That’s good for the dairy industry. They need every break they can get.”
Beef producers are also seeing a cost-price squeeze as beef prices remain below 2014 levels. Grazing costs are beginning to rise as beef herds increase in size and producers need pasture to replace rangeland that has burned or is rehabilitating.
“We get tons and tons of calls in every extension office from people looking for pasture,” Eborn said. “There is strong, strong demand for pasture.”
State grazing fees in Idaho averaged $22 per cow-calf pair in 2016, up from $20 in 2015.
Reading his silage leaves, Eborn warns producers that tough decisions need to be made in 2018 even though lower input costs are helping to reduce the pain felt by low commodity prices.
Fertilizer and chemical costs are expected to be fairly flat in 2018 after posting substantial decreases in recent years. Nitrogen fertilizer dropped 25 percent in Idaho two years ago and chemical prices declined 6 to 8 percent last year.
“There’s not much decline left in fertilizer or chemical prices,” Eborn said. For producers who are still putting their 2018 budgets together, he recommends adjusting fertilizer and chemical prices up slightly. He definitely would not plug in lower prices.
But he thinks producers can still lower their bills by shopping around and paying close attention to application practices. Studies have shown that top producers pay 20 to 25 percent less for fertilizer and chemicals than the bottom producers do.
Diesel fuel is another major cost category for Idaho producers. Fuel costs have dropped over the last three years, but Eborn thinks prices are close to the bottom. He recommends buying fuel in January, when inventories are historically highest and prices the lowest.
Many analysts expect fuel inventories to tighten during 2018, which may push prices slightly higher.
When putting UI enterprise budgets together for 2018, Eborn calculated a 3.5 to 4 percent increase in labor costs and a 2 to 5 percent increase in irrigation costs. He used an increase of 0.25 to 0.5 percent in interest rates; other analysts are plugging in a 0.5 to 1 percent bump.
“Whatever you do, try to build up your working capital,” Eborn said of the coming year. “You will be a better manager if you have a cushion.”
Machinery and land costs are the big ticket items that can make building working capital difficult. Eborn is expecting to see steady annual increases of about 3 percent in machinery costs. U.S. farmland continued to rise even after commodity prices tumbled in 2014, but Eborn thinks both land prices and rental rates will fall given the dismal profit expectations for the next few years.
One of the toughest decisions farmers have to make when evaluating rented ground is whether they can afford to keep it. There is no one answer, Eborn said. It’s largely dependent on the operator’s financial position.
“Cut costs, not corners,” he said. “Look at the entire system and look for areas to cut without affecting productivity.” He suggests identifying five things that can be done 5 percent more efficiently in 2018.
Burke Teichert, a grazing consultant, echoed that advice at the UI Range Livestock Symposium when he talked about systems thinking.
“You want to own things that are appreciating in value, not depreciating,” he said. “And you want to do it as skinny as you possibly can.”
He told ranchers there are three ways to improve profitability: increase turnover, decrease overhead and increase gross margin (total returns less total costs).
Turnover is essentially getting more units of sale from the operation and it can be hard to accomplish on a beef operation. But changing when cull cows are sold may offer an opportunity.
If you know you have older cows that need to be culled and you have the resources, wean those calves in late August. The cow is likely to weigh more in late August than she will in November plus the price may be higher. Reducing herd size in late summer also frees up feed for other animals, which may boost weaning weights for the rest of the calf crop, Tiechert said.
That’s a win-win proposition in a year when any positive contribution to the bottom line is welcome.
“We get tons and tons of calls in every extension office from people looking for pasture. There is strong, strong demand for pasture.” Ben Eborn, University of Idaho regional economist