Farm managers outline steps to save you cash.
Many financially astute American producers still have the don't-spend-it-until-you-need-to philosophy of buying inputs for the farm. However, increasingly in today's economy, farmers are evaluating not only what inputs they'll buy but when and how to make transactions to take advantage of cost-saving opportunities. Farm managers across five states shared a few simple and straightforward buying strategies that they use with their landowner clients. If you're not using these strategies already, you might consider giving some of them a try.
It pays to plan. Each of the farm managers interviewed say that by the first of December they will have determined most of the inputs needed for the upcoming growing season. In some cases, they already have made purchases of seed, chemicals and fertilizer to secure early pay discounts.
"Planning early means we have more buying options available, while planning after December results in fewer payment options and potentially more costs," explains Seth Baker, a farm manager with Union Planters Bank in Decatur, IL. Baker manages roughly 12,000 acres across 12 Illinois counties.
Finalizing plans by December also offers Baker's clients potential tax advantages. Depending upon the crop quality and commodity prices, making input purchases before January 1 helps even out his clients' taxes and income levels year to year.
Locking in leases. A considerable amount of money is tied up in leases, and now is a good time to rethink how you negotiate them. Farm managers use a variety of leases and encourage growers to evaluate their options with landowners. For many, the traditional 50-50 lease is no longer desirable.
"It's just not competitive here," says Howard Halderman, president, Halderman Farm Management, Wabash, IN. "One farm I manage nets about $80 to $100 an acre in revenue using the traditional 50-50 lease, whereas we can rent that same land on the open market for substantially more dollars."
As a result, some of his clients have adopted a one-third custom, one-third cash, and one-third 50-50 lease. He believes that in this approach the farmer and landowner share more equally in the financial gain or loss year to year.
Another lease option Halderman likes is one where the farmer pays a lower cash base but then pays the landowner a bonus if the crop grown yields above a certain level and prices are favorable. In a bad production year, or one with low prices, no additional fee is charged so the land tenant isn't buried financially.
In Ohio, farm manager Lee Vermeer still sees a predominantly 50-50 lease at work. However, he says custom farming is beginning to take root, with about 5% of his customers opting for this arrangement. "It works well here for both parties," says Vermeer, area vice president, Farmers National Company, Irwin, OH. "It helps the farmer's cash flow, and he doesn't have to take out a loan for operating costs. And there usually is a good return from the crop for the landowner." Vermeer says farmers who are interested in this strategy should check the custom rate guide for their state, which is available through most county extension offices, to identify standard fee arrangements.
He adds that large-farm operators who rent from numerous landlords prefer to cash rent. They find the accounting involved with share rents to be burdensome. "If you're farming 10 farms on a share basis, keeping track of the records for each landlord can be a hassle," he acknowledges. "Some growers prefer cash rents to simplify operations."
In Iowa, farm manager Larry Pohlman says landowners and farmer operators have made considerable modifications in crop share and custom leases. Typically, the owner provides all basic inputs while the operator provides machinery and labor. They share crop insurance and commercial storage, based on the agreed-upon crop split, with the operator's share varying from 25 to 30%, depending upon land quality. "This lease arrangement is generally more favorable to the operator than custom on average, and the owner gains with reduced cash outlay and increased operator involvement with the crop compared to custom," says Pohlman, area farm manager for Hertz Farm Management, Nevada, IA. "This type of lease also is an excellent supplement to an operator who has cash rent and owned land to reduce cash outlay."
Pay early to save. Every farm manager interviewed identifies this buying strategy as one farmers need to tap into if at all possible. Early purchases of seed and chemicals can result in significant out-of-pocket savings. Retail herbicide prices in January are typically 10 to 15% less than they are in June. For seed, January purchases receive at least an 8% discount off April or May prices when planting starts.
Most farmers are fully aware of early pay discount opportunities and want to take advantage of them. Cash availability is almost always their limiting factor. Farm manager Ron Schultz says that, in most situations, he would encourage farmers to take a short-term loan or tap into an already established line of credit to secure the early pay discounts. He also acknowledges that some growers are reluctant to tap into lines of credit so soon. His advice: Do it anyway.
"It's a simple matter of determining the time value of money and running the numbers," says Schultz, area farm manager for The Pathfinder Company, Fremont, NE. "Most usually, the cost to borrow the money is considerably cheaper than paying those higher prices for inputs later in the spring."
Factoring in fertility. Vermeer encourages producers to negotiate fertilizer prices in the fall, ahead of harvest, even if applications aren't made until spring. However, he believes fall applications usually work to farmers' advantage financially. Depending on the weather, applications often can be made into early December. "Coops and dealerships usually offer better prices in the fall to improve their cash-flow situation, and applications then help even out their workload," he says.
For fall anhydrous applications, growers may need to use a stabilizer, but Vermeer says the fall-application savings should offset that additional cash outlay. He estimates that savings on 28% nitrogen run about $20/ton in the fall, a 15% savings on spring prices. Fall prices for anhydrous also run about 15% less. Increased natural gas prices may impact farmers' savings opportunities this year, but Vermeer encourages growers to work the numbers on this option.
Invest in diagnostics. Simple soil tests also can lower fertilizer costs, but most growers don't test their soils adequately, says Schultz. He encourages farmers, at the very least, to test one-fourth of each farm every year, so that all acreage is tested over a four-year period. "It will pay you to do the testing," he says. "You can't afford to spend money on inputs not needed."
He adds that grid sampling (taking a reading on your soil fertility every 2 1/2 acres via a global positioning satellite and using variable rate technology) is even better. Although many growers don't use this technology yet, it's the way of the future, Schultz says.
Internet emphasis. Farm managers are using the Internet to purchase some inputs, with emphasis on the word "some." Halderman recommends that producers use the Internet to purchase only those products that require little or no service, and he mentions fertilizer and herbicides, such as Roundup, as examples.
"Most farmers know how to use Roundup, they know what to expect from it, and they probably don't require a lot of service with it," he explains.
He says some farmers in his area use Web sites such as XSAg.com and Rooster.com to bid on products once their local suppliers have established prices. "I know a couple of growers who bid $17 or $18 a gallon for Roundup, which was a pretty good price," he notes, adding that he doesn't know whether the bid was accepted.
Both Halderman and Pohlman caution against buying products over the Internet that may require local service. "Don't sacrifice important relationships with your local suppliers just to save a few pennies," advises Pohlman. "If you've found a significantly lower price, tell your supplier and try to negotiate for that lower price."
Pooling power. Farm managers usually secure excellent input prices for their landowner clients by pooling acreage and using that large number as a negotiating tool with suppliers. The same strategy will work for farmers who informally band together to pool acreage and purchases. However, most farmers are independent by nature and don't use this buying tool because of the communication and coordination that must occur - both in determining the inputs needed and the negotiating process required with suppliers. Still, pooling is power when it comes to making purchases, and farm managers recommend it.
Seed savings with a twist. Raising seed beans offers a roundabout kind of input savings, but a substantial savings opportunity nonetheless, contends Bret Cude, a senior farm manager with Farmers National Company, Nashville, IL. Cude says raising seed beans
v Reduces expenses: Growers can get their production seed at a lower cost and won't have to pay for it until the seed beans are delivered, essentially securing free financing with no interest fees;
v Results in out-of-pocket savings the following year: Some of the production plants, though not all, will provide seed corn at a reduced cost to their growers for the next growing season.
When Cude tallies the premiums and other financial benefits, he says growers can save, or make, depending on how you want to look at it, between $30 and $40/acre by producing seed beans. The downside is that seed beans are labor-intensive. Equipment must be exceptionally clean for planting and harvest, and bean fields must be weed-free in between. Plus, because of location, not every grower can take advantage of this opportunity. But Cude says those who can, should. He believes that, as production plants develop new programs, they will offer their best opportunities to those growers with whom they already work.
"The best part about this opportunity is this isn't some new crop," he adds. "Farmers know how to be successful with soybeans."