UNL CropWatch March 15, 2011: Strategies for Coping with Higher Input Costs
March 15, 2011
Recent increases in crop prices have brought smiles to the faces of many Nebraska farmers, but there is another side to this coin. Along with higher crop prices have come considerable increases in input prices. As the spring planting season nears, farmers need to evaluate their costs and strategies to manage these costs.
Several tools and strategies can be used to manage these higher input costs, depending on the crop and farm location. Although crop revenue is increasing, it remains important to be a least-cost producer who manages the ever tightening margin between income and production costs.
Prepaid Inputs. For several years, farmers have prepaid inputs as an income tax management strategy, but now they're also using this as a cost control strategy. Seed, fertilizer, fuel, chemical, and other suppliers are willing to offer discounts and attractive financing terms for purchases made well before planting. When making early purchases, it is important to consider the additional costs of the money needed to secure these purchases.
For fuel, many dealers allow farmers to split price fuel for planting and harvesting and sign contracts for future delivery. Some will give the farm a better price if there is storage for a season’s worth of fuel to be delivered during the off season. Full tanker loads that can be delivered to the farm also may be discounted. Fertilizer dealers may offer some of the same opportunities for early delivery and/or truckload quantities.
Bulk Containers. Buying seed or crop protection chemicals in bulk containers also can mean lower prices.
Group Purchasing Power. In recent years, its become increasingly popular for producers to pool input purchases to get price breaks. The key is to get a pool large enough to get a quantity discount, such as with tanker loads or bulk containers. Before making purchases be sure that everyone in the pool agrees to how the distribution of purchases will be managed.
Competitive Pricing. Now is the time to renew acquaintances with all of the input providers in your region. The competition among dealers is increasing and it's good business to see who can deliver your products at the most competitive price and in a timely manner. Although many farms have long-standing relationships with specific suppliers, offering the competitor an opportunity to make a bid ensures you're getting the best deal, and potentially can strengthen existing relationships or develop new ones.
Price Guarantees. With the present opportunities to price the 2011 crop through this spring, locking in input prices will help lock down profit margins. If input prices are unsure, the margins could be much smaller when the crop is actually delivered and sold after harvest. With increasing volatility and more interest in forward marketing, early pricing of inputs is becoming more important to the bottom line.
Remember, the best managers know that it's cirtical to the long-term profitability of the farm that all parts of the operation be carefully managed. Controlling input costs will be every bit as critical as making timely crop marketing decisions.
Former Extension Agricultural Economist
Panhandle REC, Scottsbluff