The dramatic rise in the cost of fuel and fertilizer – and smaller increases in other input costs – have made news and helped growers sharpen their pencils to find ways to cut costs. But risk management specialist Moe Russell of Panora, Iowa, says many growers are sweating the small stuff and missing out on opportunities to make much bigger changes to their profitability picture.

“The smallest rabbit to chase is input costs, but that’s where many farmers spend 75 percent of their winter hours – negotiating with their suppliers to reduce the cost of their inputs,” says Russell, president of Russell Consulting Group. “They’d get a lot more productivity out of managing the bigger issues like machinery costs and labor.”

In fact, Russell’s review of farm expenditures on more than 350 operations in his database – covering more than 700,000 acres – reveals that managing input costs can save growers $2 to $10 per acre on average. But managing labor costs more effectively could help the bottom line by $10 to $69 per acre, and improving equipment cost management could improve profitability by $5 to $50 per acre.

At Purdue University in West Lafayette, Ind., farm business management specialist Alan Miller emphasizes that profitability comes from managing costs, not necessarily cutting them. “Every time we get into these high-pressure periods, we get people saying, ‘I’ve got to cut my costs,’” says Miller. “I like to look at it as a broader issue.  It’s really about optimization, about maximizing net return rather than minimizing costs. Optimization is about more than just what you spend.”

Increasing Productivity

“Think things through: what is the overall impact of something you do?  Will cutting one cost cause a corresponding increase in costs, or a reduction of productivity, somewhere else?” Miller continues. “Looking for ways to increase the value of inputs is just as valuable as looking at ways to limit the costs. 

Miller also points out that the value of crop inputs often extends well beyond dollar-and-cents cost calculations. Reducing the complexity of a farm operation has value; so does reducing risk, or shifting resources to more profitable chores.

“If I can spend an hour’s worth of time in the spring being able to plant instead of doing some other fieldwork, that could be worth hundreds of dollars an hour,” he notes. “If you can make decisions that increase the timeliness of the operation so you can get more crop planted during that period when you’re going to have the highest yield potential, that fact alone is going to change the profitability of the operation.”

That increase in profitability could come from an expenditure rather than some cost-cutting move, Miller says – for instance, investing in larger equipment, a new auto-guidance system, or improved seed varieties.

Scott Langkamp, head of marketing for herbicides at Syngenta Crop Protection, points out that agronomic management – selecting the right product for the situation and applying it properly in a timely way – can quickly deliver more value than a negotiating a bargain price. He cites data from an Ohio State University analysis of 35 weed control trials across the Midwest and Northeast. Researchers found that waiting until weeds were 4 inches tall to spray reduced corn yields by six percent – roughly $20 per acre based on typical yields and prices, he notes. When weeds were allowed to reach 9 inches tall before spraying, growers had already lost about $30 per acre. 

“The value of preventing weed growth with pre-emergence herbicides quickly becomes evident,” says Langkamp, “and that travels straight to the bottom line. Working with crop consultants, ag retailers and extension specialists to find the most profitable program for your operation can have a larger payoff than hunting for the last dollar per acre in cost savings.”

He points out that while fuel and fertilizer costs have jumped dramatically in the past two years, price increases for crop protection products have been relatively modest. 

“Manufacturers of crop protection products use crude oil and natural gas as raw materials, for energy to run manufacturing plants, and to transport the products,” Langkamp notes. “The chemical industry is feeling these cost increases just as farmers are. But we’ve been able to hold price increases to about three percent, on average, for Syngenta products this year.”

Work on Labor

One of the biggest – and most overlooked – components that can be managed to improve profitability is the cost of labor, says Russell. Part of the challenge is that many growers don’t have a clear idea of what their labor costs really are. That’s why it’s important to put your costs all on paper where you can see them, he says. Pencil out the value of labor by adding salaries or owners’ draw, employee wages, medical insurance costs, and Social Security contributions. 

Russell is not a proponent of the “unpaid owner labor” approach to cost management – he believes in keeping an eye on the cost of running the operation. He also recommends subtracting out the value of any labor spent managing livestock on diversified operations, allowing managers to keep their focus on the labor inputs on the cropping side of the business.

Once costs are tallied, it’s time to look at tasks, says Russell. Every farmer has three key roles – plant/production manager, financial manager and marketing manager. “Everyone has strengths and weaknesses,” he says. “Figure out what you’re good at and spend more time doing that. Then determine what you’re less good at, and hire someone to help you. You’ll find that things will get done a lot better and more professionally, and you’ll have more fun farming.”

Building a team to support vital farm functions expands the view of labor significantly. Instead of just considering the hired man who drives tractors, add agronomic advisors, accountants, crop insurance agents, and estate planners – anyone who helps you run the operation, and whose efforts in one area free you up to manage other aspects of the farm.

Once you’ve got a good look at your labor force and labor costs, combine the figure with machinery costs, suggests Russell. “You might have more equipment and less labor, or more labor and less equipment – at the end of the day, it’s the sum of the two that affects your bottom line,” he says.

Do the Math

Miller recommends computing three key financial performance measures to determine how much emphasis to place on lowering costs:

• Asset Turnover Ratio (total revenue divided by the value of the farm’s assets).   “Management decisions that increase the asset turnover ratio generally increase returns and reduce costs per unit of production,” Miller explains.  “That is, they provide a double benefit and have a high payoff as a result.”

• Operating Profit Margin Ratio (net return divided by total revenue).  “This indicates whether revenue is being consumed by farm operating costs,” he says.

• Return on Assets (asset turnover ratio times operating profit margin).  “With that relationship in mind, taking corrective action relative to one of these two drivers of operating performance will improve farm profitability, but it is valuable to know where to focus your effort,” Miller notes.  

The recipe for improvement differs by the results of the quick computations, points out Miller – doing the math can help identify where and how to make the adjustments that will help improve profitability. 

“Cutting expenditures for inputs may be exactly the wrong tactic,” he warns.  “Cost controls generally aren’t the answer when turnover is low.  However, if asset turnover is competitive, but operating margin is not, then cost cutting may be desirable.”

Like Miller, Russell is a proponent of math-based management. “The greatest asset is figuring out where you are,” Russell says. “You can’t manage what you can’t visualize.” Return on Equity (net worth increase/total equity) and Return on Assets are great tools. Benchmark the results against the best operations in the business, he says – comparing yourself to the average isn’t safe enough.

Reduce Risk

Reducing risk through marketing tactics, insurance programs, and even agronomic tactics is also an important profitability safeguard, says Miller. “Sometimes you don’t necessarily have to increase return as long as you reduce variability and cut off low-end outcomes,” he notes. “Let’s say you could manage your operation to avoid the bottom 20 percent of outcomes. Your upper limit wouldn’t change, but your lower limit would.” In a bad year, that could save the farm.

Take the time to assess your business, suggests Russell. “Capital flows to operations with good profit and a solid business plan,” he says. That takes effort, thought, and some investment. But it helps you keep your eye on the big picture – managing your investment in your business – rather than spending too much time on smaller issues.

“Your job is to maximize the bottom line,” Russell reminds growers. “You can’t sit in front of a wood stove and say, ‘give me warmth.’ You’ve got to put something in.”

Syngenta is a world-leading agribusiness committed to sustainable agriculture through innovative research and technology. The company is a leader in crop protection, and ranks third in the high-value commercial seeds market. Sales in 2005 were approximately $8.1 billion.  Syngenta employs more than 19,000 people in over 90 countries. Syngenta is listed on the Swiss stock exchange (SYNN) and in New York (SYT).