By Paul Kuntz
In the world of grain farming, we often do a gross margin analysis. In my practice, this is looking at the grain revenue less fertilizer, chemical and seed costs. This is the gross margin that has to pay all the other bills and make all the payments. This money is what you live on and also what grows your farm.
The amount of your gross margin is affected by yields, fluctuating grain prices and the cost of your inputs. For the most part, we do not have a lot of control in this area. We can improve our agronomy and our marketing skills, but a drought is a drought and cannot be changed. And a market crash is a market crash; we cannot prevent them.
Our fixed costs are where we do have control. Or do we?
My clients like to tell me, “That is the lowest my costs can be. There is nothing else I can do.” A lot of this is the perception of their situation and a desire to keep things as is.
There are areas where it is difficult to change. If you have more seeding power than you need, you may not be able to make it perfect. If your drill can seed 6,000 acres and you have 9,000 acres, you need two drills. With two drills, you can seed 12,000, but the problem is you do not have 12,000 acres, you have 9,000 acres. On paper, we can make changes to correct the payments to match the acres, but the reality is, you may not be able to do that in real life. The same goes for your sprayer and harvesting equipment.
Then you have the neighbour you rent land from. They have told you many times, “We are not selling the land; you can rent it for as long as you want.” Then they show up one winter day and announce, “We want to sell our land.” As a producer farming their land for years, you feel obligated to buy it. You tell yourself they are not making any more land. You tell yourself if you don’t buy it, you will never get another chance to own it. You end up making a major real estate purchase you didn’t plan on.
The easiest way to correct the imbalance of money going out the door is to get the proper amount of acres. This can cause another problem with fixed costs. If all the farmers are looking to add land, rent becomes inflated. We desperately need those acres to get our cost per acre down. Land that should rent for $50/acre based on productivity ends up being rented for $100/acre because three farms want it. All of this becomes a race to the bottom.
I am seeing fixed costs for farms balloon. The reasons vary, but for the most part, it is equipment costs, land purchases and rising rental agreements. Another reason is really good crops and some great grain prices. They have made all the increased costs seem in line. The problem with that structure is great crops and high grain prices cannot be guaranteed, but the cash outflow is. Any hiccup in production or price will have negative effects.
In 2024, most of my clients on the east side of Saskatchewan suffered lower yields in canola. The other crops had strong yields but canola was down. The yields achieved by producers were not terrible; they were just off from other years. Producers who normally grow 45 bushels per acre only grew 36 bushels per acre. The yield of 36 bushels per acre is not a disaster, but when you build a budget around 45 bushels/acre, it can hurt. Most producers devote anywhere from 40 to 55 per cent of their total acres to canola. If you shave off 20 per cent of the yield on half your acres, there will be an impact. If you budgeted $14/bushel but the market drops to $12/bushel, you have lost another 14 per cent on the price side.
This type of event can put a farm in a negative cash position because more will go out than come in. If this happens only once every five years, you can build up working capital to absorb a cash loss. If this happens a few years in a row, you can have some permanent financial damage to the farm.
With the cost of equipment and what we are willing to pay for land, we have squeezed every last penny out. Our farms now have to run on peak performance as well as peak marketing just to break even. This is not a sustainable business.
We need to know what our cash outflow is beyond fertilizer, chemical and seed costs. We need to know the amount of our loan payments. We need to know what our bin leases cost. We need good estimates for machinery repair costs. We need to know how much it costs to run our farm, not just so we can try to plan the revenue accordingly, but also so we know when we are heading towards a wreck. In order to fix a wreck, we need to know how big it is.
There are insurances available to help shoulder the burden of these losses. AgriStability will most likely be the first to pay out as production and grain prices drop. Private insurance like GARS (which I am an advisor for) can also kick in if you have a high enough offer. Provincial crop insurances most likely will not be involved because, as you can see from the above example, the yield loss was only 20 per cent and you need a bigger drop than 20 per cent to begin collecting.
Regardless of the insurance product, there is most likely a scenario where you do not generate enough revenue to pay the bills, but you also do not trigger a claim from any available insurance.
The best mitigation strategy against this type of situation is to have lower fixed costs per acre. We need to look at the revenue our farms have generated per acre on a five- to 10-year average. If your farm has averaged $475/acre in revenue and your fertilizer, chemical and seed costs are $200, you need to make sure that your overall fixed costs are less than $275. This will insure your greatest chance at long-term success.
How you keep your fixed costs in line is up to you. There are many adjustments that can be made. The first is to take a deep dive into machinery costs. How much machinery do you have? Do you have a spare 4WD tractor? Is that necessary? Are you running an auger with a $300,000 Quadtrac tractor? Is that necessary? Do you need to replace machinery as often as you have been? Do you have to replace with new or can it be used? Can you focus more on repairs than replacing?
When it comes to land rent, can you negotiate a variable amount? When you do better as the tenant, you will pay more to the landlord. Conversely, though, if the revenue goes down, so does the rent. Perhaps we need to have a reasonable limit to pay. Once the landlord wants more than that, we walk away.
If we focus on the neighbour down the road, or the farm we follow on social media, we can be led down a path of misinformation. I am often asked, “How can ABC Farms Ltd. buy that new equipment? How can ABC Farms pay so much for land?” The answer is I do not know. I do not know their financial situation and how similar or different it is from your farm. What I do know is that if you want your farm to succeed, you need to focus on your farm. We do not need to be concerned about the next guy’s farm.
This is an exercise that cannot be performed perfectly. We will always have inefficiencies on our farms. We do not need to strive for perfection, but we do need to challenge our thinking. We need to challenge how we have done things in the past. We need to be willing to change.
I will make a prediction that I guarantee will come true: in the future, our farms will have some good times and we will have some bad times. That we know for sure. We need to celebrate the good times and be prepared for the rough patches. Having lower fixed costs helps us get through the tough times.
