Cost-Cutting 101, part 2: Land rent, capital expenses, labor costs

Previously, we examined some ways, as suggested by producers, to tackle the challenge of cutting costs. Many leading agricultural experts suggest costs must be reduced by $100 per acre, or by 10-30% over the economic reset period. In the last article, the “low hanging fruit” for cost reduction included the retracting fuel and energy costs, feed costs (for livestock operations) and family living costs. Of course, utilizing soil and nutrition management testing as well as your team of advisors for creative thinking were also ideas put forth by a group of producers brainstorming on ways to reduce cost. Continuing with that focus, we have some additional practices to examine. 

The era of artful negotiation, particularly, in regards to land cost is just around the corner.  When negotiating high cash rents, you must ask yourself if that piece of ground is worth accumulating negative margins and losses. Perhaps, if you are a recreational farmer with plenty of cash reserves, you may choose to keep your high-priced land. However, for most producers, a reset in land costs will be necessary. Utilizing various cost metrics to budget carefully should bring rationale into the decision-making process. One must examine both short- and long-term implications on the overall operation.

Producers who improve the value of their rented land through practices like soil testing for needed nutrients, conservation practices, or drainage work, may have an advantage in negotiation. As a landowner, your land is an investment and a continued dividend, in the form of cash rent, is valuable. Use your positive agronomic trends as a negotiation tool, as many landowners are willing to make concessions for those that increase their asset value.  However, keep in mind that in some states, local politicians capitalized on profitable times by raising real estate taxes which may be an increased expense for some landowners.   

In the immediate, consider postponing or prioritizing capital expenditures such as, equipment and machinery. Keep in mind these strategies may result in income tax implications because of less depreciation. Proactively handle repairs with regularly scheduled maintenance and inquire about possible discounts on parts orders and service agreements. These types of practices are part of a cost-cutting strategy.

Next, examine labor costs including hard labor and management, both inside and outside the family. Some of the most unproductive assets reside in this area of the business. Often, when dealing with labor, a sense of entitlement may override sound business decisions. Regardless of the relation, sometimes tough times require tough choices. 

In analyzing expenses, watch two categories of expenses in particular; supplies and  miscellaneous. If either of these expense categories, cumulatively or combined, tallies over 10 percent of total expenses, further examination is needed.  One or both of these categories often contain “expense fat.” This is one area where accountability can really improve the bottom line. 

As leaders in agriculture, encourage your trade associations and industry representatives to address land taxes and specifically, the overwhelming need for adjustment. The “rich farmer” may look good on a high-equity balance sheet but can easily go under because of hindered cash flow and profit margins due to tax increases. 

Finally, many will attempt to refinance operational money to long-term debt. If you do so, make sure to have a plan for improvement in writing. Most importantly, the plan must be executed in order to realize improvement. 

While this is only a partial list of potential reductions, hopefully our producer focus groups provided some ideas on which you will expand.  Be creative and proactive!  An economic reset offers the opportunity to re-evaluate and improve your operation both for short-term and long-term sustainability. 

TAGS: Soybeans Corn
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