Successful farm managers control what they can
Once farm financials (i.e: balance sheets, financial analysis, and cash flows) are complete for the year, it is time to hash through all the numbers and determine what they are telling you as a business manager. Your financials tell a story of the who, what and why of your farm operation. When looking through your farm business’s story ask yourself, do you care about what level of expense or what the level of a particular financial ratio is? Next, ask yourself can you do something about it? If you answer yes for either of these questions take time to take control of the situation. It is essential when riding out the up and down markets to determine what sectors of your business you can control.
Even though the 2013 crop isn’t planted many of the inputs were secured some time ago. Nitrogen for the 2013 crop was likely priced (and paid for) as early as March/April of 2012 before the 2012 crop was planted. Seed, fertilizer and pesticides are typically booked and paid for prior to the end of the preceding year. Securing inputs at the lowest cost is the driving force behind many of these decisions, although end of year tax planning can drive inputs to be purchased prior to the end of the year.
Some input costs seem to be easier to control than others. It might seem that the typical crop costs are hard to control. It is difficult to produce a crop without seed, fertilizer, and pesticides…so we try to control the costs of these inputs through early pay/early order discounts and ordering in quantities that allow for additional discounts.
However, what about power and equipment costs and how do you go about managing and controlling them effectively? According to the University of Illinois Department of Agriculture and Consumer Economics, power and equipment costs have increased from an average of $103.08 per acre to $140.61 per acre over the five-year period from 2008 to 2012 for an increase of 36 percent. All of the power and equipment expense categories increased over the five years with utilities and farm vehicle expenses showing the least cost increase (about 6 percent) and machinery depreciation showing the largest increase (88 percent). Fuel and Oil (up 10 percent), Machinery Repairs (up 24 percent), and Machine Hire (including lease payments) (up 18 percent) are in the middle.
Many farm inputs are consumed in the normal course of a growing season. Farm machinery has a life that far exceeds a single year but is only partially used (not completely consumed) and this annual use results in a decrease in the value of the asset that is recognized as depreciation.
It is also important as a farm business manager to recognize economic depreciation and how it affects your business. Economic depreciation method uses a slower rate over a longer life and excludes the use of bonus depreciation and the IRS Code Section 179 Expense Election. While economic depreciation represents a much more accurate ‘use’ of machinery as an expense, the per acre depreciation cost has increased over the five-year period largely due to the increase in machinery purchases over that same period. Increased farm earnings and favorable tax policy (bonus depreciation and the expense election) have likely spurred capital purchases to be made in increasing amount over the five year period.
While we may think of depreciation as an expense that is out of our control; the control of depreciation begins with the purchase of capital assets. So the control of this expense category lies in the careful planning for purchasing capital assets that matches the using up/wearing out/obsolescence of those assets and best suits the economic need of the farming operation in terms of size and horsepower.
Remember; make use of your financial information. There are many advantages to tracking your business performance. For more information on how you can determine these costs for your farm business, please contact your local Farm Business Management Instructor.