It’s Going to Get a Little Bumpy – How to navigate the next 36 months of lower prices and high costs. Part 2 – The Solutions

Sticking your head in the sand is not a solution, but all too often I have seen this as a reaction to navigating hard times. In fairness, it has been close to thirty years since the last significant primary producer downturn, so most farmers today have not felt this type of stress. But since we currently have a significant mental health issue in this industry, a downturn is something we want to avoid at all costs.

 

In Part 1 of this series, we covered three of the main areas of overspending on farms today – crop inputs, machinery, and personal spending. In the last coaching sessions at Farmer Coach, I used this topic to discuss the answers directly from farms on how to mitigate some of these risks. I may be able to go toe-to-toe on discussions of equipment, but when it comes to crop inputs and agronomy, I can barely tread water.

 

Crop Inputs

 

It is not a surprise that I like new-age thought when it comes to farming. I respect what was built in the past, but I also recognize bad habits that were picked up over the last few decades in agriculture. One of those habits was to pull back on crop inputs when times were tough. This was called trimming the muscle and leaving the fat (the fat being fixed costs and the muscle being fertilizer and chemicals). This was a direct correlation to gross revenue, and I applaud farms for baulking the status quo.

 

The main discussions around solving high-cost inputs were targeted applications and knowing what was in the dirt. In terms of targeted application, this could be regarding both chemicals and fertilizer as the 4Rs tend to be applicable in this instance. By only utilizing the right product or application in the right areas you reduce the cost of overall blanket fertilizing or broadcasting of chemicals. This does add some new complexities to the operation, but it also can drastically cut costs in terms of chemical rates and nutrient amounts.

 

The second part, knowing what is in the dirt, was a large topic of discussion. Most farms in the group religiously soil sampled, so it made the talk a little easier as they knew what the 2023 year had already taken out of the soil regarding nutrients. The majority had found that due to the dryer conditions throughout the growing season, there was considerable residual and carryover in the soil. This would allow for lower application rates while still achieving the same yield projections (not reducing crop inputs and ending up with lower gross revenue). 

 

This also would allow for split applications throughout the growing season so you could identify the risk/reward of putting on additional fertilizer based on how the crop progressed and not just at the start of seeding. The last comment would have been regarding multi-year applications of sulphur and other nutrients as some years you have the availability to mine your current dirt due to past practices and not overly invest in regenerating soil at this time.

 

Other discussions included the strength of pre-buying at a low cost that this year was going to allow (where in 2022 you were better off waiting until closer to the seeding window). There were also discussions on removing unproductive areas from cropping to save costs, looking at insurance options more closely, and weighing the cost of financing with the margin from pre-buying. As I expected, farmers love talking about growing grain, so this was the easiest column to identify solutions.

 

Equipment

 

Telling a farmer that he cannot buy a new half-ton is like telling a child that Santa Claus does not exist. The discussion on fixed costs, although easy to say, is much harder to implement as you watch other operations continue to spend. I often must use the line “stop looking over the fence.” Just because some of your neighbours are still buying equipment does not mean it is the right thing to do. In many instances, it is either ignorance is bliss, or they just don’t know any better (there that should piss a few guys off, don’t want to be too politically correct!).

 

When it came to solutions on equipment, the words “capital freeze” were used a handful of times. I almost teared up as it showed that somebody somewhere was listening. The main way to reduce fixed costs on equipment is to simply stop buying new equipment. Now, there are going to be arguments that waiting additional years will cost you more in the end. In past years this may have been true, but seeing where the current retail on machinery is, it is hard to believe that the balloon can inflate that much larger before popping. 

 

I am not saying that equipment prices are going to drop tomorrow. What I am saying is that sooner or later, much like commodity prices, there will be a ceiling and we will see the demand curve drop, the supply curve increase, and thus economics of a drop or softening in overall price (my opinion backed by a couple of university classes).

 

Another area of discussion was the optimization and utilization of current equipment. What are the farms’ multiples? How many acres per drill, per combine, per sprayer? There is a large variance across farms on how hard they use their equipment, and geography will play a partial role, but we tend to use it as an excuse and a crutch once the data tells the story. 

 

The last couple of areas were also surprising as there was discussion on increasing acres and hiring more staff. From the outside looking in this may seem like an inflating of costs, but in many instances, an increase in acres will lead to lower equipment costs per acre and an increase in staff will provide a return on investment when it comes to efficiency, margins, or other areas. Both are more outside the box than just cutting costs, so I am all ears if you disagree.

 

Cost of Living

 

I am going to give a simple answer – go back to living like farmers. 

 

Wealth in agriculture has exploded in the last decade, but I have a secret. Equity is not cash unless you sell. I don’t see farms running shy on equity in land and inventory these days, but I do see them tight on cash reserves and borrowing to fix poor cash positions. I hate to be a jerk, but to cut personal spending you need to go back to living like land is not worth $600K a quarter. Back then you lived based on the bank account and not the value per acre on your land.

 

We are starting to see the effects of a recession on society. Suddenly there are boats for sale again, and the truck lots now have more inventory than ever before. We are seeing a retrenchment in spending from the “average Joe”, so take it as a sign. We are also coming into a couple of years where 30% to 40% of fixed-rate mortgages are about to come up for renewal and jump from 3% to 6% overnight. I would say if you were ever going to be convinced to reduce personal spending this is the time.

 

There are a lot of areas where we have solutions for high costs. We didn’t even touch on interest rates or the fact that numerous farms told me an easy fix was to “sell the swather”. The one thing is that we are in an environment where the cost of production on farms is far greater than ever before. We are also in a perfect storm of geopolitical areas of trade and war that make commodity prices highly volatile and environmental dryness in many areas of Western Canada. I am not putting up the for-sale sign on the farm’s door yet, but I am proceeding with caution.

 

For your ending metaphor, don’t put the truck in park, just put on your seat belt as it is about to get bumpy.