Crop production costs have not adjusted to the decrease in revenues received from them. The major costs (direct and fixed) which include seed, fertilizer, machinery, management and labor and cash rent, have not decreased as much as the revenues that farm operators have received in recent years. The costs for 2015 did decline from 2014 with most of the decrease coming from fertilizer and cash rent. Cost control will need to continue in 2017 as revenues are down and Agricultural Risk Coverage (ARC-CO) payments will likely decrease.
Key Production Costs
Figure 1. shows corn costs on a per acre basis for farms in SD, NE, MN & ND with cash rents from East Central South Dakota: Seed costs, fertilizer costs, machinery costs, along with labor and management costs are illustrated by the bars. These costs represent the top 40% of net profit on cash rented corn from farms reporting to FINBIN in South Dakota, Nebraska, Minnesota, and North Dakota. Cash rent costs are from South Dakota Agricultural Land Market Trends, 1991 -2016; East-Central South Dakota average cropland rent. The sum of the four corn costs, seed, fertilizer, machinery, labor and management, were the lowest in 2000 at $158 per acre. These costs peaked in 2012 at $477 per acre. Corn costs decreased to $443 in 2013 and 2014 then decreased to $401 per acre in 2015.
Figure 1. also shows average cash rents from East-Central South Dakota. Cash rents will vary considerably across the region and for each specific tract of land, +/- $100 per acre. The highest average cash rent displayed occurred in 2014 at $221 per acre. Cash rents decreased by $17 per acre in 2015 to $204. Average cash rents accelerated from $92 per acre in 2007 to $221 per acre in 2014.
In 2015, the four corn production costs plus cash rent were 92% of total costs on cash rented corn farmland. Substantial cuts will only occur if these corn production costs and cash rent are reduced as these production costs represent such a great share of total costs.
Costs decreased $34 between 2012 and 2014 and an additional $42 per acre between 2014 and 2015. Between 2014 and 2015 costs per acre decreased $9 for seed, $21 fertilizer, $4 machinery, and $8 for labor and management. Cash rents decreased by $17 per acre. Costs for 2016 are projected to continue to decrease. The decreases in costs are not expected to afford positive returns on cash rented farmland. Commodity prices at this point are not likely to show significant increases. Also, the ARC-CO is expected to be lower in some counties due to record yields in 2015 and there will likely be a reduction to the guarantee in 2017. This means continued cost cutting and containment will be required to generate profit.
The majority of the cost reduction has come from fertilizer and cash rent. These costs are expected to be down in 2016 also. The other areas for cost reduction have been slow to respond to the decrease in revenues. Additional cuts will be needed to cover likely revenue decreases. The most likely area for cost reduction may be cash rent. Producers are facing another year of low to negative margins and will be working to lower costs for 2017.
Source: Jack Davis, South Dakota State University