8 ways to keep higher production costs in check

Every dollar you’re not borrowing or spending is keeping money in your business

Challenges are piling up for United States farmers and livestock producers. Continuing supply chain problems, increasing input costs, labor shortages and rising interest rates threaten profitability across the farm belt.

Even if commodity prices remain strong this year—and that’s not a given—rising production costs are likely to negatively impact your bottom line. Moreover, if you’re a dairyman or cattle rancher, those strong corn and soybean prices mean you’re not going to get a break on feed costs.

All this signals the need to stay on top of the elements you can control. As a certified public accountant who’s worked with many farming operations, I can tell you that nearly every farm, ranch or other ag business can find additional ways to tighten costs and better manage the risks to your profit margins and cash flow.

Here are a few pointers to help keep your production costs in check:

1. Know your cost of production. What you hear at the coffee shop or read in a university document is not your cost. Every farm has a different situation, overhead and other costs. Don’t rely on others. Figure this out for yourself. Account for every dollar. If you know your operational costs and can measure what fuel, fertilizer and feed increases will do to your potential margin, consider locking in prices on those items. For those who don’t, it’s a scary time.

2. Keep an eye on your operational performance. Stay aware of the market and prices for your farm commodities. Know how much working capital you have to work with and don’t slip below it. Make sure you’re using your resources, especially people and equipment, as efficiently as possible.

3. Lock in interest rates. “If you have something you need to lock in, let’s get it done,” says my K-Coe Isom colleague Alan Grafton. “Try to utilize as much of the low-interest vendor financing as you can to lessen your crop loan.”

4. Be smart about paying for inputs. Shop around to see if you can get a better price. Whatever your farm’s necessities—fuel, fertilizer, crop protectants, feed, irrigation supplies—you might shave off some costs by negotiating with your vendors. Maybe they would be willing to take $45,000 if you pay now, rather than $50,000 later. Maybe your vendor needs to get rid of some lingering warehouse inventory and is willing to discount the cost to you. A 10% saving here, a 1% cut there will add up significantly. And when the bill comes in, make sure you’ve received the quantity you’re being charged for. Mistakes happen all the time.

5. Consider cost-saving equipment or technology. Now might be the time to invest in precision machinery, drip irrigation, rotary milking, or cloud-based software—all investments that can reduce costs, increase yields or both.

6. Keep constant watch. Precise numbers reveal what you’re spending or earning. Monitor your income and expenditures consistently, every month. Stay on top of your receipts, records and other financial information. Staying current on your record-keeping will help you know your cash-flow needs and assist with your tax planning and other financial obligations.

7. Encourage your employees to find ways to cut costs. They may have good ideas about running leaner that you hadn’t considered. Remind an office worker to look for cheaper supplies or urge that forklift driver to go a little easier on equipment to save wear and tear. From small items like buying cheaper coffee or turning off the lights when leaving a room, to far bigger cuts such as postponing equipment purchases, employees can help you trim overall expenses.

8. Stay optimistic. Take care of your mental and physical health. Getting enough sleep, exercising and eating well will reward you with more energy, greater focus and new levels of productivity. Your company and family need you to be healthy.

Remember, every dollar you’re not borrowing or spending is keeping money in your business and helping ensure a more productive year ahead.

Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at [email protected].