Melvin Brees
Farm Management Specialist
University of Missouri Extension




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February 19, 1999

Production and Marketing Instead of Cost Reduction

When price is low and income prospects poor, it seems like many of the "experts" always recommend cutting costs. This sounds like good advice, but what costs do you cut? Fixed costs (land, machinery depreciation, etc.) are not immediate cash costs and can usually only be reduced by disposing of assets. Cash rent might be negotiated and capital purchases can be delayed, otherwise these fixed costs are hard to reduce. Overhead operating costs (interest, insurance, etc.) are nearly impossible to reduce significantly or reductions may increase risk. That leaves operating inputs (seed, fertilizer, chemicals), machinery operating costs (fuel, repairs, etc.) and maybe hired labor as possible cost reduction items.

Reducing input cost can sometimes be poor advice. Yields can suffer if you try to reduce seed costs by lowering plant populations or using cheaper (lower yielding varieties) seed. It’s hard to reduce fertilizer cost without reducing yields if you’ve been following soil test recommendations. Trying to reduce chemical costs often results in more weed pressure and poor yields. Sometimes machinery repairs can be delayed, but you risk downtime and delayed planting can also be costly. Unless you have someone you can fire, labor cost is hard to cut. The problem with cutting any of these costs is that production losses may be much greater than any cost saving!

Cost per acre or total cost is only part of the profit equation. The other parts are production and price in order to get income. Cost control is important, but you also have to have adequate production. Production efficiency or cost per bushel is much more important than total cost per acre when it comes to being able to sell for a profit!

Another popular cost cutting recommendation is to plant soybeans because they cost less than corn to produce. Apparently many producers are planning to do just that. Again, while cost per acre is important, can you market production at a profit? What clues does the market offer? Central Missouri new crop corn bids average about $2.15 for corn and soybeans at $4.75 (2-18-99). University of Missouri 1999 planning budgets suggest operating cost at about $193 per acre for corn and $116 for soybeans. MO yields (past two years) have averaged near 115 bpa for corn and 35 bpa for soybeans. These assumptions produce per acre incomes of $54.25 for corn (115 bpa x $2.15 minus $193 costs) and $50.25 for soybeans (35 bpa x $4.75 minus $116 costs)--a slight edge for corn! Do these same calculations using your own costs and yields. Watch for more market signals. Higher corn prices in relation to beans or higher soybean prices in relation to corn could shift the balance either way. There are, of course, other considerations. Dry weather production risk favors soybeans. However, current supply and demand fundamentals appear to be more friendly toward corn. In this case, not only is cost per bushel important, price per bushel received is also important.

Income and profit potential (or even minimizing losses) depends upon profitable yields obtained through efficient production. The market also provides clues as to what it does and doesn’t want produced. Both of these, production efficiency and marketing, are much more important than simply trying to cut costs. -- Melvin

University of Missouri ExtensionDecisive Marketing - February 19, 1999 -- Revised: April 20, 2004