Input cost management is on everyone’s mind this year. But how do you even begin to approach cutting costs effectively? Each operation, and really, each field is different. We’ll address specific inputs throughout the spring, but for now, we present three rules of thumb to get you started on your input cost management decisions.
Dates and Deadlines
1/31/2022 – Livestock Forage Program (LFP) Application Deadline (Deadline Today!)
1/31/2022 – Cattle Inventory Report
1/31/2022 – General CRP Signup Opens
2/1-2/3/2022 – National Cattleman’s Beef Association National Meeting, Houston
2/8/2022 – Input Impact Conference, Canyon, TX
2/16, 3/2* 2022 – Profitability Spreadsheet Conferences, Lubbock, TX., *Plainview, TX.
2/23, 3/9/2022 – North Region Production Education Online
What We’re Reading
Producer Input-Impact Conference set Feb. 8 in Canyon – AgriLife Today
Barbecue demand remains strong despite high meat prices – AgriLife Today
Optimism, higher cattle prices to start 2022 – Southwest Farm Press
U.S. Fertilizer Prices Drop Again, Easing Pressure on Farmers – Bloomberg
Rules of Thumb for Input Cost Management
A bit of good news to start the year comes from crop prices. Across the crops complex, current board prices for summer and fall delivery are higher than the previous five-year average, though most forecasts predict lower prices in 2022 than we saw in 2021. Table 1 is a summation of the District 1 budgets for crops that account for the majority of acres across the Texas High Plains.
Table 1. Texas High Plains Yield, Expected Price, and BE Values to Cover VC 2022
While crop prices are currently above recent historic averages, input prices rose much faster that crop values over the last two years. For our Texas High Plains budgets we’ve estimated that fertilizer costs rose 60+% year over year (but 200% over the last two years), chemical costs rose 100% year over year, energy costs rose anywhere from 20-50%, and we expect custom rates to rise in the neighborhood of 20% on average. Figures 1-4 show annual percent changes in the farm price of three commodities and the annual percent change in an input category.
Figure 1: Annual Percent Change in Fertilizer Cost and Annual Percent Change in Corn, Cotton, and Sorghum Price, 18/19-21/22
Figure 2: Annual Percent Change in Chemical Cost and Annual Percent Change in Corn, Cotton, and Sorghum Price, 18/19-21/22
Figure 3: Annual Percent Change in Energy Cost and Annual Percent Change in Corn, Cotton, and Sorghum Price, 18/19-21/22
Figure 4: Annual Percent Change in Custom Service Cost and Annual Percent Change in Corn, Cotton, and Sorghum Price, 18/19-21/22
First Rule of Thumb
What are we to do when managing input costs? There are not as many options for input cost risk management as there are for commodity price risk management. It is possible to use the futures market to hedge fuel, and to pursue some creative cross-hedging for other inputs, but there are certainly fewer direct options. The lack of risk management tools for input costs has a lot of folks turning to the idea of ‘what to cut first’, i.e. cost management. We’ll spend a lot of time over the spring diving into specific input categories, but there are a few rules of thumb that can help in any cost management situations.
The first, and in my opinion most import, rule of thumb is to visit with an agronomist and/or crop consultant before making input decisions. Economists can help with the idea of balancing costs and revenues, but agronomists will be able to add context to optimal yield calculations and will likely prevent a disaster from overdoing in on reducing the use of a particular input.
Second Rule of Thumb
After getting the ok on your decision making from an agronomist, the second rule of thumb is to identify what inputs take up the greatest portion of your budget. Gaining efficiency (lower application rates, targeted application, negotiating for lower prices, etc.) in cost categories that account for the greatest share of expenses will create relatively larger improvements toward profitability.
In the case of corn for example, we estimate that fertilizer represents 22% of the total budget (Figure 5). That means that if you are able to make a 5% efficiency improvement on fertilizer expense you will net a 1.25% savings toward total expenses. If you gain 5% on irrigation, which only represents 13% of the total expenses for corn, you only realize a net gain on total expenditures of about 0.5%. Spend time, and money, optimizing the use of expenses that account for large chunks of total expenses.
Figure 5: Variable Cost Categories as Percent of Total Variable Costs, Corn
Third Rule of Thumb
My third rule of thumb is balancing Marginal Revenue (MR) and Marginal Cost (MC). In non-economist terms this means make sure that the RATE of Revenue growth is going up FASTER than the rate of Costs growth. Or in the case of cutting, make sure the rate of cost reduction is going down faster than the rate of revenue reduction. Where you can, find the point where those rates are equal, as the point of maximum returns.
MR > MC –> Profitable
MR = MC –> Profit Maximizing Point
MR < MC –> Losing Profit
For example, consider Figure 6, an approximation of Girma et al., 2007. The green line represents cotton yield, in pounds, as a function of Nitrogen applied (assuming the crop’s other needs are met). The yellow line represents the Marginal Revenue of each pound of Nitrogen applied, and the blue line represents the Marginal Cost of each pound of Nitrogen applied. You can see that MR and MC are equal (at about $0.40/LB. of N.) at approximately 135 LBs. of Nitrogen applied. This corresponds with peak yield as a function of Nitrogen application; applying any additional N. will lead to yield decreases and spending more per unit of nitrogen than each unit of nitrogen returns in revenue.
Figure 6: Cotton Yield, MR., & MC, per LB. Nitrogen Applied
As a last though, sure to consider crop insurance expenditures in the same way that you consider expenditures on physical inputs, with MR and MC. We have poor subsoil moisture, expectations of low moisture through April, and will likely not be able to afford the same diet for our crops this year. To me, that suggests a strong potential for yield challenges, and there is always an element of risk in commodity prices. Consider whether your input dollar yields higher potential returns when spent on insurance or on a physical input.
You can apply these rules of thumb across the board; they are not specific to a given input or to a given crop. We will have additional posts in the near future on seeding rate adjustments, fertilizer use optimization, and irrigation use optimization by crop. In the meantime, you can use our recently posted Texas A&M AgriLife Extension Budgets and our Crop Profitability Analyzer to begin examining your input costs management for 2022. For questions, email firstname.lastname@example.org