Single Biggest Difference between Low Cost and High Cost Producers
By: Matt Roberts, Associate Professor at Ohio State
Hi, my name is Matt Roberts and I’m an associate professor in the Department of Agricultural Economics at Ohio State. I am a grain marketing state specialist there, in addition to an independent consultant and speaker on agricultural economic topics.
In terms of dollars, land charges are where we’ve seen costs increase the most over the past ten years. It’s the single biggest difference between low cost and high cost producers. Being able to get those costs under control is really important.
The first thing that I always say to farmers is that you need to do this, you need to work on it. You can’t simply accept losing money on a piece of land just to continue farming it; hoping that the next time prices go up you’ll make all that money back. Because right now, if you’re losing money farming a piece of land, you’ve established a dysfunctional economic relationship with that landlord. That has to change, because if it doesn’t, when prices inevitably turn up again, then they’re not going to be content with your current level of rent. Instead, they’re going to want higher rent.
The first thing that I recommend farmers to do, is produce a cost of production in a Profit and Loss statement. In other words, an income statement for that piece of land. This will allow you to sit down with your landlord and be very transparent. Particularly if this is a big parcel of land that’s very important to your operation. Being able to sit down and say, “Okay, this is my cost of production for your ground. This is what I’m losing right now,” and try and work to something that works better. Typically a flex lease with the amount of volatility that we have, where there’s a base and then a kicker to where you’re sharing those risks of this highly volatile price environment. The goal is trying to find a more functional economic relationship and not just accepting that you’re willing to lose money. That’s going to be really important going forward.