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What is the Right Dollar Amount?

Farmers are unique in experiencing financial swings in our industry, but I do feel the level of extreme this time is unique. As I work with my clients and attempt to look at financial feasibility beyond one year, I keep asking, “What is the right dollar amount?”

Many of the assets we own or want to buy have increased in value by astronomical proportions. So many of the day-to-day requirements of a farm, like fertilizer and seed, have more than doubled. The equipment and products we need are not readily available. When I look at these products I wonder, “What is the right dollar amount?”

The revenue we receive per bushel has more than doubled. Prices are softening but we are still at record prices. Farmers sold oats for $10/bushel! That is unheard of. Farmers sold IP canola for over $30/bushel which is crazy! Farmers sold yellow mustard for $50/bushel which is insane! As we look at grain prices going forward, we ask ourselves, “What is the right dollar amount?”

No one has a crystal ball that works, but there are some aspects that we know will be here for a while.

Rising Input Costs

The price of land has doubled in my area in the last four years. If you bought this land, that cost is going to affect your farm for years to come. It will affect your ability to borrow, your cash outflow and your overall long-term feasibility. Was the price of land too inexpensive before or is it too expensive now? What is the right dollar amount?

If you had to recently negotiate a land rental deal, it will have gone up. If you lock your rate in for five years, this will affect your overall cost of operation for those years. You are guaranteeing that the cost of your land base is increasing. How much is a fair land rental price? What is the right dollar amount?

The cost of common herbicides like glyphosate and glufosinate have dramatically risen and now fallen. They were available and then they were not available. Name brands were tough to find and generic products were abundant. If I prepay and the retailer cannot deliver it, what is the right dollar amount? If I buy it but I don’t want to take it home as I have no place to store it, what is the right dollar amount? If product is truly in short supply, what is the right dollar amount?

The cost of post-emergent herbicides has increased by 150 per cent in some cases. The product is the same and it appears to be abundant, yet the price is much higher. But what is the right dollar amount?

The cost of a combine is $1 million and headers are a quarter of a million dollars. There is a wait to get the unit. The technology has not changed greatly in the past three years. Is this combine worth that much money? What is the right dollar amount?

Tractors have become quite the spectacle. Apparently, we bought all the tractors and the tractor store quit making them. I have no idea what happened, but clearly, something happened. Quad track units over 500hp are now well over $1 million. If you act now, you can have one in two years. Does this make sense that we cannot go to a dealership and pick out a tractor? Does it make sense to order the tractor two years in advance? Is $1 million the correct price? What is the right dollar amount?

A Long-Term Look

The main issue with all of these situations is that there is a long-lasting effect. If the cost to run a farm goes up dramatically as the revenue rises, but then the revenue drops, how does this affect our operations?

In our free market world of supply and demand, I have faith it will work out. The problem is that damage will occur while it gets worked out. If CIH and John Deere overprice a tractor and also can’t supply the product, eventually some other company will come in and fill that void. How long will that take? I’m going to guess it will be years.

Land rental prices will correct if crop prices drop, but it may take many years. The demand for farmland may not take the same path because other factors are at play. Regardless, recent purchases of land will have a long-term effect on your operation.

When I work with clients, I try to provide information and direction to assist in decision-making. This is now my struggle. When clients are looking at purchasing new equipment, renting land or purchasing land, I am at a loss to give a grounded recommendation. My go-to answer is that if canola stays above $20/bushel and wheat stays north of $10/bushel, you can do whatever you want.

I was talking with a colleague at a lending institution and they were doing projections of revenue using $15/bushel for canola. I can see how this has some mathematical relevance from an averages perspective. From a reality perspective, it does not make sense. Prior to 2021, canola was worth $10 or less for a long time. Then it went to over $20 for a couple of years. It has very rarely been $15/bushel. Is it realistic to use $15/bushel to budget canola income for a 25-year mortgage?

If we wait to buy a tractor, will that be better or worse? Will combines come back down in price? History shows that this does not happen. But what if we go back to 2021 and prior income levels? In my area of east central Saskatchewan, from 2020 back to 2016, $400/acre revenue was a good crop. In 2021, those same producers grew $800/acre and even $900/ acre crops. What are we to expect in 2023, '24, '25, '26? If we go back to $400/acre revenue, our farms will be in a loss position. We all like to remain positive and expect that crop prices cannot drop dramatically because our cost to farm has increased. The reality is: markets that determine the price of crops do not care about our cost to produce them.

Plan Your Strategy

With my clients, we are keeping a close eye on historical revenues and trying to keep our break-even numbers as close to those as possible. We look at strategies like consolidating debt if prices dropped. The increase in interest rates has reduced the effectiveness of this strategy but it can still lower cash outflow. We look at keeping some equipment longer than in the past. We also look at using the windfall from recent years of high prices to reduce long-term cash outflow.

Know your numbers. Compare your fixed costs today to what they were in 2020 and prior. Take your historical income from 2020 back and see if you can manage your farm with that level of historical income and today’s expenses. Try using numbers like $15 canola and see what that does to your break-even. These exercises will help prepare us for any changes in revenue our farms may experience.

If you have made excess profits for a few years, you may have to experience some cash flow losses for a couple of years. Prepare yourself for that as well.

By recycling used oil, filters, antifreeze, their plastic containers and DEF containers, you help keep Saskatchewan's water, land and air clean and safe We have the best recycling network in the country, let's use it!

Tammy Jones B.Sc., P.Ag

Tammy Jones completed her B.Sc. in crop protection at the University of Manitoba. She has more than 15 years of experience in the crops industry in Manitoba and Alberta, with a focus on agronomy. Tammy lives near Carman, Man., and spends her time scouting for weeds and working with cattle at the family farm in Napinka.