by David Widmar
Fixed farm expenses play an important but often overlooked role in crop budgets and producer returns. A look at Purdue University crop budgets from 1990 to 2014 found that, on average, variable expenses accounted for 40% of total budgeted expenses while fixed expenses (family labor, land, and machinery) accounted for 60%.
Lowering costs of production are a critical step for managing in the current environment of low commodity prices and tight-margins. Fixed expenses, as we noted last year, have been slow to adjust. This week’s post takes an updated look at fixed expenses.
Kansas Farm Management Data
A great resource for monitoring farm management data is the Kansas Farm Management Association (KFMA). These data are based on records collected and aggregated across diverse farming operations, including crop and livestock operations. In 2016, the 1000+ association farms had an average net farm income of $43,161. This was considerably higher than the 30-year low set in 2015 ($6,744), but less than half of the five-year average ($95,669). From KFMA data, insights on three fixed expenses can be captured.
Depreciation is often a large expense for farms. In 2016, the average depreciation expense was $64,210 (figure 1). This was mostly unchanged from 2015-levels (up 0.8%). Depreciation expense is typically hard to adjust in a short time-frame as much of expense is a carry-over of earlier capital asset purchases. In other words, it is likely that much of the depreciation expense associated with 2016 was the result of purchases – combines, tractors, sprays, barns, grain bins, etc. – made in earlier years, when net farm income was considerable higher.
While the average depreciation expense was mostly unchanged in 2016, figure 2 shows that annual changes were quite large in earlier years. In fact, depreciation expense increased by more than 10% annually for four consecutive years (2010-2013).
More broadly, average depreciation expense across all operations in 2016 was 56% higher than it was in 2010 ($64,120 in 2016 compared to $41,181 in 2010).
While depreciation expense is hard to adjust because of the carry-over, family living expenses are difficult to adjust lower because it directly impacts family/household income. Additionally, most commercial operations rely on on-farm income for a majority of total household income.
In 2016, family living expenses were $70,385 (figure 1). That expense was mostly unchanged from 2015 levels (-0.2%) but more than 5% lower than the high of $74,447 set in 2014.
Farm machinery expense, measured on per acre basis, declined nearly 9% in 2016 (figure 2). After peaking at nearly $100 per acre in 2014, machinery costs have declined a total of 14% since 2016 (figure 3).
Machinery costs includes fuel, repairs, and depreciation . Machinery costs per acre, and associated machinery investment per acre, vary significantly across operations. These variations are even large for operations of a similar size. A 2014 report using KFMA data found crop machinery costs ranged from less than $50 to nearly $150 per acre on farms between 2,000 and 3,000 acres.
The USDA tracks and reports annual enterprise costs of production data for several crops. In figure 4, corn costs of production are split into operating costs (or variable costs of production) and allocated overhead (fixed costs of production). The most recent data (2016) shows that average corn production costs in the U.S. were lower as a result of variable and fixed expenses both declining.
Variable production expenses for corn – which increased nearly $71 per acre from 2010 to 2014- has declined 13%, or nearly $48 per acre, from 2014 highs.
Fixed production costs peaked in 2015 at $341 per acre. About half of these fixed costs are a farmland charge, or an opportunity costs charged across all acres. Fixed expenses increased nearly $78 per acre from 2010 to 2015 (up 29%). In 2016, these costs were 3% lower at $331 per acre.
Last year we noted that fixed corn production expenses exceeded variable costs for the first time in six years of data. From 2010 to 2014, variable expenses were an average of $36 per acre higher than fixed expenses. In 2015, fixed expenses were $7 per acre higher than variable expenses and this inversion widened in 2016 as fixed expenses were $22 per acre higher. This will be an important development to track and monitor in coming years.
Wrapping it Up
Fixed farm expenses are a large component of crop budgets and producer returns. These fixed expenses have been slow to adjust downward. Machinery cost and family living first adjusted lower in 2015. Depreciation expense, which has been the slowest to respond, was essentially unchanged in the KFMA data in 2016.
At the national-level, the USDA’s cost of production data shows that fixed production expenses for corn turned lower in 2016.
In summary, it has taken several years, but changes and improvements in crop budgets have taken place. Fixed farm expenses have been slow to adjust, but in most cases reductions have taken plan in recent years.
Interested in learning more? Follow the Agricultural Economic Insights’ Blog as we track and monitors these trends throughout the years. Also, follow AEI on Twitter and Facebook.
Photo: Johnny Klemme