November 11, 2005 | By: Laura Skillman
PRINCETON, Ky.

As farmers begin planning for 2006, making careful spending decisions should be a part of the process as costs for everything from nitrogen to health care continue to escalate.

“Costs have gone up so that 2006 costs look to be substantially higher,” said Craig Gibson, farm management specialist with the University of Kentucky Farm Business Management Program. “Producers need to think about cutting spending as margins are going to narrow.” 

Gibson said his reason for issuing caution to farmers is that spending has been increasing since 1998, and farmers should carefully consider cost-cutting measures in light of escalating costs. If spending isn’t adjusted, projections for expenditures in 2006 for interest, farm operating expenses and family living could increase as much as $47 per acre or $30,000 per family farm.

Since 1999, combined farm and non-farm incomes for sole proprietorships in the farm analysis program have increased. However, so has indebtedness as additional purchases were made rather than paying down existing debt. Debt has been increasing $12,271 on average since 1998 with the exception of one year – 1999.

Unless spending patterns change or farmers realize additional income, Gibson said, by the end of 2006 indebtedness could increase by about $42,000 for sole proprietorships. Added income is unlikely given the current supply situation for crops. While many farmers won’t sell at least a portion of their 2005 crops until 2006 to take advantage of possible higher markets, higher costs could absorb any financial gain.

Gibson said it is doubtful farm profit margins are sufficient to maintain current spending patterns. Profit margins likely will tighten due to higher energy costs. Those higher costs will also result in higher fertilizer costs especially for nitrogen, which is a major cost in corn production. It is unclear yet how high nitrogen prices may rise, he said. Pesticide costs and seed costs are also likely to creep up.

In addition, many farm families are struggling with the high costs of health insurance. Sole proprietorships with supplemental health insurance coverage paid an average of $3,438.97 in 2004 and where neither spouse has medical insurance from off-farm employment, premiums averaged $7,555.67, which was 16.8 percent higher than 2003. The increases came even though many individuals increased their deductibles to try to maintain affordability, Gibson said.

Gibson said he isn’t trying to sound an alarm, but wants farmers to consider their spending choices carefully because some are just that - choices. There is a difference between someone with a 25-year-old combine that is becoming problematic buying another combine compared to someone who trades frequently but is still spending $30,000 to $35,000 in the trade. If they are borrowing money to do purchases, they are digging a hole, he said.

Gibson said that some farmers who are already making plans for 2006 have contacted him. 

Some possible cost-cutting measures to consider are adjusting inputs based on soil type, testing the soil and discussing the results with county Extension agents or state agronomists, carefully timing pesticide applications, eliminating cosmetic spraying, using variety trial recommendations for seed selection, adjusting plant populations for soil type, purchasing necessary items and only tilling where necessary, such as in compacted areas.

Some producers are financially secure enough that new capital purchases are affordable, however, many already have more than enough debt payments, he said. Do not use income taxes as an excuse to buy something that is not necessary. In addition, insurance is important but consider what level of coverage is needed. Review policies with agents and farm management specialists.

Farmers must make a battle plan for 2006 and the sooner the better, Gibson said.

Contact: 

Writer: Laura Skillman, 270-365-7541 ext. 278

Contact: Craig Gibson, 270-827-1395