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“Producers need to think about cutting
spending as margins are going to narrow.”
Craig Gibson
UK Farm Business Management Program Specialist |
By Laura Skillman
PRINCETON, Ky., (Nov. 11, 2005) – 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.
Writer:
Laura Skillman, 270-365-7541 ext. 278
Contact:
Craig Gibson, 270-827-1395
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