Variable expenses such as seed, fertilizer and crop protection receive a lot of attention. But fixed expenses often account for a majority of the budget. We found 60 percent of budgeted corn- and soybean-production expenses are fixed – family labor, land and machinery. After several years of adjustments in the farm sector, this week’s post is a review of trends in fixed farm expenses.
Fixed farm expenses surprising
The Kansas Farm Management Association releases a summary each May of data collected and aggregated across almost 1,000 farm operations. While those data are helpful in monitoring financial trends, keep in mind a diversity of operations and enterprises are included. That’s to say we would expect variations of those trends across operations, enterprises and geography.
Figure 1 shows the trend in two major categories of fixed expenses – depreciation and family living. Broadly speaking those have followed a similar trend of rapid increases before 2014, followed by moderation in recent years.
Family-living expenses increase from $60,000 in 2010 to almost $75,000 by 2014. After a trend of reduction, that expense category returned to $73,000 in 2019.
Depreciation expense, which can take years to adjust given the long life of assets, peaked in 2016 at almost $66,000 but has since retreated to $63,000.
Depreciation is a large share of machinery costs but Figure 2 shows total machinery costs on an acre basis. After reaching almost $100 per acre in 2014, machinery expense was $90 in 2019. Keep in mind that metric can adjust from a combination of total machinery expense and acres farmed.
The expense category that jumped out to us was farm-interest expense. We’ve reviewed interest expense at the national level but the Kansas Farm Management Association data was surprising when contrasted with the observed trends in family living, depreciation and farm machinery. Other fixed costs moderated in recent years but farm-interest expense increased. In 2019 the average farm-interest expense was $32,000, an increase of 64 percent since 2014. In other words while additional fixed costs have slowed or moderated, interest expense has done almost the opposite to rapidly accelerate since 2014.
Consider fixed versus variable
Going back to variable versus fixed expense, the U.S. Department of Agriculture reports national average cost and returns data for corn production. Figure 4 shows the average of the variable and fixed costs of production. The question at hand is which costs adjusted the most.
Variable costs peaked in 2014 at $356 per acre. During the past five years, that category has decreased by $23 per acre. On the other hand fixed expenses during the same period 2014-2019 increased $22 per acre. The net impact – at least of that national-level data – is that total corn costs hit $669 per acre in 2017, but have increased in recent years to $689 per acre in 2019.
One caveat – the 2019 cost estimates may change as the USDA finishes collecting and summarizing relevant data. In recent years it’s been common for the August net-farm-income estimates to reduce costs, especially fixed.
Wrapping it Up
While the trend has been for producers to manage and control costs in light of depressed commodity prices, that doesn’t often play out in a uniform and linear process. The Kansas data shows that producers were able to adjust family living expense rather quickly, but that category has since increased. Depreciation and machinery costs were a bit slower to adjust. On the other end of the spectrum, interest expense has increased considerably and has likely undone any gains created by family living and depreciation improvements.
At the commodity level the USDA’s national data shows that variable expenses have decreased, but fixed expenses have continued to increase. Of course we’d expect a lot of variability in that by geography.
At the farm level, producers should carefully consider cost structure and monitor all components – not just variable expenses.