The goal of every cotton producer is to maximize profitability in his or her business. The current political and economic environment in which producers operate makes this goal particularly challenging. Increasing global competition and scrutiny of agriculture policy are of specific concern.
With the future of government support payments in jeopardy, it becomes increasingly apparent that cotton price and yield alone must be sufficient to cover all production costs and provide an acceptable return on investment.
While there are a number of possible strategies to reduce cost, we will briefly discuss three strategies: developing a marketing plan, identifying high-cost fields, and good machinery management.
Developing a marketing plan: A marketing plan is an essential step in effectively managing price risk. A plan includes evaluation of the financial position of your business, risk-taking philosophy, timing of cash flow, estimated breakeven cost, and a realistic profit margin based on selected pricing strategies.
A marketing plan is a written strategy of when and how the crop will be sold. A crucial element in the marketing plan is the objectives. If the objectives include covering the cost of production and family living expenses, then the cost of production for each commodity must be determined. These costs need to be expressed on a per pound of lint basis so they can be compared to prices being offered in the market.
When market price reaches a level that will allow the farm to accomplish some or all of its objectives, action should be taken to “lock in” at least a portion of the crop at that price.
While a good marketing plan may reduce costs, it can also help stabilize net income. Markets will not give you anything if you do not take action to implement your marketing plan.
Identifying high-cost fields: The cost of producing cotton varies by region and from field to field. Field characteristics such as soil type, topography, irrigation capabilities, and pest pressures make some fields better suited for cotton production than other fields.
As an example, of six fields enrolled in the Arkansas Cotton Research Verification Program in 2004, cost of production ranged from 37 cents per pound to 50 cents per pound. Cost of production includes annual direct costs (seed, fertilizer, chemicals, etc), the annual portion of fixed costs (depreciation on machinery and irrigation equipment, etc.), and annual rent, either cash or crop share.
Taking high-cost fields out of cotton production and using them to produce some other crops will reduce the overall cost of producing cotton for that farm. Identifying the cost of production on each field requires a rather extensive, though not prohibitive, record-keeping system. However, fields that typically have low yields and high pest pressures are the most likely candidates for a high cost of production.
Good machinery management: The manager must control the size of the machinery investment and related operating costs. Machinery and motor vehicles represent a large investment on commercial farms, as much as $500 to $700 per acre on small to medium size cotton farms. This represents a total investment per acre for machinery and equipment and is not an annual expense.
Texas A&M University calculated the representative machinery investment per crop acre in 2004. Grain farmers averaged $254 per acre in machinery investment while rice farmers averaged $333 per acre in their computations.
Maintaining flexibility in equipment purchases is another way to manage machinery and equipment costs. Purchasing equipment to use for more than one crop helps spread the cost of that machine over more acres.
Short-term leasing or custom hire are very economical ways to secure needed machinery services when extra capacity will only be needed for a short time. Conservation tillage or no-till farming can permit a reduction in machinery and labor needs if adopted on a large scale.
Rob Hogan, Scott Stiles and Kelly Bryant are University of Arkansas Extension economists. Comments or questions? Call 870-460-1091 or e-mail [email protected].