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Amid high interest rates, farmers still cutting costs

A farmer unloads his corn into a trailer this past October in Aurora County. (Matt Gade / Republic)

WHITE LAKE — It's shaping up to be another year of cost cutting for one local farmer, who expects late planting to hinder farm operations in an already weak economic climate.

Steven Mohnen, 63, of White Lake, has a diversified operation. He runs a successful bull business and grows corn and soybeans on approximately 2,200 acres. But with the amount of snowfall his land's received this winter, he predicts a rough year for his crops.

"It's going to be a late spring," Mohnen said. "I think it's going to be a tough start. I really do."

Late planting would do no favors for South Dakota farmers, many of whom have cut costs for years in order to combat dropping crop prices.

But while prices fall, Mohnen said expenses haven't followed suit. He said corn seed has risen to about $300 per bag, and farmers may be paying around $420 per acre of land in expense costs.

"It's hard to cut costs because you've got to maintain what you're doing," Mohnen said.

But while diversification has helped Mohnen's operation, he said other producers are getting out of the cattle business altogether.

"The cattle market isn't nearly good enough for what it should be, either," Mohnen said. "I see a lot of farmers selling their cows just because they say it's not profitable. There are a lot of cows going to market nowadays."

Will Walter, department head for the Farm/Ranch Business Management program at Mitchell Technical Institute, said as of Jan. 1, corn prices were actually about $0.25 higher than one year earlier, but soybean prices were nearly $1 lower, depending on the location.

"It seems most have cut costs as much as possible already without losing profitability," Walter said.

Walter also said he isn't aware of any common expenses that have risen dramatically in price, but there is one factor that could cause pain for producers this year: interest rates.

The Wall Street Journal Prime Rate — the base rate on corporate loans posted by at least 75 percent of the nation's 30 largest banks — rose from 4.5 to 5.5 percent over the past year.

Walter said the average operation in his program maintained about $400,000 in liabilities as of Jan. 1, 2018. If liabilities remain steady this year, those producers could face an extra $4,000 in interest alone.

"Even though rates are still historically low, many farming and ranching operations are carrying higher debt loads than in past times," Walter said.

Lessons from lenders

While margins are tight, farmers have not looked to greater farm loans as an answer, according to local lenders.

"We typically finance crop inputs, which have remained static in price," said Jayson Plamp, vice president of agribusiness lending at First Dakota National Bank in Mitchell. "In general, many producers' debt loads have increased due to carryover debt remaining after all of the production from the year has been sold."

As far as expenses, Plamp said crop and livestock production costs increased between 2010 and 2013. But since 2013, commodity prices have fallen faster than expenses, and health care has become especially costly for many producers.

Plamp works primarily with farms from the eastern half of South Dakota, and farms in the southeastern part of the state have especially struggled with weather problems over the past year.

According to Plamp, late snow and excessive and persistent rainfall caused problems with planting and livestock health last year, and cold weather during fall and winter hurt the harvest.

Meanwhile, farmers in other parts of the state generated a profit through ideal weather conditions, good yields and federal Market Facilitation Program payments, Plamp said.

Plamp also said many younger producers struggled last year, as many are highly leveraged, or taking on a large amount of debt compared to their equity.

"Highly leveraged operations have generally struggled more in comparison to those with lighter debt loads," Plamp said.

To avoid cutting too far into productive expenses like fertilizer, seed or chemicals, Plamp said producers should know their costs and cash flow needs and develop a written marketing plan. And while many producers are cutting back on capital expenditures, Plamp had a few other pieces of advice for farmers looking to save money:

• Sell underutilized assets;

• Pay down debt to reduce cash flow requirements;

• Look for additional revenue streams that don't require big capital investments, like custom farming, feeding or calving for neighbors.

Finally, Plamp said producers must be open about their challenges as soon as they arise.

"Communicate challenges as soon as they are recognized," Plamp said. "Typically, challenges are more easily dealt with early."

For his operation near White Lake, Mohnen said he'll save money by buying used equipment when needed, and he'll probably prioritize corn over soybeans this year. Along with a better price, he said corn can also be cut for silage to feed his cattle if needed.

But for long-term success, Mohnen said the U.S. needs to sign new international trade deals, and farmers need earnings to catch up with expenses.

"We've got two sons who want to take this operation over," Mohnen said. "It isn't going to be good for a young farmer if things don't get better than what they are today."