Farm profitability faces significant pressure in 2023 as availability and high costs for farm inputs continue to be concerns. Deciding when to buy products and at what prices is a challenge given global and domestic market uncertainty. To secure products at reasonable prices, consider creating an input purchasing plan.
Input purchasing starts with your farm’s production plans. For dairy farms, these production plans include livestock and crops. Livestock plans look at herd size, milk output, feed nutrition and animal health. Crop plans look at acres, yield goals, nutrient needs and pest concerns. Most importantly, these plans help define what products you will need to buy. An input purchasing plan takes your production plans and adapts them into an efficient buying strategy to secure products at affordable costs.
Borrowing concepts from grain marketing, input purchasing focuses on being intentional and proactive about buying decisions. Decisions include prioritizing use of on-farm storage, inputs with higher purchase amounts, potential supply risks and alternative product options. Most importantly, these plans help maximize available cash as you review buying opportunities.
A key question starting out is whether your approach to input purchasing is strategic or tactical.
Strategic vs. tactical
A strategic plan focuses on purchasing inputs during the fall season (Figure 1). With a longer period before planting, there are more opportunities to position input prices. Decisions are based on best value and long-term market indicators. A tactical plan focuses on purchases in winter or spring when fewer opportunities exist to position prices before planting (Figure 2). Decisions are responsive to market conditions and focus on securing remaining input needs. Which type of plan you create impacts your plan goals.
Plan goals
All plans must have realistic and reasonable goals. For buying inputs, a primary goal is to secure input needs at lowest possible costs. Additional goals may be to ensure flexibility for income tax management and secure portions of total input needs by a specific date. For example, 50% of nitrogen fertilizer and 25% of purchased feed will be bought by Jan. 1. The total cost will be equal to at least $70,000 of prepaid expenses for income tax management. This goal focuses more on ensuring flexibility for income tax management while also recognizing a need to secure products.
Quantity objectives
Each purchase has a set amount of product that moves total purchases closer to meeting plan goals. More purchases with smaller quantities is recommended to spread out potential risk and continue to evaluate market conditions. If prices rise, you have secured some product at a lower value. If prices fall, you have invested a limited amount of cash at higher prices.
Pricing targets
A target price is a value acceptable to buy at. Targets should be based on market expectations, starting with comparison prices from at least two retailers. Factor in available discounts to identify actual market offerings. Lastly, compare inputs to expected commodity prices to see if potential profits offset purchases. With a strategic plan, you can be more selective with pricing targets to gain bigger discounts. With tactical plans, it is difficult to be selective when you are closer to planting and need inputs.
Price-saving tools
Price-saving tools focus on financing, early cash or even quantity discounts. Financing options offer reduced interest rates or discounts on total dollars. Early cash and quantity discounts are offered in exchange for securing a portion of your input needs. In seed and chemical purchases, some price-saving tools can be offered together. Most price-saving tools are available in the fall, making them ideal for strategic purchasing plans.
Decision deadlines
Decision deadlines help to keep plans proactive and efforts toward purchasing moving forward. Working with your pricing targets, these dates enable you to decide whether or not to buy. Oftentimes, decisions come down to one of two options: If input prices are at or below your targets, go ahead and make your planned purchase. If prices don’t meet your targets, don’t purchase and move on to your next decision deadline. A third option has to do with availability. If prices are close and availability is a concern, you may still decide buying is a good decision. Paying attention to seasonal patterns and indications of market changes helps to decide which option is best for your farm.
As your planning enters winter and shifts to a tactical focus, decision deadlines shift to being part of your exit strategy. The key goal of every input purchasing plan is to secure needed inputs prior to planting. Pricing targets continue to be important, but securing input needs is now your top priority. By having a “final purchase date,” you ensure inputs are acquired ahead of when you need them.
MSU Extension has created resources to help producers develop input purchasing plans. Templates are available in both a Microsoft Word and Microsoft Excel format. These templates are available at the Michigan State University Extension’s Farm Management website under the “Decision Tools” section.
