As the agricultural economic reset cycle proceeds, a top priority is cost cutting. Cuts must be made on the fixed and variable costs as one watches both sides of the balance statement. There is very little one can do about past, high-priced purchases, such as land or cows. Now is the time to place a higher priority on your costs. However, use caution and be strategic in the process.

Recently, at the Graduate School of Banking at Colorado, a banker told me that one of his producers was cutting costs in the wrong places. This is an excellent observation. In the same class, another banker indicated that a number of his producer customers decided to eliminate or reduce crop insurance as a cost-cutting strategy. Unfortunately for one, this left little financial defense against golf ball-sized hail and for another, 80 miles per hour straight winds. Especially in a challenging economic environment, revenue protection measures are good practices.

On the cattle side, some beef producers decided to cut veterinary services as a means of reducing expenses. Forgoing vaccination protocols led to disease such as Blackleg and the consequent loss of several steers. Another decided to skip the veterinary checks for pregnancies in his beef herd. Unfortunately, after no pregnancies occurred, he discovered his prized herd sire had become sterile. This presented significant time and revenue loss.

Other similar, non-productive eliminations include soil sampling, feed testing and fertilization. In tough economic times, sometimes there is a tendency to overreact. It is true that cutting these expenses may improve cash flow in the short term; however in the long term, these cuts will impair cash flow due to reduced productivity. Remember that a good advisory team can bring insight and objectivity.

Reducing cost is necessary and should be an applauded practice in today’s environment. However, a cost-cutting strategy is meant to increase chances for long-term sustainability, not diminish them. Similar to any other crucial business strategy, proceed with caution.

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As suggested by the majority of lenders at the recent banking class, areas for potential cuts include family living costs and cash land rent, among others. While perhaps not all the cuts necessary, these areas are appropriate for many farm and ranch businesses.