From the November 2026 digital edition · Read on magazine page 28
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Growers tackling their 2027 operating budget are finding it’s no easy task, as the challenge is no longer simply determining what fertilizer, fuel, labor, water and equipment will cost, but deciding how much uncertainty the operation can afford to carry.
These days, prices can change quickly, water availability is constantly altering production plans and interest rates are impacting the economics of buying inputs early or financing machinery.
What’s more, commodity returns may not provide enough margin to absorb unexpected increases. And for permanent-crop growers, changing acreage or switching crops is rarely a simple response when the numbers move in the wrong direction.
That is pushing budgeting beyond a single set of assumptions and making the timing of purchases almost as important as the price itself.
“California farmers are facing substantial uncertainty around fertilizer prices and availability,” said Steven Fenaroli, managing director of public affairs and communications for the California Farm Bureau. “Fuel, labor, water, insurance, equipment and regulatory costs are adding pressure at the same time commodity prices and farm returns have not kept pace.”
The evidence of that pressure was clear in an American Farm Bureau Federation survey released in April. Among 249 California respondents, 67% said they could not afford all the fertilizer they expected to need without reducing either applications or acreage. Nearly 62% described their financial situation as worse than the previous year, while another 32% said it was unchanged.
In 2027, that combination is changing the goal of the budgeting process. Rather than attempting to predict one precise outcome months in advance, growers may be better served by identifying their largest exposures, protecting liquidity and building enough flexibility into their plans to react as conditions change.
A Budget Built Around Variables
Among the expenses California growers are watching most closely are energy, fertilizer, labor and water, according to Matt Woolf, Ph.D., specialty crop analyst at Terrain, an agricultural economics and market intelligence service.
“Uncertainty remains higher than normal,” Woolf said. “Diesel and UAN-32 fertilizer prices are heavily influenced by energy markets, while water costs can swing dramatically depending on weather conditions and water allocations.”
Labor offers somewhat greater visibility because minimum wage increases are generally known ahead of time. Availability remains an issue, Woolf noted, but has become less of a pain point in recent years.
Other expenses are proving harder to pin down. For instance, Farm Bureau survey respondents identified fuel as the most common additional concern beyond fertilizer, followed by labor, regulatory costs, water, insurance, equipment and crop-protection products. For some, transportation has become another major variable.
“For us, fuel costs are quite high, and there are these intangible costs of driver shortages on the trucking side of our business,” said Duncan Young, principal of San Francisco-based Saorsa Growth Partners, which provides fractional CFO services and works with agricultural businesses. “As finding qualified drivers becomes increasingly competitive, we can’t be certain of our freight costs, since we may have to pay drivers more or contract with third parties if we continue to have retention problems.”
Insurance presents a different problem because an operation may know the premium but still have difficult decisions to make about the amount of risk it wants to transfer.
“Insurance has also been increasingly painful over the last several years,” Young said. “Given rising rates, I’m increasingly leaning toward holding more cash.”
That emphasis on cash is likely to play a larger role in 2027 planning as growers weigh discounts against the financial cost of committing money months before an input is needed.
Pre-Buy or Wait?
In a volatile market, purchasing early can provide price certainty and protect against potential shortages. But the Farm Bureau survey suggests many California growers have been reluctant to lock in fertilizer well ahead of use.
Only 62 of the 249 respondents, or about 25%, had pre-booked fertilizer. Of those who had not, 72 said prices were too high, 54 cited uncertainty about acreage and 48 were waiting for prices to decline. Even among the growers who had pre-booked, fewer than half had locked in more than 50% of their expected needs.
Those numbers illustrate the dilemma. A pre-buy may lower the purchase price or eliminate exposure to a later spike, but it can also tie up working capital, generate financing costs and create storage and inventory risk. The decision, therefore, cannot be made on price alone.
“Interest rates, inventory levels, supply-chain conditions and oil futures are all useful market signals,” Woolf said. “How much is purchased through a fixed-price agreement versus the spot market is farmer-dependent, since each grower will have a different level of risk tolerance.”
The same principle applies outside inputs. Young experienced the other side of prepayment when one of his clients received money early from a cash-rich customer.
“For us, it was interest-free cash that offset the cost of our working-capital facility,” Young said. “Our bank didn’t incorporate prepayments into its borrowing-base calculations, so we also effectively increased our credit line at the same time.”
The lesson for growers is that the value of an early transaction depends on what happens to cash after the agreement is signed. A discount that appears attractive on an invoice may be less compelling once borrowing costs, storage, insurance and the opportunity cost of the capital are included.
Contracts Can Reduce Risk, Not Eliminate It
Fixed-price agreements offer another means of controlling uncertainty, but contracts introduce their own risks.
Young sees that firsthand in organic grain, a market that does not trade on an exchange and relies heavily on bilateral agreements. High commodity prices have shortened the horizon for some buyers that might otherwise have contracted through the following harvest.
“Where we used to see contracts around this time of year heading out to the following harvest, we’re seeing a lot more customers hesitant to contract at the current market prices,” Young said. “If they thought they’d go up, they’d be booking, but they aren’t.”
That reluctance creates another form of exposure. Buyers that wait may benefit if supplies improve and prices decline, but they risk having less product available if the market stays tight.
Contracts themselves do not remove counterparty risk.
“In practice, we contract by the quarter with weekly truckload targets, but in this business you sometimes have to give to get,” Young said. “Reputation is the real enforcement mechanism in a bilateral market, and it’s more durable than any contract provision.”
That means when growers evaluate suppliers, they place added value on reliability rather than simply the lowest quoted price. A procurement plan built around a bargain is of little value if the product does not arrive when it is needed.
Carrying Inventory Comes at a Price
Additional storage capacity can give agricultural businesses another option as it allows them to buy or retain inventory when conditions are favorable and carry it until it is needed or until a contracted delivery date arrives.
But storage is not free, and holding inventory can quietly turn procurement into speculation.
“Contracting end-of-season prices and holding all year can be great if you have the balance sheet to support it and have good storage facilities,” Young said. “That said, any time you’re betting on the price, you’re betting.”
His preference is to separate operating expertise from market speculation whenever possible.
“If you’re best at managing assets, collect a premium there and use contracts to manage price risk,” Young said. “If your edge is predicting weather and reading global markets, then bet on price and pay someone else the asset-management premium.”
That distinction matters for a 2027 procurement strategy. More storage or larger inventories may create financial value when they support a known operational need or contracted sale. They become more dangerous when the expected return depends primarily on guessing where a commodity price will move.
Preserve Cash Before Adding Equipment
The same cash-flow discipline applies to machinery. Higher borrowing costs and tight margins are making growers more cautious about whether to purchase equipment, lease it, continue repairing an existing machine or postpone replacement.
Fenaroli noted the credit environment has become a significant concern.
“Interest rates are a huge concern for ranchers,” Fenaroli said. “A lot of banks are looking at ways to help people make their payments, or are just writing fewer loans. As a whole, it is a tough time economically right now.”
Young recommends resisting the temptation to view available credit as proof that an equipment purchase makes financial sense.
“From what I can tell, the banks love to lend to ag, which can make it easy to borrow your way into equipment, but that equipment depreciates,” Young said. “Just because your lender marks the collateral at a certain price doesn’t mean it’ll sell for that when you need to sell it.”
An asset sale involving one of his clients reinforced how uncertain equipment values can be. The agricultural machinery market remained relatively localized, and equipment moved slowly until the seller gained a better understanding of where demand existed.
Plan Several Versions of 2027
Perhaps the biggest change growers can make in preparing for 2027 is to stop treating the annual budget as a single prediction.
Woolf recommends scenario analysis that tests the operation against different combinations of commodity prices, water availability and input costs.
“Rather than rely on a single forecast, many growers evaluate how their operation would perform under different commodity prices, water availability and input costs,” Woolf said. “The goal is usually about maintaining flexibility rather than predicting the future.”
Those scenarios can create decision points before a crisis develops. A grower may establish the commodity price at which acreage no longer generates an acceptable return, the water-cost threshold that changes an irrigation or planting decision or the input increase that requires spending to be pulled back elsewhere.
For annual-crop producers, that may mean reducing acreage or switching crops when projected margins no longer justify the investment. Permanent-crop growers have fewer options, making contingency planning and liquidity even more important.
“The scenario analysis provides more clarity for when it’s a good time to fallow part of the land or place greater emphasis on pulling in input spending,” Woolf said. “Maintaining flexibility is more important than assuming one forecast is going to be correct.”
That may be the most useful principle for growers entering another uncertain budgeting cycle.
The strongest 2027 plan may not be the one that predicts fertilizer, diesel, water or interest rates correctly. It may be the one that identifies what the operation will do when those assumptions prove wrong.
“Plan for the worst and hope to weather the storm,” Fenaroli said. “California Farm Bureau is doing what we can to ease regulatory pressures and ensure the farmer can remain profitable.”
