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A Letter to Farmers

February 26, 2010
By: Bob Utterback, Farm Journal Columnist

I was recently asked by a grain producer: "What are the attributes of a successful grain farmer of the future?” I told him I wanted to give it some thought and would put it on paper. Here's my response.

Dear Producer,

When I thought about your question, I felt it came down to improving management in three key areas: production, price risk management and stabilizing input costs.

1. Production

Your product must be the superior quality that buyers want. The classic lesson taught in business school revolves around the story of the Edsel. A lot of market research was put into building the car that the market said it wanted. After Ford produced the lavish car, consumers did not respond. While consumers liked the concept on paper, what they really wanted was cheap transportation. The moral of the story for producers: While consumers say they want organic food, what they really want is "green” produce—high-quality food that is cheap!

Yields must be high enough to provide profit. Some economists suggest producers should push technological advances until the last unit of expense is equal to the revenue generated. This implies that there are three big areas for future improvement: control of diseases in high-yield populations; an effective use of water, especially in the Western states; and fertilization practices for optimum production in light of potentially more stringent runoff regulations.

In addition to producing superior quality, the product must be held until the buyer wants it. Producers will need to store on-farm to take advantage of basis and carry incentives. As many on-farm storage units approach the size of a modest elevator, I see a couple of problems developing. First, the farmer uses the grain bin as a substitute for selling inventory early. The logic is to get the grain in the bin and market it later. As many old-time elevator managers will tell you, the quickest way to go broke is taking unnecessary flat-price risk exposure. Second, in 2009 many producers learned that just because you have the storage space does not mean you have the dryer capacity to keep the combines running. As units get bigger, necessary management skills increase exponentially, not linearly.

Bottom line: Producers who continue to improve product quality along with yields and storage management will be the ones in position to take advantage of opportunities as they present themselves.

2. Price risk management

We all want to get the most from our production but at what risk? Is it prudent to have the chance to lock in $150 per acre profit but risk it for another $20 to $50?

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FEATURED IN: Farm Journal - Mid-February 2010

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