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Business Matters: Margins Revert to Old Norm

January 8, 2014
By: Chris Barron, Top Producer Columnist
 
 

ChrisBarron Business Matters

While grain farmers have experienced production challenges during the past five years, they’ve also reaped record profits.

Throughout the past 30 years, corn and soybean margins have been much tighter. For perspective, the difference between production cost and price opportunity was about 8¢ per bushel for corn and about 26¢ per bushel for soybeans. I’m not saying margins won’t be better than that, but I’m cautious because some years, prices rarely—if ever—rose above cost of production for any length of time.

Ask yourself: 1) What is my 2014 production cost, and how will I monitor it throughout the year? 2) How much downside price risk can my operation tolerate? 3) What is my realistic profit objective, and will I be disciplined enough to capture opportunity?

Hit the Bull’s-Eye. Cost of production is a moving target, and calculating average costs in an environment with tight margins isn’t good enough. During the past few years, we could have been off by 30¢ per bushel with little consequence. With today’s tight margins, knowing your cost of production within 5¢ per bushel or better is a necessity. Look at individual line item costs in terms of cost per bushel.

In your calculation, be sure to include land, taxes, interest, insurance, seed, fertilizer, nitrogen, herbicide, equipment, fuel, labor, grain handling, drying expenses and storage costs. Knowing your costs on a per-acre basis is good, but you’ll also want to look at production costs from several different angles to get the best perspective.

Risk management might need to be looked at differently as we move into 2014 and beyond. Crop insurance has single-handedly been the risk-management tool of choice for most farms. With potentially lower revenue coverage in 2014, we need to dig into our toolboxes and come up with additional risk-management systems.

Learn how to use futures and options. If you’re not comfortable doing this, look elsewhere for help. You don’t need to become a trader, but you must understand today’s marketing environment.

In addition, focus on basis opportunities and market carry, depending on your plans for delivery. The best risk-management strategy comes from having the best plan. Don’t rely on one strategy. Implement several tools, allowing you to be flexible when conditions change throughout the year.

Profit opportunities in 2014 could be few and far between. No one truly knows what the markets will offer up in the year; however, we do have the power to calculate the other side of the equation. Scenario planning and keeping your cost of production up to date can give you the confidence to take advantage of a particular price.

Calculate your scenarios to determine your target price and profit margin objectives. Once you have determined your goals, be disciplined and make sales. The year ahead might not be as profitable as recent years, but profits can be captured with solid management. 

Chris Barron is director of operations and president of Carson and Barron Farms Inc. in Rowley, Iowa. He is also a farm business consultant and the author of the AgWeb.com blog, "Ask a Margins Expert." To submit questions and comments, e-mail Chris at cbarron@cb-farms.com.

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FEATURED IN: Top Producer - January 2014

 
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