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February 2011 Archive for Ask a Margins Expert

RSS By: Chris Barron

Chris BarronHave a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.

 

Track Your Marketing

Feb 27, 2011

How do you track your marketing? I've observed several interesting methods as I've worked with producers over the last couple of years. One method I often see is the process of stacking contracts on the desk or in a file in the order of which they were sold. When the producer wants to know where they're at they simply tally up the totals. Another method I see used quite often is recording sales in a notebook. One common problem I've found with this process is occasionally the notebook grows legs and disappears.
 
The final method I see occasionally is the grower tries to remember sales in their head. This method is okay until something happens to your head or by chance you happen to forget about a contract or two. Generally I find these growers will contact the elevator before harvest to get a summary of what’s been sold and often the producer is surprised by the information on the summary.
 
With the volatility we are faced with in the markets, it's absolutely critical to have concise and reliable internal marketing information. For example, if we know with absolute certainty our percent sold and bushels per acre sold at any given time we can make much more effective decisions. If we know at a glance that we are precisely 25% sold we can calculate in an instant an additional specific percentage sale.
 
Another possible complexity that needs to be tracked accurately is multiple sales locations. This is another area where I see challenges in keeping track of precisely what we have sold unless we have a condensed single tracking system. As our operations grow and we make different decisions with different farms, different entities, and different elevators the tracking challenge becomes more complicated.
 
I’ve found that tracking marketing sales on a basic spreadsheet to be the most effective method. This information can be easily e-mailed to lenders, processors, landlords, or partners which helps keep the document a living and accurate tool. If you form the habit of recording sales each and every time they are made the spreadsheet will do the rest of the work for you. By having this information at your fingertips you've just empowered yourself with information which will ultimately improve you’re marketing by virtue of accurate information. Over time keeping this information becomes even more valuable as you can study trends and pass information from year to year.
 
Here is an example worksheet that I've used for years which is very basic but can empower you with instant information and a realistic picture of your current marketing position.
Ask A Margins Expert

If you would like more information on systems for tracking your marketing send me an e mail with your questions. 

Machinery cost calculator

Feb 21, 2011

 

Calculating your equipment cost and figuring it into your cost of production can be a challenging task. One way I see many producers evaluate their equipment cost is to use the local universities "custom rate survey" report. With this information the producer will assign a custom rate to each pass that they complete for the growing season and harvest. By totaling up these values the producer can gain some idea of equipment cost which can be translated into their cost of production. Generally this method will cover the equipment expenses for your operation and is a quick and easy way to calculate cost.
One potential problem with this method is you are relying on other people's numbers to produce your individual cost structure. There are several variables that can be different from one operation to another such as fuel, labor, repairs, depreciation, and interest rate. With this in mind we will look at one method to determine your equipment cost which is consistent and effective in determining your individual cost.
The first piece of information to collect is total equipment value. The second piece of information is to calculate your total acres of operation which should include all of the acres you farm plus any custom work. The final component you will need is to include a standard annual ownership cost. The generally accepted standard is to use 25% of your total machine value. This 25% is comprised of 10% interest or opportunity cost, 10% depreciation, and 5% repairs. These numbers may vary from one operation to another. If you have older machinery your repairs may be higher but depreciation would be lower. On the other hand, new machinery lowers repairs but increases depreciation and interest.
Here is an example calculator to help you understand how to set this up within your own operation.

 

Equipment Cost Calculator
Total acres Farmed
3,000
Total Equipment Value
$800,000
Annual ownership %
25%
Annual Cost / Acre
$66.67

 

 
Assuming this 3000 acre producers machinery value is $800,000 then his/her annual cost per acre would be $66.67. Using this type of calculation year in and year out gives you a consistent tool to use in order to analyze how a purchase decision may impact your operation on a per acre basis from year to year.
Once you have this fundamental process in place you have the primary cost of your equipment calculated. From here, all you need to do is calculate your fuel and labor cost for each pass you complete on your operation and you will have an accurate machinery cost per acre.

Five Traits of Successful Producers

Feb 11, 2011

 

As I've been traveling this winter to many different meetings across the country, I've had the pleasure to meet some outstanding producers! I started making some notes on individual strengths that I observed in many of these producers operations. Based on these observations, I discovered there were five factors or traits that these very successful producers have in common.
The first trait is Entrepreneurship. These producers are constantly pursuing new opportunities. They have clearly defined written business plans supported by a definite mission. They tend to be doers, the minute a plan is designed the implementation process begins. They think “out-of-the-box” and are not afraid to invest time and money into new ways of doing things.
The second trait is Innovation. These producers seem to constantly be asking the question, “how can we do things better?” They tend to be focused on profitability rather than just an accumulation of acres or size. For example, their focus tends to be on continuous improvements for every portion of the operation in order to maximize profit margins. They generally do their own on farm product comparisons to determine which options provide their operation the most value. As challenges arise these producers are equipped to develop timely solutions.
The third trait is Capital Management. These producers are businesspeople who just happen to be farmers. This group makes decisions based on calculated economic information rather than what feels right or by emotion. For example, they use computerized information management tools to develop, manage, and measure results as a standard business procedure. In addition to having a firm understanding of cash flows and balance sheets, they tend to have outstanding working relationships with capital partners, lenders, and suppliers.
The fourth trait is People Management. Of the five traits listed this may be the most important component. Communication ultimately can be the single process to make or break an operation. The most successful operations I've observed consider the people to be their most important form of capital. These operations have a workforce that consists of quality “management level people” rather than just hired help. Many of these operations provide opportunities for people to partner, profit share, or even buy their way in to the existing business over time. Generally, these operations have little if any personnel turnover.
The fifth trait is Technology Management. These producers adapt rapidly to new equipment, products, and technologies. They are early adapters to technology. These operations benefit immediately to technological opportunities because they have the resources within their operations to use it. They have the innovation, the capital, and most importantly the people to implement new technologies. Another noticeable priority of these producers is their high value of continuing education. These producers understand that rapid changes in agriculture require a strong commitment to ongoing education to ensure success.
Reflect on these five factors or traits within your individual operation. Ask yourself, which of these areas do we excel? What areas could we improve?
Managing margins is no longer just about being a good producer or a good marketer, but rather it's about being a good Business Manager!
 

Chart Your Breakeven

Feb 05, 2011

Most market analysts and traders use charts and graphs to guide them in decision-making. I would argue that it's just as important to use charts and graphs on the production side. Anything we can do to remove the emotion and paint a picture of reality will ultimately improve our chances for success. 

As we discussed in a previous blog, the current grain price should be viewed as half of the margin equation rather than price alone. To best manage our margins, sometimes we need a visual perspective to create an understanding of our reality.
 
Calculate your total cost of production for each crop. Chart that cost of production to create a visual picture of breakeven at each yield level. Remember to include "Return to Management" in the cost. Return to management is the cost of living and salaries required from the business during the course of the year. This must be included in your cost because paying yourself is part of the operations cost. This will obviously raise your cost of production but must be included to ensure a price level adequate to cover all expenses.
 
Here is an example chart with a breakeven selling price at every yield level. Once you have your costs calculated, connect them to price. Price and yield visualization with profit margin opportunities built in is just another way to help you manage margins rather than predict prices.
Example:   This is a corn grower’s chart with a cost of production at $4.00.
Barron Chart
 
Keep in mind, this chart is a reflection of your breakeven including your "return to management" therefore, you already have your profit built in. Any price opportunities above your breakeven is icing on the cake.
 
There are many tools available to help you create this type of chart. If you are interested in how to put together this type of chart for your own operation just send me a note.
 
 
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