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September 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.

 

Grain Margins For 2012

Sep 26, 2011

Two weeks ago, cash corn bids were in the $7.30 range. Now those same cash bids are in the $6.20 range. Rapid price moves like this affect everyone emotionally, whether we like to admit it or not. These emotions aren't necessarily a bad thing. They help us to question ourselves, to make sure our plans and goals are in check.

When market conditions shift, don't panic. Instead use the situation as an opportunity to hit the reset button. Use this time to recalculate your cost of production. Knowing your actual cost of production is the one part of the equation that you can control and calculate. Assess your previous plans and goals and compare them to what a new marketing plan may look like. Spend some time answering the following questions in order to develop a clear understanding of your margin goals.

1. At what price level do I have an adequate margin to begin sales?
    a. What are my basis opportunities?
    b. What are my estimated or actual yields?
    c. What percent of my crop do I sell at a time?

2. What overall profit margin would I be satisfied with?
    a. Cash flow requirements?
    b. Next year's cost of production increases?

3. What marketing tools am I willing to use to reach my margin goals?
    a. Cash sales only?
    b. Futures/Options? 

4. At what point do I need to have the current crop sales complete and at what margin level should I start new crop sales?

Invest time working through these questions and put your plans in writing, it will be much easier to be disciplined. A written plan with goals and objectives provides an effective tool for managing risk and opportunity.

As you work through plans such as the one listed above, consider using tools that can make these planning strategies more simplified. Here is an example of a margin chart which demonstrates your margin at every price and yield level.


Chart your Margin

(click to enlarge image)


In this working version you simply plug in your cost of production and it will automatically calculate every margin scenario. We will be using this system among several others in the weeks and months to come as we plan our strategies for maximizing margins in the coming years.


If you're interested in learning more about this tool feel free to contact me.

cbarron@cb-farms.com
 


 

Invoice 2012 Seed Needs Now

Sep 18, 2011

 

Why should we be concerned about invoicing our seed needs for 2012 already? It seems like every year we need to be making our decisions earlier and earlier. For many it's difficult to commit to expenses for 2012 when we have yet to receive any income from 2011! Even though it may seem early to be making seed decisions, now is the time to begin the process as your seed decisions set the foundation for your planning in the coming year. There is really no better time than before or during harvest to think through your coming year’s seed plan. Some of the strengths and challenges of current hybrids are fresh in your mind which helps you make better product decisions. Most importantly, working through your seed decisions now will ensure receiving the best products from your seed supplier. Supplies on some key products may be tight as weather has impacted seed production much the same as it has impacted our commercial fields. If you're willing to commit early, it’s more likely seed companies can meet specific product needs.
As producers we prefer to leave supply issues to the seed companies. We expect to order what we need and have it delivered when we need it. This year however, presents a couple unique challenges for the coming year. Overall corn acres look to increase, as some estimates indicate we may reach over 94-95 million acres. So the question we face as producers is: do we want to access the best agronomic options for our fields at the front of the line or at the back of the line? Other local concerns regarding supply are disease situations. For example, Goss’s Wilt was severe in many areas. With the heavy return to corn on corn in localized areas, there will be a high demand for specific products which have better tolerances to this disease. Having these early conversations with your seed supplier will help you to lock down the products which best fit your situation.
Another compelling reason to have the seed plan completed early is for the development of your marketing plan. Once you have a rotation plan set and specific acres of production assigned to your fields, it's much easier to calculate production totals. Seed plans also help you determine other production expenses, which allow you to have a better handle on overall expenses. By having an accurate production and expense plan you can now compare this information to your marketing opportunities. The best margin opportunities could be in front of you right now!? With a solid plan and a clear picture of your expenses, production, and marketing plan it will be much easier to capitalize on margin opportunities.
Don't wait around too long this year to work through your seed plan. Seed is the foundation decision which initiates your overall crop management for the coming year. As you develop confidence in your productivity plan you can begin to improve your marketing plan and take advantage of margin opportunities as they develop.

Your Harvest Scoreboard

Sep 12, 2011

 

With football and harvest season both under way, it’s a great time to draw a comparison between football and crop production. In football and crop production alike, we develop a game plan, run our offensive and defensive plays, and focus on the "Big Win."
Just as the football game has four quarters, crop production can be viewed much the same. For example, in the crop production first quarter (January – March), we develop our offensive strategies around equipment, agronomics, risk management and marketing.
Second quarter (April – June): We continue our offensive gains. Planting and crop protection are the top priorities during second-quarter play. Unfortunately, many of us this year played a lot of defense against a formidable opponent known as the weather! Thankfully, by the end of June most of us got the needed turnovers of better weather so we could continue our offensive march down the field.
Third quarter (July – September): Again we find ourselves dealing with additional turnovers. Weather events such as too wet, too dry, excessive heat, severe hail and windstorms. During the same time, marketing opportunities continue to improve, creating a different complexion for the game. With pricing opportunities reaching record levels, we are faced with the question of how aggressively to play offense before harvest arrives.
Fourth quarter (October – December): Time to bring the crop to the end zone! To this point, we've managed through the ups and downs of the game and we have an opportunity for a Big Win. During this quarter, we are bringing the crop to the end zone. At the same time, we are learning our final yield information. Now we can begin to calculate what the market opportunities will allow us to post on the scoreboard. As the yields become reality, the final play will be to determine price. This year, the final pricing could be like the last touchdown pass for the Big Win.
The true question is: How big of a win do you want to finish the game?
Here is a scoreboard that you can use to calculate your operations performance. Simply enter your yield per acre, cost of production per acre and overall average selling price. Once you plug in this information, you will have a clear picture of how your scoreboard looks. Costs per acre, income per acre, yield and price are all critical numbers. But don't forget to keep your eye on the end game: your MARGIN!

 

 
 Margin Scoreboard
 
 
 
 
 
 
 
Away
 
Home
 
 
Cost/Ac.
Yield
Income/Ac
 
 
170
 
 
$789.00
Price
$1,054.00
 
 
$6.20
 
 
 
Margin
 
 
 
 
33.6%
 
 
 
 
 
 
 

 

If you would like this working scoreboard, please send me an e-mail and I'd be happy to forward it to you.
After harvest and toward the beginning of next year, we will have many new and exciting tools to use as we try to improve our game for next year.

Time for Corn Harvest

Sep 05, 2011

 

Corn harvest is already underway for some farmers. Many other producers are still fine tuning equipment and waiting for crop maturity. Most years, growers have the luxury to allow the grain to dry down “some” in the fields in order to minimize drying costs. Depending on location, producers usually have a moisture percentage in mind for starting harvest. For some it might be 28% moisture and for others it may be 19% moisture.  This year however, it may be necessary to harvest the corn crop at a higher moisture level. Much of the Corn Belt has experienced weather extremes such as, too wet, too dry, excessive heat, hailstorms, and/or windstorms. Most every farm has experienced at least one, if not all of these variables during the growing season. In general, this corn crop won’t tolerate an extended period of time waiting to dry down in the field. Poor plant, root, and stalk health will require us to put a high priority on harvesting early.
 In visiting with producers across the Corn Belt the most common concerns with early harvesting is the increased cost of LP in comparison to last year. LP costs this year are roughly 30% higher. This price increase may be mentally troubling but don't forget corn prices are roughly 40% higher than last year also. While it's not fun paying more for LP at harvest it's still a relative cost, as compared to the increased corn price.
We have a high value corn crop that's currently in the field! Think of this crop as cash instead of grain. For example, 160 bushel corn at $7.50 is $1200 an acre. If you're going to hesitate on starting harvest for an extra week in order to feel comfortable about the calendar or the moisture of the corn (drying expense), ask yourself the following question: If there were twelve $100 bills lying out in the middle of each acre, would I go out to the field and start picking them up? This may be the year more than ever, to try and keep your perspective on opportunities. Yields are variable but prices are high. Understand your individual risks with leaving the crop in the field too long. Some harvest risks include, severe weather (heavy rains, windstorms, snow), stalk health, down/damaged corn, and grain quality just to mention a few. If there were ever a year to go get the crop it’s probably this one! The best margin manager’s will always aggressively go after their cash opportunities. The money isn’t harvested until the grain is in the bin!
 Here is a basic tool designed to calculate crop value, drying cost, and assess potential economic loss.

    Harvest Decision Aid
 
 
      Harvest   Report
 
Fill in the tan Boxes
Fill in Blank
 
Blue boxes report results
Results
Total Acres
2400
 
Total Crop Value
$2,961,480.00
Grain Price/ bu.(avg. selling price)
$6.67
 
Crop Value Per/ Ac
$1,233.95
Yield
185
 
Total Bushels to Harvest
444,000
 Grain Harvest Moisture %
25.0
 
Total Drier Cost
$177,600.00
Drier cost per/point to... 15%
$0.04
 
Drier Cost Per/ Ac.
$74.00
Daily Harvest capacity / bu.
12,500
 
# Day to complete Harvest
35.5
 
 
 
 
 
Harvest loss potent. (bu. per /ac.)
5
 
Harvest loss expense per/bu.
$33.35
 
 
 
Total Harvest loss Value
$80,040.00
 
 
 
% of drier cost…. value
45%

 
If you're interested in this basic tool let me know, I'd be happy to send it to you.
I’ll have a more comprehensive version of this tool available for next year.
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