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Have 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.
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?
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.
(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.