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February 2012 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.

 

Crop Share Analysis Tools, Part 2

Feb 24, 2012

 

As discussed in the previous blog, I promised a tool for measuring two partners in a crop share arrangement. As crop share arrangements increase in popularity, the need for tracking tools quickly becomes apparent to the people involved. Every situation tends to be unique in its own way. Some partnerships may be 50-50; others may be 60-40, while others could be 70-30. There is no right or wrong way to form partnerships so long as the information is transparent.
Here is an example of a basic tool used for calculating production cost between two individuals. This same type of format could also be used to measure the value exchange between a landlord and a tenant.

 

Land…. Partnership Calculator
 
Complete yellow boxes
 
 
 
 
 
Individual 1
Individual 2
 
Price/Bush.
$5.79
Total Bush.
37,000
$5.72
$5.85
 
Yield
185
 
Total Bu.
18,500
18,500
 
Acres Total
200
 
 
100
100
 
 
Acre $$$
Total $$$
% cost
50%
50%
1
Land Rent
$300.00
$60,000
32%
$30,000
$30,000
2
Tax
 
$0
0%
$0
$0
3
mgt.
 
$0
0%
$0
$0
4
Int.
$12.00
$2,400
1%
$1,200
$1,200
5
Ins.
$25.75
$5,150
3%
$2,575
$2,575
6
Seeds
$110.82
$22,164
12%
$11,082
$11,082
7
Fert. Lime
$95.00
$19,000
10%
$9,500
$9,500
8
NH3
$126.55
$25,310
14%
$12,655
$12,655
9
Herb.
$22.87
$4,574
2%
$2,287
$2,287
10
Insect.
 
$0
0%
$0
$0
11
Mach.
$135.00
$27,000
15%
$13,500
$13,500
12
Dry/bu.
$0.25
$9,250
5%
$4,625
$4,625
13
Haul/bu.
$0.24
$8,880
5%
$4,440
$4,440
14
Stor./bu.
$0.04
$1,480
1%
$740
$740
 
 
per/ acre
Total cost
 
 
 
 
Total Cost
$926
$185,208
100%
$92,604
$92,604
 
Cost per / bu.
 
 
 
$5.01
$5.01
 
Total Income
 
 
 
$105,820
$108,225
 
Gross Return
 
 
 
$13,216
$15,621
 
Income per/ac.
 
 
$132.16
$156.21
 
ROI
 
 
 
14.3%
16.9%

 

 
If you're interested in getting a copy of this spreadsheet, send a request. I'd also encourage you to send me your comments and questions regarding this or any other type of tool for measuring, analyzing, or tracking your business.

Crop Share Analysis Tools

Feb 15, 2012

 

Crop share arrangements are becoming more popular, as cash rental prices for land continue to climb. Over the course of the next several blogs, I'll address a number of different situations where producers have asked about tools designed to analyze different types of sharing situations.
 High commodity prices over the past several years have obviously increased profitability. Many landowners are looking for creative ways to participate in the profits including, custom farming, shared percentages, variable leases, and other kinds of unique arrangements.
Another scenario I see developing among producers and/or landowners is where each individual takes a percentage of the farm in order to share equipment, management skills, and reduce their overall risk.
The first example we’ll review in this blog is of three producers sharing percentages on one farm. I was asked; “Is there a tool which could calculate different percentages for a grandfather, father, and son.” This producer didn't have any way to analyze their situation, but he knew it was critical to accurately document the process.
There is a fair amount of “production partnering/crop sharing” occurring and/or being considered. This process requires specialized analysis tools. These tools can be built simple, yet comprehensive. A clear understanding of cost of production, yield prospects, pricing opportunity, and ultimately the bottom line, provides tremendous value when multiple people are involved.
Here is an example of the tool I built for three farmers partnering on the same farm with different percentages of ownership. This tool will accommodate any percentage for each individual, along with each person’s different market price.

Price/Bu. Avg.
$6.03
 
Complete the Yellow Boxes
Yield
180
Total Bu.
36000
 
Acres Total
200
Corn
Crop Type
 
Drier/Bu.
$0.24
Drier/Ac.
$43.20
 
Hauling/Bu.
$0.23
Hauling/Ac.
$41.40
 
Storage
$0.05
Storage/Ac..
$9.00
 
Total Bu.
36,000
14,400
14,400
7,200
Acres
200.00
80.00
80.00
40.00
Name
Farm Total
Grandpa
Dad
Son
Price/Bu.
$6.03
$6.23
$6.02
$5.85
% Share
100.0%
40.0%
40.0%
20.0%
Land
$300.00
$120.00
$120.00
$60.00
Tax
$0.00
$0.00
$0.00
$0.00
mgt.
$50.00
$20.00
$20.00
$10.00
Int.
$15.00
$6.00
$6.00
$3.00
Ins.
$25.00
$10.00
$10.00
$5.00
Seeds
$110.00
$44.00
$44.00
$22.00
Fert. Lime
$95.00
$38.00
$38.00
$19.00
NH3
$115.00
$46.00
$46.00
$23.00
Herb.
$25.00
$10.00
$10.00
$5.00
Insect.
$14.00
$5.60
$5.60
$2.80
Mach.
$135.00
$54.00
$54.00
$27.00
Dry
$43.20
$17.28
$17.28
$8.64
Haul
$41.40
$16.56
$16.56
$8.28
Stor.
$9.00
$3.60
$3.60
$1.80
Expense / Ac.
$977.60
$391.04
$391.04
$195.52
Expense Totals
$195,520.00
$78,208.00
$78,208.00
$39,104.00
Income / Ac.
$1,086.00
$1,121.40
$1,083.60
$1,053.00
Income Total
$217,200.00
$89,712.00
$86,688.00
$42,120.00
Margin / per/ac.
$108.40
$143.80
$106.00
$75.40
Margin    ROI
11.1%
14.7%
10.8%
7.7%

If you're interested in a copy of this spreadsheet send me your request.
In the next blog I'll feature a spreadsheet designed for two partners which would be adaptable for landlords and tenants both.

Set a Margin Goal

Feb 07, 2012

 

In the last blog we discussed the importance of "Stress Testing" your margins. Understanding how particular risks can impact your business is only half the battle. The other side of the equation includes understanding profit opportunities. Knowing what these profit opportunities are and being disciplined enough to take advantage of them are two different things. For example, it's easy to make this statement; "If corn gets to $6.50, I'm definitely going to sell some corn."  Or "I’d be willing to sell to my insurance level, if corn hits $6.50." The problem with these statements is that once we receive the opportunity, we may not take advantage of it. We can all come up with excuses as to why we should wait for the price to climb a little more! Without a predetermined plan of action, it's almost impossible to make a sound business decision.
 Let's take a look at a couple processes which can hopefully improve your confidence, accuracy, and discipline as you manage margin opportunities.
Goal Setting is the best place to start. How do you structure goals for your operation now?
Here are five essential components to keep in mind as you structure goals.
1.       Specific
2.       Measurable
3.       Attainable
4.       Rewarding
5.       Timely
By applying your goals into a written plan and utilizing these five guidelines, you'll significantly improve your chances for success!
Margin Goals are the most effective goals for your farm. While setting individual goals for yields, market prices, and input costs are important, always keep your primary focus on margin opportunity!
Here's an example of the tool I shared in the last blog, which not only analyzes stress tolerance but can also help you to structure goals which meet the criteria listed above.

 

 
 
 
 
 
Margin Goals
 
 
Margin Analysis
 
 
 
 
 
 
Acres
1000
 
Total Production
175,000
Yield
175
 
Total Expenses
$845,000.00
Price
$5.75
 
Total Income
$1,006,250.00
Cost of Prod. Per/ac.
$845.00
 
Expense Per / ac.
$845.00
 
 
 
Income Per / ac.
$1,006.25
 
 
 
Total Net Income
$161,250.00
 
 
 
Net Income / ac.
$161.25
 
 
 
 
 
 
ROI / Margin
19.1%
 

 

 
This type of tool can help you remove the emotions which sabotage discipline. It's very likely we'll see significant volatility in the coming years. Having the capacity to manage your margins as conditions rapidly change will be an absolute necessity in achieving your goals for success!
If you'd like a copy of this tool for structuring margin goals in 2012 send me your request.
 
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