My Thoughts on Your Cost of Production Per Acre
Nov 23, 2011
I have had several lengthy conversations with some of our countries top corn producers, and the consensus is $5.50 corn is still extremely profitable and needs to be taken advantage of. No, it is not as profitable as $6.50 corn, but it does turn a good profit. Let's look inside the numbers for a moment:
- Assume you can average a 180 to 185 corn yield. At $5.50 per bushel your gross revenue will be close to $1,000 per acre.
- If your "total" expenses are between $700 and $800, that still gives you a profit of $200-$300 per acre. There are very few businesses in America that can turn a 30% Net profit, and here you have one staring you in the face for a second year in a row.
I know these numbers will vary from operator to operator, so I would encourage you to start working on both your variable and fixed cost estimates immediately for 2012 if you have not yet started. It is imperative that you know ALL of your expenses (or at least have general idea) before you start pricing bushels.
I am amazed every year when producers tell me their cost of production per acre. As you can imagine, I here numbers all over the board, some down as low as $200 per acre (which is simply NOT possible). With our industry being so fragmented, there is no standard accounting practices in place, land prices vary from state-to-state, and producers tend to have their own methodologies for coming up with their break-evens. To let you know, many of the top producing operators I work with have these calculations down to a science. They have elaborate spreadsheets that equate their TOTAL expenses. If one penny leaves their farm it is accounted for. They include everything when figuring their TOTAL cost. If they own their land, they factor in what it would be worth in the "rental" market and charge themselves accordingly. They factor in their own pay, their payroll taxes, their estimated business taxes, seminar and learning expenses, fuel, travel, etc... For those of you who are not doing this, you are at a large disadvantage to your competition. Remember, you are trying to run a business, you are NOT trying to be a professional gambler! If you had the opportunity to invest in a business that could turn a 30% NET profit you would be all over it. Fortunately that opportunity is still on the table and being made available for a second year in a row. If you understand and know your net operating and production expenses it makes your marketing decision that much easier. If you owned a large construction company you would need to know your total expenses before you could place a bid, this is no different. As in any business you are trying to lock in and capture a net profit.
Remember, there isn't a soul out there, including myself that knows where prices will be next year at harvest. Our job as producers is to properly identify risk as it pops up and comes about. From here we have to make the proper adjustments for our specific operation based on our own personal cash flow and financial needs of the operation. One of my clients has referred to me as his "point-man"... He says, "When 'Charlie' pops his head out the weeds, I need you to yell duck." I thought that was a good analogy. As we walk down this path together all I am trying to do is point out and identify the risk along the way. If you fail to duck, shoot or react its all for not. Just remember, when I tell you there is a steep decline ahead, and that the road looks to be a little rocky with a couple of hair pin curves, and a few patches of black ice....then you should try your best to throttle back and reduce some risk!
As for today, some in the trade seem to be thinking we will see another strong ethanol production number this morning. If it doesn't play out this way I would suspect we setback even further. I did want to let you know one of our clients up in Minnesota told us yesterday that his local ethanol plant called him up begging him to delivery his bushels NOW that he had contracted to deliver in March. I am being told they honored the March premium and the near-term basis. It worked out great for the farmer, as he no longer has to mess with the storage. It also leave some bulls with more hope and thoughts that the crop and the bushels are just NOT there.
Technically I think it looks like the Dec Corn market wants to eventually test the most recent lows down around $5.72, if that doesn't hold the market may soon look for support down around the lows made last March at around $5.45.
Remember, this is only a small portion of my Daily Report that comes out every morning. For more information on your profitability and cost per acre, go ahead an sign-up for the 30 Day trial of my report. There's no obligation! Simply sign-up by clicking here at the Van Trump Report