The Bottom Line: Budget Toward a "Profitable Breakeven"

January 7, 2017 02:34 AM
 
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By Ryan Bristle

Time will tell whether 2016’s record yields are a short-term bandage or a longer-term bailout. Selling extra bushels pushed many operations into the black—or, in the worst cases, limited losses—but signs are pointing to another year of tight margins. This means creating a solid business plan might be the most profitable step you take this winter. 

Yields, of course, can just as easily disappoint. For this reason, if you budget toward a breakeven price per bushel using only yield projections, you can be sorely off the mark. That’s why we recommend using gross dollars per acre for your budgeting goals. As yield estimates change throughout the year, your marketing objectives can (and should) change as well. 

Let’s take a look at some business planning basics to help you get there.

Start with input costs. It might seem obvious, but the reality is while most farmers are good at tracking expenses on an aggregate level (for tax purposes), most don’t really understand their true costs.
What are the crucial costs per acre?

  • Land
  • Machinery and labor
  • Agronomic inputs
  • Depreciation
  • Term debt payments
  • Living expenses
  • Profit

Land, machinery and labor, and agronomic inputs are easier to identify and track. For machinery, use a realistic and repeatable formula you can compare with yourself (history) and with others (benchmarking). Even if your equipment is paid for, there’s still a cost to own and operate it. Using a formula based off market value is a good start, but make sure you include repair and maintenance costs, plus the interest or opportunity cost of ownership. We see machinery and labor costs trending down, but the range is still extremely wide.

The remaining four costs can get lost in the mix or simply forgotten. Depreciation is a non-cash expense that accounts for the cost of replacing equipment worn out in the production process. Tax depreciation is a different story—use depreciation based on the market value of machinery and other assets rather than the book value.

Living expense is the operator draw and can vary depending on your family situation. If your personal living expenses are coming out of the operation, be real about including this as a cost of production. 

Profit plays an important part of the budget and should be considered a cost of staying in business and capitalizing your growth. Building profit into the business plan makes sure you don’t forget to plan for it when considering breakeven targets.

Writing down and regularly reviewing your goals might be the most important habit you develop for your business. In this case, let’s focus on goals for your farming operation:

  • Gross dollars per acre revenue. Manage toward a combination of yield and price that will allow you to cover all of your costs, including profit, term debt payments and depreciation. This then becomes the basis for developing your yearly marketing plan.
  • Working capital. Shoot for a working capital position that covers 50% of your annual expenses. Working capital is the first shock absorber when you hit financial bumps. 
  • Return on assets and equity. Over time, we see better returns in production agriculture than almost any other industry. Set your long-term goals and make decisions for the future that align your returns with these goals.
  • Growth. My personal business motto is “smart growth = sustainable success.” I have it on my farm business cards and the mouse pad on my desk. Growth goals differ by operation, but intelligent growth sets you apart from the crowd in the long run.

A quote I’ve been pondering lately is “In the future, we’ll be able to better predict the future.” In the meantime, be smart about running your farm like the business it really is.  

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