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January 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.

 

Margin Enhancement Opportunities

Jan 31, 2011

 

With current price levels growers will be producing an extremely valuable crop. As the value of our crop improves so do the opportunities to use products that can enhance our yields and ultimately widen our profit margins.
The current crop value for the 2011 corn crop is in excess of $1000 per acre for many operations. Obviously there are many expenses on the other side of the ledger; however, if we are precise in our purchasing decisions we have some opportunities to explore new technological improvements and products. The higher we can get our grain marketed the faster the returns from our yield improvement products.
If you assume that a particular product or technology can improve your yield by 10 bushel per acre, there is a much wider margin for return potential with $5.50 corn than with $3.50. Using this scenario, there is an extra $20 per acre of income to work with for every 10 bushel per acre of increase. This instantly increases the likelihood of a positive return as we consider using additional crop protection or yield improvement products. Using a $5.50 corn price and making the assumption that a particular product would cost $10 per acre, you would only need 1.8 bushel to cover your cost. After covering your costs you still have an income return of $17.50 per acre!  (See chart below) When market prices are strong there are large paybacks for increasing yields.  Many of the products and technologies that we have to choose from will provide more than 2 bushel per acre in performance improvement.
Consider building your own calculator to consistently measure improvement opportunities one product at a time. If you are interested in some decision-making tools feel free to send me questions.

 

        Margin Enhancement Calculator
Product / Technology Price
$10.00
per/ac.
 
Grain Market Price
$5.50
per/bu.
Yield Improvement prediction
5.0
Bu./ac.
 
Income / ac. Enhancement
$17.50
per/ac.
Bu. needed to cover product cost
1.82
Bu./ac.
Total Acres of application
100
Total Income / Return $$$
$1,750.00

 

 
Obviously, there are loads of options to choose from as we try to improve our yields. Here is just a short list of considerations to encourage you to think about individual product and technology options that may help to improve margins.
1.       Nitrogen Stabilizers                                                 
2.       Rootworm Corn
3.       Seed Treatments
4.       Variable Rate and Swath Control equipment
5.       Planter attachments or new equipment
6.       Spatial and Soil type mapping
7.       Tile/Drainage
8.       Fungicides
9.       Herbicides
10.   Crop Scouting Service
 
Every operation is unique as to what products and technologies may enhance profits. Some product decisions will be made depending on how the growing season plays out. Agronomic conditions will determine if some products may be needed or excluded. The basic concept is to develop a plan that is applicable for your own operation. It's up to you to maximize your margin opportunities.

Manage Margins in Volatile Times

Jan 21, 2011

 

Having  extremely high prices on our market screens with even more bullish predictions being discussed  daily create a difficult environment to make sales! Market volatility can drive our emotions wild unless we keep focused on margins instead of prices. If you have a firm handle on your overall cost of production it will allow you to break out particular line items by an expense or by a particular amount of bushels. Consider matching up a particular sale to cover a particular expense.
 Assume your five year production average is 180 bushel per/ac. in corn with a $4.00 per/bu. cost of production which would make your per acre cost $720.00. If you make a 10% production sale (18 bushel) at a $5.00 corn price, you’ve just generated $90 per acre revenue. Even more importantly you've covered 12.5% of your overall expense with one 10% production sale. If you could repeat this process on the rest of your crop you would be locking down close to a 25% return! Granted, you won’t be making every sale under the same condition, but it's important to consider the opportunities that each incremental sale provides. Once that sale is complete focus on the next opportunity and what makes sense for your individual operations margin goals.
 Many producers have fertilizer, nitrogen, seed, and herbicides locked in at this point. As these individual line items are purchased one can assign a dollar value to that particular portion of the crop investment. For example, if a fall fertilizer application was purchased, you can calculate what your current cost per acre would be for that portion of your investment. Let's assume an expense of $50 per acre for the fertilizer application. If your current local corn price is at $5.00, that means you would need to sell 10 bushel of corn to cover your fertilizer expense. If your seed bill is $100 per acre, you would need 20 bushel of corn. These examples may seem overly simplified but the discipline to manage profit margins may keep you in business longer than trying to hit high prices. The basic idea is to match up marketing with inputs, once an acceptable profit margin is hit, make a sale. When we know our margins along the way it becomes less stressful to make an incremental sale and helps to minimize emotional reactions.
Every producer has their own comfort level when managing risk and opportunity. Some operations have a large risk tolerance as others may have a much lower risk tolerance or capacity. Therefore, assess your own individual cost of production and refine it by the bushel and by the acre. This process will empower you to make marketing decisions based on margin management rather than price prediction.
 
 

Know your farms cost of production, on-the-fly

Jan 14, 2011

 

                     Know your farms cost of production, on-the-fly
 
Environmental conditions are constantly changing! Prices and input costs are volatile and the changes are extremely rapid. Sometimes you only have hours or even minutes to make critical decisions. It's important to have a process in place to adjust to these changes in a timely manner, as well as having the capacity to measure your results.
Just as pilots make a flight plan, agricultural producers need to do the same. For example, pilots communicate with the tower on takeoff, make course corrections in flight, and adjust for crosswinds along with many other variables. Before the plane even leaves the ground the pilot has a specific set of procedures and structured plans of action for most any situation. Think of the benefits a farming operation would have with these types of structured procedures.
This type of planning can start out fairly simple. I’d like to suggest four specific concepts or actions that may be able to help you in your operation when it's time to make a course correction.
The first action to consider is to be deliberate. If you are deliberate in your decisions you will have a pre-determined plan for each specific or potential challenge you face. Have plan B already in your mind or in writing so when conditions change you already know what you will do.
The second action is to be decisive. If you are decisive you are exercising discipline. For example, if you make the statement, "I'm going to sell 5000 bushel of corn once it reaches $5.40," but say corn reaches that price and you change your mind, it's critical that you understand why. Ask yourself, why am I not willing to sell now? I was content with $5.40 before. Is it because of greed or is it because of a change in the market situation? Its okay to change your mind but it's critical to understand why. Being decisive means being disciplined.
The next action is to be accurate. There are thousands of tools to use in this arena of business management. I’ve found that spreadsheets are an extremely powerful tool. If you have the ability to structure the numbers you can remove much of the emotion. As we move forward over the coming weeks I’ll provide many examples and options for tracking profitability with spreadsheets and other tools.
The final action is to be immediate. Don't wait around too long to make a course correction. Don't be afraid to make constant adjustments to your original plan and incremental improvements. Timing is critical and is generally the one variable that can provide the biggest payout.
Develop your flight plan and do what's necessary to stay on course.
If you are interested in some options for management tools feel free to send me questions.
 
 
 

Business Planning Starts with Mission and Goals

Jan 10, 2011

 

 
Welcome everyone to my first blog on the topics of managing farm margins: cost of production and business management. I’m an Iowa corn and soybean producer and I also work as an independent business consultant with other farmers across the United States.
As with any endeavor it's important to set forth several key structures to ensure, or at least increase the likelihood of success. Therefore, I thought it would be a good idea to start out with a mission statement for my blog and support it with several goals, just as any good business plan should be started.
The mission of this blog is to provide timely and useful information to producers in order to encourage creative solutions and ideas for their businesses; as we face many unique challenges and opportunities in the year ahead.
The goals:
1.       Help individual producers understand the critical importance of cost of production management.
2.       Challenge producers to look critically at decisions.
3.       Assist producers to think outside of the box when faced with unique challenges.
4.       Understand the challenges that occur so rapidly and help keep the focus on what is really important; be flexible in the face of rapid change.
5.       Answer questions in a helpful and simple manner.
 
As we begin the New Year we all have the opportunity to improve our businesses. Let’s get to work!
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