Sep 21, 2014
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Drivers for Success in 2014: Margin Control

December 7, 2013
Financial Glasses
  
 
 

According to the Iowa State University Extension Service, it cost $777 to produce an acre of corn in 2013.

With the December Chicago Board of Trade price 75% of what it was in February 2013, managing margins will be one of the biggest challenges in 2014, says Moe Russell, Farm Journal columnist.

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This is one segment of the 14 Drivers for Success in 2014.

When managing margins, evaluate break-evens based on short-term and long-term aspects. "Generally, our goal for long-term profitability is $100 per acre return after all costs," Russell says. "Obviously, this example [see below] does not project that kind of profit."

From a short-term cost perspective, you can take a slightly different approach. "When calculating machinery, drying and storage costs, we factor in depreciation and opportunity cost on invested capital, which are non-cash costs," Russell says. "When tallying short-term break-evens (a year or two out), you can forego including depreciation and opportunity cost on invested capital because you don’t write a check for them."

This omission can save $80 to $100 on short-term costs.

Don’t forget to factor in general and administrative (G&A) overhead. This cost needs to be applied to both short- and long-term projections. Russell’s data suggests G&A can vary from $6 to $28 per acre. The example below uses $10, but it’s important to know exactly what you pay. Another often overlooked short- and long-term line item is labor costs in the form of operator draw. This is an addition to hired labor and the sum of the two. For our clients, operator draw runs $50 per acre, Russell says.

To calculate for a diversified livestock and crop operation, start with the total operator draw and allocate a portion to the livestock operation. Then, take the remainder and divide by harvested acres. If you own a crop-only operation, simple divide the number by harvested acres. This is a cash cost and needs to be included in both types of break-evens.

Other short- and long-term costs that are often overlooked include: advertising, bank charges, donations, dues and subscriptions, meals for hired labor, office supplies, professional fees, telephone, travel, training and general farm supplies.

 

margins moe russell

 

For More Information
Find tips and tools to make your farm business as profitable as it can be with AgWeb's Profit Center.

This is one of the 14 Drivers for Success in 2014. Read the full list from Farm Journal's 2013 December issue.


 

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