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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.

 

Ready for the Report?

Jun 26, 2012

 

You can bet professional traders will have a plan going into the June 29th report. As a producer, are you ready for the report? Do you have a plan to take advantage of price opportunities? No one really knows for sure what the report will say. Furthermore, no one is exactly sure how the market will react to this information. However, there are three quick things you can do before the report to be in a position to take advantage of opportunities.
1.       Review your cost of production. Many of us do a pretty good job of calculating costs toward the beginning of the year, but sometimes fail to update this information on a regular basis. Things change during the course of the year which may impact your cost. Purchasing additional crop inputs, equipment repairs, or unforeseen expenses should be evaluated on a regular basis. If you need a quick tool for calculating production cost I'd be happy to send you this basic spreadsheet.

Farm Name
Joe Farmer
Total Prod. $
$1,534,575.00
Total Acres
1,500
Expense/Ac.
$1,023.05
Crop
CORN
Gross $ /Ac.
$1,147.00
Market Price Goal
$6.20
Cost/Bu. Prod.
$5.53
Yield Est. / Goal
185
 $ Margin Ac.
$123.95
Total Grain Bu.
277,500
ROI
12.1%
Total Expense
 
 
CROP EXPENSE LIST
Expense /Ac.
OVERALL
BU./ AC.
ALL /Bu.
Return to Mgt.
$100.00
$150,000.00
16.13
24,194
Land Pay/Rent
$245.00
$367,500.00
39.52
59,274
Taxes
$20.00
$30,000.00
3.23
4,839
Interest
$7.00
$10,500.00
1.13
1,694
Insurance
$25.00
$37,500.00
4.03
6,048
Seed
$102.00
$153,000.00
16.45
24,677
Fertilizer
$86.22
$129,330.00
13.91
20,860
Nitrogen
$117.62
$176,430.00
18.97
28,456
Herbicide
$28.71
$43,065.00
4.63
6,946
Fung./Insect.
$37.50
$56,250.00
6.05
9,073
 Spray 2 pass
$15.00
$22,500.00
2.42
3,629
Equip./ Labor
$165.00
$247,500.00
26.61
39,919
Grain Hauling
$37.50
$56,250.00
6.05
9,073
Drying Expense
$27.50
$41,250.00
4.44
6,653
Storage
$9.00
$13,500.00
1.45
2,177
Tile / Irrigation
$0.00
$0.00
0.00
0
Total Expenses / Ac.
$1,023.05
$1,534,575.00
165.01
247,512

 
2.       Yield is another obvious consideration going into this report. Crop conditions from one part of the country to another are wildly variable this year. Some areas have had plenty of rain while others are turning into a desert. Just as you adjust your cost of production on the move, it's even more important to estimate yield regularly. Run numerous scenarios with different yield potential in order to have a clear understanding of the price opportunity you'll need to cover expenses. Thinking in terms of “bushels per acre needed to cover costs” is a helpful approach.
 
3.       Market Price. Develop an understanding of what price level meets your individual margin goals. Once you know your costs and yield potential you'll be able to determine what price level is needed. The market is extremely volatile right now, that's why it's so important to have a tool in your hands for calculating the rapid changes. In addition to management tools like I've provided above, be sure to consider every tool that is available. Crop insurance is the most popular and commonly used tool among producers. However, there are many other marketing tools available which can help you manage risk and capture opportunity. Forward contracts, basis contracts, futures, and options are also great tools. If you're not already using these tools, it's time to start. There are plenty of market advisors and professionals who understand these tools that can help you improve profit margins! Volatility is likely here to stay, use it to your advantage.  Equip yourself with the best information - to create the best strategy - to capture the best opportunities.
 
Again, e-mail me at cbarron@cb-farms.com if you’d like a “Cost of Production Analysis Tool.”
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