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October 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.

 

The Results from our Wind-Damaged Crops

Oct 31, 2011

Unfortunately wind played a major role this year in the list of challenges for growing corn. As I pointed out in the July 17 blog, it's difficult to know for sure your level of production until the grain is in the bin.

This windstorm swept across a large portion of the Corn Belt. Because of the unknown yield damage many producers throttled back sales to almost a standstill. Some producers already had sales to their insurance levels. Others may have only had small percentages priced. Regardless of where farmers were with their marketing, after the storm almost all of them halted sales.
 
Now that much of the wind damaged crop has been harvested we can begin to calculate margin opportunity with certainty. There is no perfect solution or absolute formula for determining the correct market price. On the other hand, once you have harvested the grain, you have an absolute yield and can determine what profit margin is appropriate for your operation. Therefore, the perfect solution depends on:  (yield*grain price) - cost of production. Once you calculate gross income per acre you can decide on a margin level which is right for your operation.
 
Here is a margin tool for calculating different yield results. This tool will help you to determine reasonable price goals as well as to compare farm to farm results.
 
 

 
Margin Opportunity Calculator
 
 
 
 
 
 
 
 
 
                         Fill in the Tan Boxes
#1, #2, #3
CORN
 
 
Green Boxes Report Information
Results
 
 
 
 
Farm #1
Farm #2
Farm #3
Farm #4
Farm #5
Yield
204
186
177
164
147
Grain Price
$6.43
$6.43
$6.43
$6.43
$6.43
Cost per/ac.
$876.00
$876.00
$876.00
$876.00
$876.00
Cost per/bu.
$4.29
$4.71
$4.95
$5.34
$5.96
Income per/ac.
$1,311.72
$1,195.98
$1,138.11
$1,054.52
$945.21
Income per/bu.
$6.43
$6.43
$6.43
$6.43
$6.43
Margin per/ac.
$435.72
$319.98
$262.11
$178.52
$69.21
Margin per/bu.
$2.14
$1.72
$1.48
$1.09
$0.47
Margin -- ROI
49.7%
36.5%
29.9%
20.4%
7.9%

 
 
Here are some pictures from the windstorm that we experienced on our farm. What looked like total destruction, turned out to be 200 bu. /ac. corn. Other areas weren’t as fortunate, some had significant yield reductions. With the significant variability in yields this year, it's all the more reason for utilizing margin tools.
                                                                                                                                                                                                   
  
This picture was taken the day of the storm. 75 mph winds
storm damaged corn 1
 
48 hours after the above picture of the same field.
storm damaged corn 2 
 
 
Harvest: 6 Row Plots Averaged over 200 bu. per ac.   
corn harvest 3
 
If you're interested in the above margin calculator, let me know.
 
 

 

 

2011-12 Grain Profits

Oct 23, 2011

 

One way to think about improving opportunities for next year is to look at the profits per acre from 2011. Just as we calculate fertility removal based on yield per/ac., consider profit removal based on income per/ac. If yields are high it pays to replenish the soil with nutrients that were removed. If yields are lower the fertilizer application could be lowered somewhat, providing the current fertility level is adequate. The same is true as we think about profits. If profits are high we need to replenish each acre with the products and services which helped us to achieve success. If profits are lower for the year we may need to cut back on some overall expenses and reassess plans for improving our profitability next year.
Just as we document our fertilizer planning we should also document our profit planning strategies. If we put on a particular level of fertilizer, it's generally tied to a specific yield goal. When we invest in particular products and services they should also be tied to specific profit goals.
Be sure to invest some time during and immediately following harvest to assess which products and services specifically led to both positive and negative results. It's easy during harvest to think about changes or improvements from the combine seat. It's also very easy to forget several of the products, services, or management techniques without some written reminders. It's definitely worth taking a little time to plan for next year's success.
Here is a list of the top management techniques, products and services which tend to have the fastest return on investment for most farms.
  1. People - Always invest first in Family, Partners, Employees, and your Community.
  2. Seed – Use The Best Genetics / Hybrid Placement.
  3. Fertilizer and Nitrogen - High fertility equals high yields
  4. N Stabilizers / Crop Insurance / Crop Protection Products - Protect Your Investments
  5. Financial / Marketing Consultants - Manage Risks / Capitalize on Opportunities
  6. Equipment & Precision Technology  – Timeliness, Accuracy, Efficiency
 
 If you have significant profits in 2011, be sure to replenish opportunities with the right investments for success in 2012.

Matching Bushels & Expenses

Oct 17, 2011

 

One way to think about marketing is to consider how many bushels you need to cover expenses. As you analyze each individual expense it's important to have a clear understanding of the productivity required to meet each expense. With this information at your fingertips, you can determine price objectives for both expenses and income. Managing a successful farming operation in the future will depend on your ability to recognize margin opportunities immediately and be able to follow through with disciplined marketing.
Here is a tool which calculates bushels needed in order to cover your expenses.

Farm Name
Joe Farmer
Total Prod. $
$1,644,075.00
Total Acres
1,500
Expense/Ac.
$1,096.05
Crop
CORN
Gross $ /Ac.
$1,202.50
Market Price Goal
$6.50
Cost/Bu. Prod.
$5.92
Yield Est. / Goal
185
 $ Margin Ac.
$106.45
Total Grain Production
277,500
ROI
9.7%
 
 
 
CROP EXPENSE LIST
Expense PER/AC.
OVERALL $
PER/ AC. Bu.
OVERALL
Return to Management
$150.00
$225,000.00
23.08
34,615
Land Payment/Rent
$245.00
$367,500.00
37.69
56,538
Taxes
$25.00
$37,500.00
3.85
5,769
Interest
$15.00
$22,500.00
2.31
3,462
Insurance
$25.00
$37,500.00
3.85
5,769
Seed
$102.00
$153,000.00
15.69
23,538
Fertilizer
$86.22
$129,330.00
13.26
19,897
Nitrogen
$117.62
$176,430.00
18.10
27,143
Herbicide
$28.71
$43,065.00
4.42
6,625
Fungicide/Insecticide
$37.50
$56,250.00
5.77
8,654
Custom Spray 2 pass
$15.00
$22,500.00
2.31
3,462
Equipment/Fuel/ Labor
$173.00
$259,500.00
26.62
39,923
Grain Hauling
$37.50
$56,250.00
5.77
8,654
Drying Expense
$27.50
$41,250.00
4.23
6,346
Storage
$11.00
$16,500.00
1.69
2,538
Tile / Irrigation
$0.00
$0.00
0.00
0
Total Expenses / Ac.
$1,096.05
$1,644,075.00
168.62
252,935

 
 
This type of tool helps you to clearly visualize your production requirements. As you get a handle on expenses, you will be able to structure price and yield goals designed to cover all expenses.
A final thought; notice “return to management” is the first line item expense. Be sure to pay yourself first. Determine a reasonable profit level which suits your farm and be sure to include that in your overall expenses. When you're marketing your grain part of the expenses you are covering should be PROFIT.

The Real Cost of Depreciation

Oct 10, 2011

 

Here is an interesting concept for you to consider, from Moe Russell of Russell Consulting Group:
 
A standard rule many use when estimating depreciation cost is 10% of equipment and 5% of facilities. Some disagree with that and say, 'The tractor I purchased ten years ago is worth more now than I paid for it, so there is no depreciation."
 
What many forget is that depreciation is the allocation of funds to replace equipment worn out in the production process. What the tractor is worth is not the issue, it is what it cost to replace that tractor that defines depreciation.
 
More importantly, when we replace equipment, we seldom replace it with like items; we often upgrade to newer technology, larger equipment or different features. Since depreciation is the allocation of funds to replace equipment, it follows that the real cost of depreciation is the cost of what you replace with upgraded equipment.
 
Several years ago, Chris Barron and I did a study and looked at depreciation three ways on four items of equipment. The first way was to use the equipment for a specified number of years and then line it up and sell it for cash (have a sale). The second was to replace the equipment with new equipment but with the same horsepower and size (replace). The third was to upgrade to newer, bigger equipment (upgrade). 
 
Following are the results of our study:
 
Item                 Have a sale    Replace    Upgrade
Tractor                3%                9.5%        14.2%
Combine            4.4%              8.8%        13.8%
Planter               3.1%            1.3%          23.8%
Sprayer               9.3%            14%          18.8%
Average              5.0%            8.4%          17.6%
 
Bottom line: If you are going to stay farming, 10% depreciation is not enough.
 

The Marketing Game

Oct 02, 2011

 

It can be frustrating to watch grain markets decline as we've seen during the past couple of weeks. Markets can't go up forever, nor can high prices be sustainable for long periods of time. Inside this bad news, however, there may be a silver lining. This market adjustment gives livestock producers and end users an opportunity to lock in some profitable margins. These lower prices will definitely help to keep demand chugging along. Demand strength is the key to the markets improving as we move forward.
So what can grain producers do in the meantime, during this price break? Here are a couple of activities to focus on until it's time to jump back in the marketing game:
1.       Focus on harvest. This is the best time of year to gather valuable information on a number of different production practices. Taking a short break from the market screen and focusing on harvest is a healthy process. When you come back to the marketing picture, you'll be able to think more clearly, with a better understanding of your production level. Final yield information for the 2011 crop will help you begin to calculate margin opportunities with more confidence.
 
2.       Hit the reset button. We've witnessed corn prices drop over $1.50 and soybeans drop over $3.00 a bushel in a relatively short period of time. Many market analysts are still relatively bullish long-term. Let’s assume that markets trend higher after harvest and into the spring. At what level do you plug in sales for the balance of your 2011 crop? One way to look at this is to calculate specific price levels and tie them to specific margin results. (See my blog from last week: I have a tool which will calculate this quickly and easily.) Determine a margin which you are satisfied with and take advantage of the profit opportunities! Once your grain is in the bin, you have all of the information needed to know exactly what your results will be at every price level.
 
Opportunities for margins like we've had in the grains don't come along very often. Use this downturn in the grain markets to study your numbers, set your goals and take advantage of profits when the markets improve.
 
A final thought: If you don't have cash rental rates set, now is a good time while markets are lower. It's easier to discuss volatility and risk to a landlord when corn is in the $5.00 range instead of the $8.00 range.
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