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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.

 

2012 Cost of Production: A First Look

Aug 30, 2011

 

 
2011 has been a year full of bullish news. It’s easy to get caught up in the excitement of new price opportunities. No one wants to miss out on an opportunity to sell grain at a high price. These new opportunities and volatility in the market present a unique challenge. For example, many producers began sales for the 2011 crop at price levels well below where we are now. It's easy to beat yourself up on missed opportunities. However, if those sales were made above your cost of production, they were sound business decisions.
 
Another difficult question is whether or not to make sales for 2012 or even 2013. If you made sales too early and missed opportunities in 2011, that missed opportunity can play games with your mind as you consider 2012 sales. Additionally, if the current market price for the 2011 crop is at $7.70, it can be difficult to start selling the 2012 crop at $6.70.
 
So what are the solutions for managing emotions, risks and opportunities? Consider using historical charts, which can be effective in demonstrating reality. To better understand our current situation, we sometimes need to study historical information. History is not a perfect predictor of the future, but it does allow us to study trends and can help us to visualize future probabilities.
 
Here are two charts for corn and soybeans which show the average season price versus the cost of production. (Charts provided by Russell Consulting Group)
Corn cost of production
Soybean Cost of productionHistory demonstrates that every time we have rallied a grain market, it has been followed by a period of time where the market price dips below the cost of production. As you can see, there are some periods where costs can be higher than the market price, either rapidly or for an extended time. No one can predict how or exactly when the market dynamics will change. The one fact we do know is that markets cycle. The key to managing through these challenges will be your ability to take advantage of margin opportunities.
So what can we do to manage our risks and enhance our margin opportunities? The ultimate answers are unique to each individual farm. Here is a list of focal points I've observed some successful producers using to manage emotions, risks and opportunities:
  1. Understand and study historical trends.
  2. Improve your working capital (cash is KING during economic cycles).
  3. Lower equipment costs per acre (partnerships, increase acres, or custom work).
  4. Variable cash lease agreements instead of fixed leases.
  5. Multi-year fertilizer applications (P&K).
  6. Purchase "high-value products" -- maximize productivity (supplier services, relationships and loyalty are key!).
  7. Use options to protect market opportunities (learn about and understand marketing tools).
  8. Multi-year grain marketing (match up income opportunities with expenses in order to lock in specific margin goals).
  9. Know your cost of production!
  10. Always stay current on new information (timing is everything).
I'm sure there are many other ideas and suggestions that could be added to this list. Create your own list; focus on what's important for your individual operation. Your ability to manage margins during cycles will have a direct impact on your ability to sustain and grow your business!
Please send me your comments and questions.

 

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