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June 2012 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.

 

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.”

Ag Tweets

Jun 19, 2012

 

Social media has become a huge platform for information exchange. Social media is no longer a kid's toy, but rather a unique information gathering system which you can use to help manage your business. This media source can provide fast information, along with accurate first-hand accounts with specific details and pictures.
 Twitter in particular has made it possible to communicate with virtually hundreds of people in an instant. Conversely, Twitter gives you the ability to follow specific people, organizations, or companies which can provide you with beneficial information. With Twitter you have the ability to follow the most reliable sources of information. If you receive unreliable or incorrect information from a particular source you can cut them out of your “followers” list.
In today's world, we tend to have information overload. Twitter gives you the ability to filter out information that you're not interested in or is not trustworthy.
If you're not already on Twitter, this is a great time of year to begin using this powerful tool. Hundreds of farmers, commodity traders, Ag companies, universities, and numerous other agricultural interests tweet massive amounts of valuable information. For example, with the sporadic rainfall, drought conditions, heat, and other crop challenges, you're able to get firsthand accounts from specific farmers, in specific locations. This can give you a much better perspective of crop conditions for the entire US, rather than just what you see in your area or County. Another huge benefit is the ability to follow commodity traders. Having some insight into the psychology behind their actions can definitely give you a better understanding of the market in general.
This blog is not a commercial for Twitter; instead, it's a commercial for making sure that you're always using every tool possible to improve your margins. Twitter is just another tool for your “Business Toolbox.”
Happy tweeting!!

Navigate through Price Volatility

Jun 06, 2012

 

Market volatility has been the norm for the past several years in the corn market. It's pretty likely we’ll continue to see volatility, especially between now and the beginning of harvest. Depending on weather, outside markets, Europe, demand, and a number of other variables, prices between now and harvest could range from $4.00 to $6.00 plus?!  Breakeven for many producers ranges from $4.50 to $5.25. As prices hover around breakeven, we’re all faced with the difficult task of figuring out what is the best marketing plan.
In general, producers have very little grain sold ahead compared to the past couple of years. Additionally, the past couple of years have conditioned us to believe that a 30 to 40% profit margin is normal. This makes capturing a 5 to 10% profit margin a psychological challenge! Unfortunately, the reality is we may need to recalibrate our marketing goals to match realistic opportunities.
 Here are a few tips to help you develop a plan to manage the potential volatility ahead.
1.       Identify what you currently know.
A.      % of grain currently sold & avg. price
B.      Storage available (on farm or at the elevator)
 
2.       Estimate your total crop production.
A.      Run several scenarios
B.      Continue to improve your estimate as the crop matures.
 
3.       Set realistic profit margin goals.
A.      Know your cost of production
B.      Know your yield potential
C.      Set a realistic price target
D.      Start sales with bushels that you do not have storage for
E.       Be disciplined - not greedy
 
It's impossible to predict the exact direction of the markets. Just like it's impossible to predict the exact direction of a thunder storm. However, once you've spent some time and effort focusing on the conditions that you can manage, you should have a better idea of what profit margins are realistic for your farm and the confidence to capture opportunities.
 
Here is a tool designed to help you navigate through the potential storm of volatility that may lie ahead. Simply plug in your acres, yield estimates, cost of production, price information, and storage capacity. This information should help you to organize your thoughts, evaluate opportunities, and determine what profit margins are appropriate for your operation.
 
 
 

 

 
Profit Navigator
 
Fill- Tan Boxes
 Info.
1000
Total Ac. Production
 
 
$875.00
Cost of production/Ac.
 
 
180
Yield Estimate
 
 
$5.25
Price/Bu."Opportunity"
 
 
$5.85
Current Price/Bu. sold
$117,000.00
11.1%
20,000
Current Bu. sold
 
 
150,000
Storage Capacity
 
 
30,000
Short on Storage
$840,000.00
88.9%
160,000
Total Bu.-Yet to sell
 
 
180,000
Total Bu. Production
 
 
$957,000.00
Total Income
 
 
$5.32
Avg. Sales Price/Bu.
 
 
$4.86
Breakeven Price/Bu.
 
 
$957.00
Income / Ac.
 
 
 
9.4%
Profit Margin
Produced by C&B
$82.00
Profit/Ac.
 

 

 
 
If you'd like a copy of the "Profit Navigator" decision tool, just send me an e-mail request.
 
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