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Chart Your Breakeven
Feb 05, 2011
Most market analysts and traders use charts and graphs to guide them in decision-making. I would argue that it's just as important to use charts and graphs on the production side. Anything we can do to remove the emotion and paint a picture of reality will ultimately improve our chances for success.
As we discussed in a previous blog, the current grain price should be viewed as half of the margin equation rather than price alone. To best manage our margins, sometimes we need a visual perspective to create an understanding of our reality.
Calculate your total cost of production for each crop. Chart that cost of production to create a visual picture of breakeven at each yield level. Remember to include "Return to Management" in the cost. Return to management is the cost of living and salaries required from the business during the course of the year. This must be included in your cost because paying yourself is part of the operations cost. This will obviously raise your cost of production but must be included to ensure a price level adequate to cover all expenses.
Here is an example chart with a breakeven selling price at every yield level. Once you have your costs calculated, connect them to price. Price and yield visualization with profit margin opportunities built in is just another way to help you manage margins rather than predict prices.
Example: This is a corn grower’s chart with a cost of production at $4.00.
Keep in mind, this chart is a reflection of your breakeven including your "return to management" therefore, you already have your profit built in. Any price opportunities above your breakeven is icing on the cake.
There are many tools available to help you create this type of chart. If you are interested in how to put together this type of chart for your own operation just send me a note.