Manage Margins in Volatile Times
Jan 21, 2011
Having extremely high prices on our market screens with even more bullish predictions being discussed daily create a difficult environment to make sales! Market volatility can drive our emotions wild unless we keep focused on margins instead of prices. If you have a firm handle on your overall cost of production it will allow you to break out particular line items by an expense or by a particular amount of bushels. Consider matching up a particular sale to cover a particular expense.
Assume your five year production average is 180 bushel per/ac. in corn with a $4.00 per/bu. cost of production which would make your per acre cost $720.00. If you make a 10% production sale (18 bushel) at a $5.00 corn price, you’ve just generated $90 per acre revenue. Even more importantly you've covered 12.5% of your overall expense with one 10% production sale. If you could repeat this process on the rest of your crop you would be locking down close to a 25% return! Granted, you won’t be making every sale under the same condition, but it's important to consider the opportunities that each incremental sale provides. Once that sale is complete focus on the next opportunity and what makes sense for your individual operations margin goals.
Many producers have fertilizer, nitrogen, seed, and herbicides locked in at this point. As these individual line items are purchased one can assign a dollar value to that particular portion of the crop investment. For example, if a fall fertilizer application was purchased, you can calculate what your current cost per acre would be for that portion of your investment. Let's assume an expense of $50 per acre for the fertilizer application. If your current local corn price is at $5.00, that means you would need to sell 10 bushel of corn to cover your fertilizer expense. If your seed bill is $100 per acre, you would need 20 bushel of corn. These examples may seem overly simplified but the discipline to manage profit margins may keep you in business longer than trying to hit high prices. The basic idea is to match up marketing with inputs, once an acceptable profit margin is hit, make a sale. When we know our margins along the way it becomes less stressful to make an incremental sale and helps to minimize emotional reactions.
Every producer has their own comfort level when managing risk and opportunity. Some operations have a large risk tolerance as others may have a much lower risk tolerance or capacity. Therefore, assess your own individual cost of production and refine it by the bushel and by the acre. This process will empower you to make marketing decisions based on margin management rather than price prediction.