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April 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.

 

Asset Exposure & Insurance Coverage

Apr 29, 2011

 

When was the last time you sat down with your insurance agent to discuss coverage? With the rapid changes that are occurring in agriculture it's more important than ever to review your coverage at least once per year. If you are making any changes in ownership, purchases, or equipment usage, make a point to do a review of your coverage as you adjust and make changes. Don't wait until you've already made changes to talk to your insurance company. Have the discussion before changes are made to make sure there are no gaps in your coverage.
Think about the dramatic changes that have taken place in just the past six months with market prices. At what value do you have your grain insured? If you currently have a 50,000 bushel bin insured for $3.00 corn, think of the loss exposure difference you have if your bin is filled with $6.00 corn. This example is a difference of $150,000 in coverage needs. Just think about all of the other examples on your farm that could possibly be under insured. Has the value of your equipment changed since you did your last insurance review? Have you purchased any new equipment? Are there other operational changes that have been made and not properly communicated?
Another important consideration is your umbrella coverage for the entire operation. A $1 million umbrella used to be adequate for many operations; however, with the extreme growth of many operations $5-$10 million umbrellas may be needed (Or more yet?). Invest some time reviewing your comprehensive coverage plan with your insurance agent. Ask questions to be sure you fully understand your coverage and any potential loss exposure. Be transparent in your description of your operation to your agent. Only with the proper information can insurance companies put together the appropriate plan for your operation. Discuss all of the possibilities, potential changes, and specific needs for your operation. Provide a list of every piece of property in detail with assigned values. The more information you can provide the more you will be able to rest assured that your hard-earned assets are protected.
Here is a list of basic topics to discuss with your agent in an insurance review. You may likely think of more topics of concern for discussion but this list will get you started.
1.       Umbrella coverage level /deductibles
2.       Liability coverage level /deductibles
3.       Farm personal property & equipment values
4.       Equipment lists and values
5.       Buildings and grain storage values
6.       On farm inventory -grain/livestock values
7.       Custom work or commercial exposure (volume of work and level of coverage needed)
8.       Plans for operational changes within the next year
9.       rental equipment or unique usage arrangements
10.   Partial ownership structure and coverage
11.   Other interests, names, or exposures
 
Inadequate coverage could be a big blow to your bottom line. One of the best ways to manage your margins is to reduce risk and eliminate the possibility of any catastrophic expenses. The best margin managers are always the best risk managers.
Please send me your specific questions or comments.

Multi-Year Sales Plan

Apr 22, 2011

 

At some point there will be an opportunity to make a multi-year crop sale. How will you determine if the opportunity is right for your operation? Will you develop a strategic plan or will you just make a decision when the timing seems right? Investing some time now in a plan to manage future margin opportunities is just good business. If grain prices continue to rise it’s likely that inputs will do the same, on the other hand, if grain prices go down our inputs may not move back down as quickly. Margin opportunities this year for most operations are very strong. Don't assume that these opportunities will continue. Stay focused on your cost of production, keep a close eye on the markets, and develop a written strategy so when it's time to make a decision you can do the right things for your operation in a timely manner.
There are many factors to consider before a decision on a multiyear sale can be made. For example, what will input prices be? What external factors could impact grain prices either positively or negatively? (China, ethanol, oil prices, US dollar, growing conditions, or some other Black Swan) What amount or percentage of sales is appropriate for next year? What will the crop rotation be? What marketing tools will be best suited for forward pricing? Do you have a marketing consultant or an advisor who can help you analyze the complexities of the above questions? If you currently do not have a market advisor, now would be a great time to begin working with one. Another set of eyes looking at your operation may see opportunities that you could miss.
There seems to be more questions than answers as we look to any long-term business plan. Therefore, it's important to narrow a strategy down to individual components. There are three primary tasks which will empower you with enough information to feel confident moving forward with multiple year sales. The three components are supplier discussions, crop rotation plans, and an overall cost of production analysis. Once these three components have been fully analyzed you will be able to look at pricing opportunities and make effective margin management decisions.
  1. Supplier discussions: Have a conversation on input pricing opportunities. Are there any pre-pay opportunities? Is there any loyalty or early pay options for product commitments? If you would be willing to pay cash for nitrogen or fertilizer today, for the 2012 crop, what would your price be? Share your cropping plan for the coming year with your supplier. Ask them their opinions on the current input prices. Having this discussion well in advance will send a clear message to your supplier that you are focused on inputs and have a clear objective in mind for managing the costs.
  2. Crop rotation plans: You may not know with certainty what your crop rotation plan will look like for next year, however, it's important to put together your best estimate. Once you have your rotation plans made it will give you enough information to determine your needs for, fertilizer, seed, equipment, insurance, storage & handling, herbicides, and capital needed for operating.
  3. Cost of production analysis: As you make your crop rotation plans and come up with your cost structure it's critical that you do something with this information. If you're going to spend the time working through your crop plans and questioning suppliers on prices, take the next step and put this information together to develop your specific cost of production. Assuming you can lock down some specific input prices you should be able to come up with an estimated cost of production for your 2012 crop. Once you've done your homework and can compare your costs with pricing opportunities, you will be able to make informed margin decisions for the coming year.
In general, high prices do not last for long periods of time. If price opportunities are present and you do not have the information to confidently know what type of margin you have at every price level, it will be difficult, if not impossible, to take advantage of opportunities. Investing some time in a comprehensive cost of production analysis for the coming year will allow you to maximize your profit margin!
If you're interested in tools for putting together plans and projections on your specific cost of production, send me your questions.
319-533-5703

Nascar & Farming: The Race is On

Apr 18, 2011

 What is different? What is the same? The similarities of Nascar and Agriculture are a lot like looking in to a mirror. So many of the obstacles and challenges that race teams face in Nascar are challenges and obstacles we face in Agriculture. A success story: Hendrick Motorsports five Championships & 53 Race Wins in the last five years! Total dominance over all other race teams!

Another critical concept of Hendrick Motorsports is the structure of "multiple car teams." This idea is very basic. Put four cars on the track that work together as "one team" and you have four times the power, four times the information, four times the money from sponsorships, four times the amount of talented   people that want to work with a winning organization! All of this along with some time and professional leadership results in a dominating organization.

What do you need to do as farmers to be successful when agriculture seems to change as fast as a Nascar race? Think about the four car team model vs. a 1 car team model. Think of the difficulties of a single car being able to compete with the lack of resources mentioned above. This is much the same as the single farm operation trying to be competitive with a multi-unit operation. If two or three or even four farmers could develop a strategic approach with proper leadership and people working together towards the same rewards one can just imagine the potential Strength and Benefits. Like Hendrick Motorsports, four times the information, four times the capital to work with, four times the talent and skill to draw from and four times the opportunities, as suppliers, investors and other farmers want to tie their wagon to your "New Operational Structure".
 
There are more opportunities in Agriculture now then ever before as we consider all of the technological tools we have at our fingertips. However, this creates the largest challenges we have ever faced in Agriculture. If we as operators can learn to work together as a team, share critical information, put some of our independence and ego’s aside, and most importantly work toward networking our personalities together, we could be that "four car team" that Nascar has already accomplished. Think about neighbors and other farmers in your area; are there others that you could network with in a way that would benefit you both? Think about the potential! There are strategies available to begin this process. Talk to others who have been successful in this process and discover how you could put together a Winning Strategy.
 
If you're interested in networking or collaborating with other farmers in your area send me your questions. I have developed a multi generational business model that I would be happy to share with you. http://www.cb-farms.com/MultiGenBusMod.html
 
Gentlemen, Start Your Engines!!

Does Custom Farming Really Pay?

Apr 11, 2011
Many of us are willing to do some additional custom work as part of our operation in order to spread equipment cost over more acres. It doesn't seem that difficult to custom plant or harvest some additional acres, however, it's important to consider whether the additional income is enough to outweigh the costs of providing the service.
 
There are several factors which some farmers use to justify the need for additional custom work. These justifications include relationships, the need to spread costs over more acres, the desire to farm a larger acre base, and the possibility that custom jobs may lead to land or rental opportunities in the future. These justifications may be enough reason to consider additional custom activities, but they tend to be very difficult to quantify.
 
Analyze the specific reasons to do particular custom jobs. Be sure to fully understand your equipment cost per acre, for your primary operation. If you’re fuzzy on your costs for your operation, how will you determine an appropriate rate for a custom job?
 
One of the most enjoyable parts of farming for all of us is doing the field work. By spending some time calculating costs and structuring a margin plan, we can take an enjoyable opportunity and enhance it with additional profit. Don’t mistake activities for achievement.To just go out and cover more acres without a comprehensive margin plan may limit your ability to be profitable.
 
Here is a list of questions to consider when deciding whether or not custom work is appropriate for your operation.
  1. If I do custom work could it impact the timeliness and consistency of my own operation?
  2. What is the appropriate rate to charge for my services rather than just using the local university custom rate averages?   (Know your own costs!)
  3. How will covering more acres with my machinery affect my equipment replacement plan?
  4. Is there a possibility that my operations productivity, quality, and efficiency could be distracted by custom work?
  5. Do I have the proper insurance coverage for the additional risk exposure while performing custom operations?
  6. Will the custom income be enough to offset profits of equal time spent working on tasks on my own operation?
  7. Can I charge enough to generate an adequate rate of return to meet my profit goals?
 
These are just a few questions to consider when evaluating the benefits and challenges of providing custom work services.
 
When you sit down to calculate your cost in order to determine the appropriate rates, there are several key components to evaluate.
  1. Fuel
  2. Labor
  3. Repairs
  4. Depreciation / Replacement Costs   (An entire topic of its own, blog coming soon.)
  5. Interest
  6. Taxes and Insurance
  7. Trade-off value / Cost of being away from your operation.
 
Every operation has a unique set of opportunities when calculating these expenses. Invest some time calculating the specific expenses for your individual situation. Once you know your specific costs you will be able to structure rates in such a way that provides you with your desired return on investment.
 
If those rates are not acceptable to potential customers, you may be better off keeping your equipment at home. Doing custom work because it's an enjoyable activity could be an expensive hobby. On the other hand, if you know your costs and can team up with other operations, the mutual benefits can pay great dividends to everyone involved.
 

I have several tools available which help to calculate your equipment cost. If you're interested in these tools feel free to contact me. Good luck with your spring work and be safe! 

Margin Management Nitrogen Cost Calculator

Apr 01, 2011

 

Managing margins can be difficult unless you have the proper tools to understand how expenses impact your cost of production. One effective way to analyze information is to have it broken down into cost per bushel. Having tools available at your fingertips that instantly break down costs per bushel instead of just price per unit or price per acre helps you see more clearly the actual cost.
For example, nitrogen is usually discussed and thought of in terms of price per ton. I've gotten many calls this spring from farmers wondering if they should lock in some nitrogen for next fall's application. When I asked about price we always have the discussion around price per ton. Basically the range on a price per ton runs from $700 - $850 a ton for 2011 fall application in many areas. So what does that price per ton really mean as you try to analyze the value of nitrogen at that price? There are several questions that need to be clearly understood and thought through in order to determine the value of this proposed purchase. What rate is most appropriate, what are your yield goals, what are your margin goals , what’s  the price of corn, what’s the price per acre for the N, and what’s the price per bushel for the N.
My challenge to everyone is to think of nitrogen in terms of price per bushel instead of price per Ton. The easiest and most effective way is to create or utilize a spreadsheet tool which can instantly provide this analysis based on your specific situation.
By focusing on cost per bushel instead of cost per ton it becomes much easier to concentrate on a price margin. By breaking down these raw product costs into meaningful usable numbers it will help you to develop a clearer picture of your specific production costs.
Here is an N margin calculator that I designed for our farm. By entering information into items 1 through 6 you can have an instant report on your costs adjusted for each yield level. As you make adjustments to any of the six variables you can instantly see the impact on your cost per bushel.

 

Margin Management   --  N Calculator -- Example
Enter
1
N Rate
200
Per/Ac.
2
N Price/ton
$750.00
Per/Ac.
3
Yield Goal
200
Per/Ac.
4
Price Goal
$5.60
Per/ Bu.
5
Margin Goal
$1.30
Per/ Bu.
Margin Cost increase as yields declines
6
N Stabilizer/ac
$10.00
Per/Ac.

 
N Calculator
By utilizing this tool it's possible to create any scenario which allows you to evaluate the results instantly. As you can see, I highlighted the yield at 200 and at 160. In this particular situation there was an increase in cost of $.12 with a lower yield level. $.12 may not seem like much of a change, however, if you adjust the margin objective it's more likely you will capture that expense from an increased marketing target. Think of it this way, for every 100,000 bushel of corn production that $.12 provides an additional $12,000 of income to the bottom line. With accurate information, the proper perspective and a little extra focus here and there managing margins can pay big dividends.
If you would like a copy of this calculator send me a request and I’ll get you a copy.

 

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