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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.

 

Cashing in Your Chips?

Nov 27, 2011

 

With the crops out and bins full, when should we cash in on grain sales?
There are some who consider production agriculture to be a gamble. In Vegas, it's common knowledge that cash put into a game does not necessarily mean profit. The vast difference between risking your cash in Vegas versus risking your cash on the farm comes down to one word: calculation. Vegas risk is random, while agricultural risk should be calculated.
There is, however, a common challenge that we all face when comparing Vegas to ag production: the human emotions of greed and fear. Unfortunately, these two emotions have the power to drive decisions with even some of the most intelligent marketers. How can we manage these emotions?
Let's use the 2011 crop production as a working example. Let's also use a margin calculator to determine a number of different options for pricing our 2011 bushels. Once harvest is complete, we have two of the three variables in place which will allow us to determine our profit objective.
Here is an example of a margin opportunity calculator being used to determine profitability with five different pricing options. Plug in your yield and your cost of production for each option. From there, simply plug in five different market price scenarios.

 

 
 
Margin Opportunity Calculator
 
 
 
 
 
 
 
Cashing in the Chips?
 
 
                         Fill in the Tan Boxes
#1, #2, #3
CORN
 
 
 
Green Boxes Report Information
Results
 
 
 
 
Marketing --------
Option 1
Option 2
Option 3
Option 4
Option 5
#1
Yield
190
190
190
190
190
#2
Grain Price
$6.40
$6.20
$6.00
$5.80
$5.60
#3
Cost per/ac.
$800.00
$800.00
$800.00
$800.00
$800.00
 
Cost per/bu.
$4.21
$4.21
$4.21
$4.21
$4.21
 
Income per/ac.
$1,216.00
$1,178.00
$1,140.00
$1,102.00
$1,064.00
 
Income per/bu.
$6.40
$6.20
$6.00
$5.80
$5.60
 
Margin per/ac.
$416.00
$378.00
$340.00
$302.00
$264.00
 
Margin per/bu.
$2.19
$1.99
$1.79
$1.59
$1.39
 
Margin  -- ROI
52.0%
47.3%
42.5%
37.8%
33.0%

 

 
Once your numbers are in place, ask yourself: What is my profit objective?
There are other factors to consider as you evaluate your profit potential. Currently, the basis is favorable for selling cash grain, and the overall profit margins are still solid for most farms, even at the $5.50 price range. Spend some time discussing what margins are appropriate in your business with your family, partners, marketing advisers and lenders. Each operation is unique and should have its own individual set of profit objectives. What are your margin goals?
Sitting on your grain with no specific plan is taking a big "Vegas" gamble! Instead, develop a plan to manage risk so you can capitalize on opportunities. Greed and fear will always loom as part of our emotions, so be sure to develop a calculated plan to ensure profitability! Don’t allow your luck to be random.
      Know when it's time toCash in Your Chips!
If you'd like a copy of the above spreadsheet to calculate your profit margins, just send me a request. The spreadsheet can be used for basically any cash grain crop. Also, feel free to send me your specific questions on managing risk during these volatile times.
 
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