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March 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.

 

Prioritize Plan Your Spring Work Load

Mar 25, 2011

 

In order to maximize margins every solid business plan must contain an objectives list. With the spring work load ahead and the pressures of long hours and equipment challenges, it’s important to have your plan ready before you need it.
Here is a basic checklist to help you organize and prioritize your spring work load. You may have several additional tasks to add to the list but the point is to get started making a list. Actually writing down the list and prioritizing your projects will help you to improve your efficiency and communication with your partners, employees, suppliers, landlords, and family.
1.       Marketing plan: Review your plan and understand your targets in order to be disciplined when opportunities present themselves. Generally some of the best marketing opportunities occur on the days we are extremely tired from long hours, dealing with planting challenges, and basically not focusing on the markets at all. Consider placing some small offers at a level you would be comfortable making a sale. If one hits the target it will alert you to take a minute to focus on the market opportunities.   
 
2.       Hi bred and variety placement: Spend some time making sure that your hybrid selections are predetermined for specific field placement. Getting the right hybrid on the right field can pay you large agronomic dividends. Time is precious at planting time; therefore, trying to figure out where your hybrids go from the planter seat is just another unneeded distraction.
 
3.       Herbicide plan: If you do your own spraying the priorities are very similar to hybrid placement. The wrong herbicide on a field can kill the entire field. A basic written plan for herbicide placement is well worth an hour or two of time. Figuring rates, Tank mixes, and being sure to understand all of the usage information will save more than time but will ultimately improve your bottom line.
 
4.        Contingency plan: Remember to think about the (what if's) of all your plans. What if your primary tillage tractor goes down? What if a particular hybrid you've been waiting for on a specific field doesn't show up? What if a key operator gets sick during planting season? Invest some time answering your individual –“what if questions”. Time is money and by having a plan in play in case of a problem you can save massive amounts of time which translates immediately to the bottom line.
 
5.       Labor force: Make sure everyone understands the specific plans for the planting season. Invest some time writing down some of the short-term goals for spring and have this information available for everyone in your operation. Making your tillage and planting plans transparent for everyone within your operation will have a positive impact on your overall efficiency.
 
6.       Lender communication: Fieldwork time is a great opportunity to invite your lender to spend some time on your operation in order to better understand the character and dynamics of your business. During spring work lenders generally have more time for farm visits. Invite your lender to your operation for the day and cultivate your relationship!
 
7.       Landlord communication: Invite your landlords out in the field if they're physically able to participate or ride along in the equipment. Have them spend some time with the various field operations on their farm. This participation will help them have a better appreciation for your commitment to their land and the working relationship you have with them. By working on your relationship it will open the doors to longer-term opportunities.
 
8.       Family expectations: Don't neglect your family. Sometimes you'll need to work long hours for long stretches at a time, however, your kids are only young once. Investing a couple of hours to catch a track meet or a ballgame will pay you big dividends in the long run. Pre-plan for an alternate operator to assist you if you absolutely must keep a piece of machinery moving. It's possible to take care of business and family at the same time. Life is a balancing act.
 
9.       Safety: Spend some time doing a walk-through of your machinery and equipment before spring field work begins. Think about potential problems or situations that could put you or your counterparts in a dangerous position. Even a small injury can cause a significant amount of downtime. Slowing down, getting enough sleep, and developing a safety plan will ultimately help you be more effective and profitable.
 
This is a brief list of several items to consider before spring field work is in full swing. Invest some time making your personal priority list. Write it down and keep it simple. Share the information with your key partners and family in order to accomplish your goals. If everyone is on the same page and working toward the same destination your spring productivity will be at maximum capacity. Time is money so keep this quote in mind. “Managing your margins isn't always just about making the dollars and cents; it's more about making Sense with the dollars.”
 
Good Luck with Your Spring Plans!

Pay Yourself First & Market with Confidence

Mar 18, 2011

 

Now that we all have our crop insurance decisions made, it's time to refine our cost of production. Soon we will be swamped with spring field work and it will be difficult to adjust management decisions. Invest some time going through your costs one item at a time. Examine them to be sure that they are as accurate as possible.
The most important line item to consider is your return to management which is a key part of your cost of production. Paying yourself should always be one of the first considerations. After all, we are all in the farming business in order to provide for our families and make our businesses sustainable. By having your margin as part of your cost of production you will be much more likely to achieve higher market prices. Without considering your margin as part of the cost you potentially could be content with prices which leave a shortfall for the operation.
Spend some time evaluating what profit level per acre is adequate, reasonable, and realistic. This process is not as painful this year with the price opportunities that exist (for now). However, on years when prices are lower or risks are higher this process will allow you to discover reality while you still have time to make adjustments or corrections with your business plan.
Here is an example of failing to include your margin as part of the cost of doing business. Let's assume your cost of production per acre is $700 without paying yourself. This per acre cost gives you a cost per bushel of $3.89. Without paying yourself as part of the cost you are starting out with a lower cost of production per bushel. By not having a margin goal in mind it becomes extremely difficult to have a price objective in mind. Not having a specific price objective for your operation can make marketing purely speculation as opposed to margin management.
Here is an example of the scenario discussed above assuming 500 acres of corn with an average selling price of $5.11.

 

Farm Totals 500 ac.
180 bu./ ac. yield
$350,000.00
Cost / Total
$700.00
Cost / Acre
$3.89
Cost of Production /Bu
 
$459,900.00
Income / Total
$919.80
Income / Acre
$5.11
Income / Bu.
 
$109,900.00
Profit / Total
$219.80
Profit / Acre
$1.22
Profit / Bu.

 

 
Here is the same example of the scenario which you would pay yourself $150 per acre.

 

Farm Totals 500 ac.
                                   180 bu. /ac. yield  
$425,000.00
Cost / Total
$850.00
Cost / Acre
$4.72
Cost of Production /Bu
 
$534,600.00
Income / Total
$1,069.20
Income / Acre
$5.94
Income / Bu.
 
$109,600.00
Profit / Total
$219.20
Profit / Acre
$1.22
Profit / Bu.

 

 
By paying yourself first the price objective for your sales went from $5.11 to $5.94 per bushel. By considering your margin as part of the cost of doing business this operation would still achieve $109,000 profit. In addition, you would pay yourself $75,000 for managing the operation with this 500 acre example.
With a higher price objective it may be more difficult to achieve your price. Conversely, if the price objective is reached this process will enhance your confidence level to make the necessary grain sales.
Caution: Be sure to consider risk management tools such as futures and options to manage risk. But keep your business plan in perspective, if pricing opportunities are above your margins (including paying yourself) there needs to be compelling reasons if you are not marketing your grain. By factoring your profit margin as part of your cost it should make it easier to be disciplined, responsive, and confident in your marketing decisions.

Protect your Crop Investment

Mar 11, 2011

 

High prices and extreme volatility is the common theme in crop production today. Crop insurance is the single expense item which can protect a high percentage of your costs of production. With 3% to 6% investment many growers can protect almost 100% of their production risk. Every situation is unique but just looking at a premium cost for a decision on which level of coverage to purchase is only one part of the decision equation. The value of this year’s crop in many cases for corn could range between $800 and $1000 per acre. This crop has the value of a new Cadillac rather than a used Buick. Would you insure the value of your car differently if it were a new Cadillac versus a used Buick? Risk management decisions need to take into consideration the value of what you are protecting. Think about what you're protecting and spend some time understanding the crop insurance that you’re purchasing.
Calculate your cost of production and compare the gap between your cost per acre and your minimum revenue guarantee. If the gap is small or within your ability to tolerate risk your coverage is adequate. On the other hand, if the gap is too wide there are several options to consider.
Let's say the gap is too wide for your comfort but to go from 75% to 80% coverage your premium increases by $10 per acre. You may think that the extra $10 investment in the premium isn't worth the expense. Rather than just looking at the cost side be sure to understand the value that the additional $10 of investment may return. For example if the $10 gives you an additional $50 of coverage you need to look at the bottom line of what an additional $40 per acre of net coverage will return in the event of a loss. If an additional $40 per acre of coverage narrows the gap or possibly eliminates the gap the additional $10 of investment would be easily worth it.
 Here is a list of items that both the agent and the producer should discuss and mutually understand.
1.       The producers cost of production
2.       Producers APH “actual production history”
3.       The dollar gap between cost of production and proposed insurance coverage
4.       The producer’s debt load and capacity to tolerate risk
5.       The producers comfort level of production risk (Can I sleep at night with this coverage?)
6.       Enterprise units versus Basic or Optional units   (Is the cost savings worth it?)
7.       Insured bushels  - safe to price ahead of harvest - at each coverage level
8.       Understand what your specific coverage would be for a specific loss scenario calculation.
 For example, what would your coverage be if your corn crop yield came in at 130 bushel per ac.
 
 
Here is an example of a Crop Insurance Calculator that I use to measure risk management decision-making.
 
 
 

             Insurance      Calculator
 800 Acres of Corn…..
 
% Cost
Insurance Cost / Acre
35.00
5.0%
Insurance Coverage
35.00
Per / Acre Price
Insurance Coverage
$28,000.00
Total Price
Insurance Coverage
$893.99
Per / Acre
% Level Of Coverage
85%
 
APH
175
 
Spring Price $$
$6.01
 
Min. Rev. Guarantee
$893.99
 
             Bushels Of Risk Coverage
Total Bushel
Bushels
Bushels
Guarantee
Per/ Acre
% Of Total
119,000.00
148.75
82.6%
119,000.00
Bushels Safe to Forward Price
$715,190.00
Total Final Guarantee $$
$0.00
Per/Ac. Insurance Indemnity
$0.00
Total Insurance Indemnity

 
Cost of production Information for above considerations :( 800 Acres Corn priced at $5.09 and 180/BPA)

Economic Results
 180 bu/ac. CORN
Farm Totals
 
Expenses
 
$571,040.00
Cost / Total
Per Acre
 
$713.80
Cost / Acre
Per Bushel
 
$3.97
Cost of Production /Bu
 
 
Total Income
 
$732,960.00
Income / Total
Per Acre
 
$916.20
Income / Acre
per Bushel
 
$5.09
Income / Bu.
                                       Income after Insurance Indemnity
 
Gross Profit
$161,920.00
$161,920.00
Profit / Total
Per Acre
 
$202.40
Profit / Acre
Per Bushel
 
$1.12
Profit / Bu.

 
 
Here is a scenario example with the exact numbers as used above changing the yield from 180 to 130.
Example:  800 Acres of corn priced at $5.09 - 130 BPA - in a Loss Situation.

Economic Results
130 bu./ac. CORN 
Farm Totals
 
Expenses
 
$550,640.00
Cost / Total
Per Acre
 
$688.30
Cost / Acre
Per Bushel
 
$5.29
Cost of Production /Bu
 
 
Total Income
 
$533,520.00
Income / Total
Per Acre
 
$666.90
Income / Acre
per Bushel
 
$5.13
Income / Bu.
                                       Income after Insurance Indemnity
 
Gross Profit
$73,030.00
($17,120.00)
Profit / Total
Per Acre
 
($21.40)
Profit / Acre
Per Bushel
 
($0.16)
Profit / Bu.
             Bushels Of Risk Coverage
 
Total Bushel
Bushels
Bushels
 
Guarantee
Per/ Acre
% Of Total
 
119,000.00
148.75
114.4%
 
119,000.00
Bushels Safe to Forward Price
 
$715,190.00
Total Final Guarantee $$
 
$112.69
Per/Ac. Insurance Indemnity
 
$90,150.00
Total Insurance Indemnity
 

 
Using a spreadsheet to calculate these scenarios is the most effective way to analyze different situations. If you have questions on tools to calculate these different scenarios accurately send me your questions.
Volatility in agriculture creates numerous challenges. By studying and managing your risk you can take advantage of opportunities. Risk management is an individual decision. What is a good crop insurance plan for one could be inadequate for another. Determining the level of coverage that best suits your specific situation takes a great deal of effort and time. Commitment to understanding your crop insurance plan will help you be a more successful margin manager.

 

Make Things Happen!

Mar 04, 2011

 

I heard a great quote from a very successful businessman this week. “There are those who make things happen, those who watch things happen, and those who don't know what just happened” I would say this quote holds as true in agriculture as with any other business.
We all know of “those who make things happen”. These are the people who develop a plan, set specific goals and objectives, and are willing to immediately move forward with their plans. This group knows where they want to be and work their plans to make things happen. This group is also willing to assume higher risks than the average person. On the other hand, they consider that larger risks generally will have larger returns. They look at risk as a necessary component to achieve success and spend a significant amount of time calculating different scenarios in order to make sure that their actions are deliberate and accurate. When challenges arise in the middle of a project they consider these problems as opportunities to learn, adapt, and change course in order to be more effective. This group has a focus on their mission of achievement.
“Those who watch things happen” are an interesting group. This group can generally be divided into two different categories. The first category is those who watch due to a lack of motivation. Their view is that it may be easier to watch others work through challenges and problems and see if others have success before they try to create their own opportunities. Another big reason for watching rather than participating is to avoid risk and the possibility of being in an uncomfortable situation. Therefore, it’s just easier to watch others before taking their own actions. The second category of this group who watches things happen tends to be more vocal. These people would rather be verbal critics and simply talk about what others are doing instead of focusing on their own operation. Unfortunately, we've seen a great deal of this as competition for land and growth opportunities have increased over the past several years. Watching the neighbors, spreading rumors, and assuming the victimization role is definitely not a recipe for success. Hopefully as we move forward this particular group will recognize that redirecting energy into their own operation is more profitable than simply watching and worrying what their neighbor is doing.
“Those who don't know what just happened” tend to be that group which is focused on their internal operation so intently that they don't see what's going on outside of their own operation. This group is so busy trying to get their work done that they don't seem to have a clue of what's going on in their community, industry, or family. It seems that this group would rather not know what's going on around them because they are most comfortable just focusing on their own business or work. This group may also be somewhat resistant to changes. It's easier to look the other way, rather than engage new processes, procedures, or a major project that contains many unknowns. The final challenge this group faces is the need for continuing education. The world of agriculture today is faced with tremendous complexities and rapid change. The solution to success will be tied directly to knowing what's happening in our industry.
 
We can all ask ourselves the following questions. Which group do I fit in and what areas could I improve upon? Am I a person that makes things happen? Do I just watch things happen? Do I ever wonder what just happened? Once we are honest with ourselves we can figure out where we fit as business people. The great part about these three types of business people is that we can choose which one we want to be. We can continue as status quo or make the improvements necessary for our businesses.
 
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