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June 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.

 

Dad's Legacy

Jun 27, 2011

 

Being involved in the business of agriculture can be stressful and time consuming. We're constantly focused on productivity, efficiency, marketing, and profit margins. These are all extremely important focal points and necessary to the success of our businesses. On the other side of our business spectrum are the family members, partners, employees, friends, and neighbors. Our relationships with the people we are surrounded by are truly the lifeblood of our businesses. The people we are surrounded by teach us as individuals how to properly interact, communicate, assist, care for, and even love. This realization hit me after my dad passed away on Saturday evening.  Over the years he taught me three important traits which can help us all to be better people. These traits are, character, integrity, and love.
I've realized as I reflect on my relationship with dad, character is the term that defines a person's true being. Dad was the type of person who always wanted to do everything right. He always expected deep green corn, weed free fields, straight rows (before auto steer) and high yields. He expected everyone to always do their best, give all you could give, and “get your work done.” His expectations of everyone were high because his expectations of himself were high. He always kept a close eye on the neighbors, (he did have three pairs of binoculars). At the end of almost every day dad would drive around the country side to see what everyone was up to. I used to think he was just nosy. As I've matured, I now realize his true motivation. It never failed, if someone in the community needed a hand, was short a couple wagons at harvest, got a tractor stuck, or just needed a piece of equipment to finish a project, he knew it. He was always there to lend out any additional support he could to help others. He was a true provider.
Integrity was another virtue that I realized dad demonstrated throughout his life. Here are a couple examples of integrity in action. Dad was a sales representative for Pioneer Hi Bred for more than 22 years. He loved working with the people and helping them to improve their crop production. He was willing to spend the time necessary to truly understand the specific needs of his customers. He was also very honest with his customers. Sometimes I wondered if he might offend someone. On the other hand, his direct approach and his honesty gave him tremendous credibility. He was also very focused on providing more than what anyone expected. If he told you that he was going to do something, he would deliver, you could count on him every time.
Love is probably the most difficult trait of them all. We rarely link the word love and business in the same sentence let alone the same context of an article. However, my dad lived his life by co-mingling love and business together constantly. Dad loved seeing equipment roll across the fields stirring up the dust of productivity. He loved teamwork; he liked to know that multiple operations were being done at the same time. He loved the days when everyone was working together; as he called it, “we're getting something accomplished now”. Everyone expresses their love in many different ways. Dad's expression of love rarely came from words. His expressions almost every time came from a smile, a twinkle in his eye, and a wink. Another way he would show his appreciation in later years was to drive by the fields with his old 1992 Crown Victoria Ford. He'd pull in the driveway and Park as you were finishing up the field. In order to leave the field you'd have to pull up to him, get out of the tractor and answer at least 10 questions about what was going on that day. That was his way of showing affection and appreciation for what we were doing on the farm. He always considered everyone that worked on our farm or partnered with us as family. He loved his family and he loved farming.
I hope I’ll be able to leave character, integrity and love to my family as part of my legacy. What traits will your legacy leave?
Next week I'll get back to work with the normal Margins & Business Management information.
Dad would expect it!
 

Grain Margins & Price Volatility

Jun 19, 2011

 

Volatility is playing a major role in this year's marketing challenges. Volatility has a tendency to toy with our emotions, while at the same time creating tremendous opportunities. Markets continue to be affected by numerous factors such as weather, funds, the dollar, oil prices, supply, usage, ethanol discussions, and a host of other topics. As we deal with market uncertainty for this year's crop it is important to understand your margin as it relates to the price of grain.
As discussed in last week's blog, I introduced a margin calculator to help you better understand opportunity by looking at three specific components for your marketing analysis. The three components are:  yield, price opportunities, and cost of production. Understanding what market prices did last week is only part of the equation. We can all understand that July corn was off about $.86 and Dec. corn was off about $.52. The real question is how does the price move affect your individual margin opportunities? Let's take another look at the spreadsheet from last week, to understand how margins were affected.
       Example: $.52 decline in the weekly Dec. 11 corn price.

 
 
(Dec.11) 6-13
(Dec.11) 6-17
#1
Yield   (5yr APH)
186
186
#2
Grain Price
$6.92
$6.40
#3
Cost per/ac.
$925.00
$925.00
 
Cost per/bu.
$4.97
$4.97
 
Income per/ac.
$1,287.12
$1,190.40
 
Income per/bu.
$6.92
$6.40
 
Margin per/ac.
$362.12
$265.40
 
Margin per/bu.
$1.95
$1.43
 
Margin -- ROI
39.1%
28.7%
 
Change
 
10.5%

 
As you can see the market price change last week impacted the margin by 10.5% for this example. The value of having this type of tool is to help you be more focused on your marketing system rather than price alone. We all have unique opportunities with respect to yield, price, and cost of production. Analyzing your individual situation helps you paint a clear picture of local challenges and opportunities.
Prices will likely continue to be volatile. By focusing on margin management you can improve your ability of managing risk and profitability.
If you would like to receive this spreadsheet send me a request.
319-533-5703

Grain Margin Calculator

Jun 13, 2011

 

Are you struggling with how much grain to sell for the 2011 crop? At what point will the best opportunities for 2012 crop sales begin? What are the information pieces you use to make a marketing decision? Have you historically been good at predicting grain prices? What will input prices do? What yield level can you expect from your operation? These questions are difficult, especially as we face intense volatility in the grain markets.
Sometimes the complexity of decisions can be overwhelming. One option to consider is to determine the information that you do know and try to make educated decisions. Markets can change in the blink of an eye. Developing a structured plan to analyze your opportunities can be a critical solution for making decisions based on goals and objectives rather than emotion. No one can predict grain prices perfectly; however, every one can develop strategic plans which help to manage emotion and uncertainty.
Margin management involves the process of determining yield, price opportunity, and production expense. Assembling this information will provide adequate details to make effective strategic decisions. Another factor to consider is your individual margin goals. What historical margin levels have been profitable and effective over time? What goals are realistic and achievable? How much risk are you willing to take in order to achieve higher price opportunities? Do you know your specific margin with $5.00 versus $7.00 corn? In order to be an effective margin manager these questions must be analyzed.
Here is a tool designed for analyzing your grain margin opportunities.

 
 
Margin Opportunity Calculator
 
 
 
 
 
 
 
 
 
                    Fill in the Tan Boxes
#1, #2, #3
 CORN
 
 
 
Green Boxes Report Information
Results
 
 
 
 
 
Farm #1
Farm #2
Farm #3
Farm #4
Farm #5
#1
Yield
185
185
185
185
185
#2
Grain Price
$5.00
$5.50
$6.00
$6.50
$7.00
#3
Cost per/ac.
$900.00
$900.00
$900.00
$900.00
$900.00
 
Cost per/bu.
$4.86
$4.86
$4.86
$4.86
$4.86
 
Income per/ac.
$925.00
$1,017.50
$1,110.00
$1,202.50
$1,295.00
 
Income per/bu.
$5.00
$5.50
$6.00
$6.50
$7.00
 
Margin per/ac.
$25.00
$117.50
$210.00
$302.50
$395.00
 
Margin per/bu.
$0.14
$0.64
$1.14
$1.64
$2.14
 
Margin -- ROI
2.8%
13.1%
23.3%
33.6%
43.9%

 

 
 
Margin Opportunity Calculator
 
 
 
 
 
 
 
 
 
                         Fill in the Tan Boxes
#1, #2, #3
 Soy
 
 
 
Green Boxes Report Information
Results
 
 
 
 
 
Farm #1
Farm #2
Farm #3
Farm #4
Farm #5
#1
Yield
55
55
55
55
55
#2
Grain Price
$10.50
$11.50
$12.50
$13.50
$14.50
#3
Cost per/ac.
$600.00
$600.00
$600.00
$600.00
$600.00
 
Cost per/bu.
$10.91
$10.91
$10.91
$10.91
$10.91
 
Income per/ac.
$577.50
$632.50
$687.50
$742.50
$797.50
 
Income per/bu.
$10.50
$11.50
$12.50
$13.50
$14.50
 
Margin per/ac.
-$22.50
$32.50
$87.50
$142.50
$197.50
 
Margin per/bu.
-$0.41
$0.59
$1.59
$2.59
$3.59
 
Margin -- ROI
-3.8%
5.4%
14.6%
23.8%
32.9%

 
This is a fairly simplistic approach designed to help you visualize margin opportunities and compare different scenarios. The three variables mentioned above include, #1 yield, #2 grain price,#3 production cost per/ ac. As you plug in either actual or estimated information it will allow you to evaluate realistic scenarios. No one knows what prices will do, however, of the three variables pricing and markets seems to attract the most attention. Market prices are critical but it's also important to consider production cost and yield as part of your decision process.
Understanding margin management is the name of the game for success in grain production. We face volatility, technology improvements, weather risks, economy, government regulations, and a host of other unforeseen challenges. As we deal with these external variables it will require different management skills than we've used in the past. Compiling information so you can understand your margin opportunities will provide a more clear perspective. Making decisions as opportunities present themselves is one of the most effective ways to keep your operation successful.
If you are interested in receiving the above spreadsheet e-mail me a request.
 Also feel free to give me a call or e-mail other questions.
 
319-533-5703
 

 

Farm Size & Margin Managment

Jun 05, 2011

 

Does farm operation size determine profit levels? Do more acres equal more profit to the bottom line? What are your management skills and what are your specific goals? There are efficiencies of scale with more acres, however; more acres won't magically improve your margins without proper management.
Over the past several years I've worked with many different growers in helping them document and better understand their cost of production. I’ve observed in most every case that size is not a direct factor when it comes to profitability or effective margin management. I‘ve noticed that operations with a long-term strategic plan are the most effective margin managers. These growers tend to always have a focus on the specific details of their operation. They set a priority on documentation, agronomy, marketing, cost of production analysis, information management, and accounting. All of these practices should be used whether you have 100 acres or 10,000 acres.
These top managers also have one common trait. They focus their time and energy on what they do best within their operation. They are willing to hire experts or partner with others in order to be effective in areas they have challenges. For example, you may be a great mechanic but struggle with agronomic information. You may be good at making marketing decisions but lack in accounting or information management. Whatever the case may be, try to focus on what you do well and enjoy. If you can focus on the projects you enjoy, your efficiency will improve to its full potential. When it comes to the things you don't enjoy or aren’t good at, hire professionals or partner with someone to complete those tasks. Both your productivity and quality of life will improve! The more complex our industry becomes the more difficult it is to be effective in every area by yourself. As we move into the summer, I'll be expanding on this topic in more detail.
As I work on cost of production analysis with many unique operations it's been interesting to see how priorities differ. Last March I worked with a 1,000 acre grower with the goal of making $100 per acre margin. He was looking for an overall bottom line profit of $100,000. Some of his goals were to improve risk management and pay down debt. Less than one hour later, I found myself having a discussion with another producer who had the same goal of $100,000 bottom line profit. The difference with the second grower was that he had 2000 acres instead of just 1000. This producer had set a goal of making $50 per acre margin. The second producer had been going through some significant growth and had several line item expenses that were higher. The second grower also had acreage growth as one of his priorities. There is basically no one correct answer for everyone. Set your own individual mission based on your long-term plans and build goals to accomplish success for your operation. Every region of the country is unique. Every farmer is unique.
Caution: Another observation is with respect to overall growth. I’ve noticed some antagonism in certain parts of the country as operations within the same area choose different business models. Some are focused on growth, some may be focused on risk management, and others may be focused on just refining and improving their existing operations. Be careful to stay focused on your specific operations plans and strategies. I've noticed in some areas, frustration and even anger among producers regarding land or growth opportunities. Frustration, jealousy, or angry emotions will never allow for clear and concise business decisions. Staying focused on your individual mission and goals will pay dividends much more effectively than wasting time with concern of what your competition is doing. Keep in mind, a focus on profit margins rather than just acres farmed may be the model that creates the best long-term solution. Farm size is ultimately your personal choice.
If you have questions on cost of production analysis or margin management please feel free to e mail or call me with your questions. We have several effective tools available.
319-533-5703
 
 
 
 
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