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August 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.

 

2012 Cost of Production: A First Look

Aug 30, 2011

 

 
2011 has been a year full of bullish news. It’s easy to get caught up in the excitement of new price opportunities. No one wants to miss out on an opportunity to sell grain at a high price. These new opportunities and volatility in the market present a unique challenge. For example, many producers began sales for the 2011 crop at price levels well below where we are now. It's easy to beat yourself up on missed opportunities. However, if those sales were made above your cost of production, they were sound business decisions.
 
Another difficult question is whether or not to make sales for 2012 or even 2013. If you made sales too early and missed opportunities in 2011, that missed opportunity can play games with your mind as you consider 2012 sales. Additionally, if the current market price for the 2011 crop is at $7.70, it can be difficult to start selling the 2012 crop at $6.70.
 
So what are the solutions for managing emotions, risks and opportunities? Consider using historical charts, which can be effective in demonstrating reality. To better understand our current situation, we sometimes need to study historical information. History is not a perfect predictor of the future, but it does allow us to study trends and can help us to visualize future probabilities.
 
Here are two charts for corn and soybeans which show the average season price versus the cost of production. (Charts provided by Russell Consulting Group)
Corn cost of production
Soybean Cost of productionHistory demonstrates that every time we have rallied a grain market, it has been followed by a period of time where the market price dips below the cost of production. As you can see, there are some periods where costs can be higher than the market price, either rapidly or for an extended time. No one can predict how or exactly when the market dynamics will change. The one fact we do know is that markets cycle. The key to managing through these challenges will be your ability to take advantage of margin opportunities.
So what can we do to manage our risks and enhance our margin opportunities? The ultimate answers are unique to each individual farm. Here is a list of focal points I've observed some successful producers using to manage emotions, risks and opportunities:
  1. Understand and study historical trends.
  2. Improve your working capital (cash is KING during economic cycles).
  3. Lower equipment costs per acre (partnerships, increase acres, or custom work).
  4. Variable cash lease agreements instead of fixed leases.
  5. Multi-year fertilizer applications (P&K).
  6. Purchase "high-value products" -- maximize productivity (supplier services, relationships and loyalty are key!).
  7. Use options to protect market opportunities (learn about and understand marketing tools).
  8. Multi-year grain marketing (match up income opportunities with expenses in order to lock in specific margin goals).
  9. Know your cost of production!
  10. Always stay current on new information (timing is everything).
I'm sure there are many other ideas and suggestions that could be added to this list. Create your own list; focus on what's important for your individual operation. Your ability to manage margins during cycles will have a direct impact on your ability to sustain and grow your business!
Please send me your comments and questions.

 

$1,000/Ac. Production Cost for Corn!

Aug 21, 2011

 

As I've been working on 2012 crop plans with farmers, it's becoming increasingly apparent to me that we are fast approaching $1000/ac. production cost. These production estimates are showing costs north of $5.00 / bu. These numbers may seem extreme in some parts of the Corn Belt; however, in the highly productive corn growing areas these numbers will be common.
Did you ever think the cost of production for corn would reach $1,000/ac? It wasn't very long ago when we dreamed of the possibility of grossing $1,000 /ac. income! Yet at the same time our costs were in the $700-$750 /ac. range. It's interesting to me how things tend to stay fairly relative. Basically the cost of production will rapidly follow the market price opportunities. So the question is; are we willing to lock in the margin opportunity as it becomes a reality? Pricing $6.50 corn with 190/bu. yield grosses $1,235 /ac. If the cost of production is at $1,000/ac. and income is around $1,200/ac. We still have a $200/ac. margin opportunity.
The higher the input costs the more risk we assume. Dealing with higher volumes of money makes it more important than ever to manage opportunities during volatile market moves. Margins tend to stay at about the same percentages whether corn prices are at $4.00 or $7.00 as markets rally. On the other hand, market prices can drop significantly faster than inputs, which can easily reverse margins to negative numbers!
It's more important than ever to know your cost of production. It's easy to assume when we see $7.00 bu. corn prices that we should be making money. In most every case we do have great margin opportunities, but at what specific margin level do we make sales? Do we making marketing decisions based on what we think is a good price OR what is a good margin? I would argue that understanding your margin will always help you to make the best pricing decisions.
Here is the chart of some production costs I've assembled from a small number of producers projecting their margins for the 2012 corn crop. These numbers range across four states. I took the highest line item costs from each producer and put them in the high-cost category. I also took the lowest line item costs for each producer and put them in the low-cost category. I then averaged the two categories. This is not scientific by any means, but it's interesting to see how Costs, Yields, and Prices can vary.

 

Production Cost ….. Bench Mark Range
2012 Projections
Production Item
Average
 Low Range
 High Range
Land
$287.50
$200.00
$375.00
Taxes
$25.00
$20.00
$30.00
Interest
$15.00
$5.00
$25.00
Insurance
$25.00
$5.00
$45.00
Seed
$100.00
$75.00
$125.00
Fertilizer
$87.50
$50.00
$125.00
Nitrogen
$117.50
$85.00
$150.00
Herbicide
$30.00
$20.00
$40.00
Fungicide/Insecticide
$37.50
$25.00
$50.00
Custom Spray 2 pass
$15.00
$10.00
$20.00
Equipment/Fuel/ Labor
$172.50
$135.00
$210.00
Grain Hauling
$37.50
$30.00
$45.00
Drying Expense
$27.50
$0.00
$55.00
Storage
$10.00
$0.00
$20.00
Tile / Irrigation
$0.00
 
 
 Production Expense/ Ac.
$987.50
$660.00
$1,315.00
 Production Expense / Bu.
$5.20 
 $4.40
$5.72 
Price Opportunities
$6.15
$4.85
$7.45
Yield Opportunities
190
150
230
 Production Income /Ac.
$1,168.50
$727.50
$1,713.50
 
 
 
 
Margin Opportunities /Ac.
$181.00
$67.50
$398.50
ROI
18.3%
10.2%
30.3%

 

This information is interesting to review and benchmarking against others can be a valuable process. Take some time to calculate your opportunities. The best decisions always come from the best information; Your Own!
What are Your Margin Opportunities???
If you're interested in cost of production and margin management tools, feel free to send me your questions.

Fertilizer Price Calculator

Aug 14, 2011

 

Fertilizer Calculator
As producers consider fertility in today's world of “high tech” we consider nothing less than a precision application, rate, and placement. Conversely, many of us settle on understanding fertilizer price as a “cost per ton.” For example, we understand that potash may cost us $598 /ton and the cost of phosphorus is at $681/ton. Generally we discuss fertilizer in terms of price per ton rather than price per acre or per bushel. Many producers sit down once to calculate this tonnage on a cost per acre, based for an average application rate. Once we have an idea on the cost per acre, on average, we tend to use that number for all of our fields.
In order to manage margins with more accuracy, converting “ton prices” and fertilizer rates over to a cost per acre should be easy and convenient. Here is an example of a simple fertilizer calculator. This tool can be useful to evaluate and instantly calculate different application scenarios.
  Fertilizer Calculator                  
  Price/ton Rate P & K Price / Ac.     Price/ton Rate P & K Price / Ac.  
Potash $598.00 120 $59.80   Potash $598.00 120 $59.80  
Map $681.00 52 $34.05   DAP $671.00 52 $37.93  
    Total Per / Ac. $93.85       Total Per / Ac. $97.73  
    Available N 11       Available N  20  
Potash 0-0-60 Spring N Value $5.16       Spring N Value $9.55  
MAP 11-52-0                
DAP 18-46-0       Enter Plan Here      
             P 52      
   Fill in the Tan Boxes          K 120      
                   
                   
                   
           
By thinking of fertilizer costs in terms of price per acre (based on a rate of application) you can improve individual farm unit decisions. Margin goals from one farm to another can be very different. Just as each farm requires unique fertilizer management each farm also requires unique margin management.
This tool also includes an anhydrous nitrogen calculator which serves a similar purpose. If you're interested in receiving this tool just send me a request and I'd be happy to forward it to you.
 

Crop Reality Check

Aug 08, 2011

It's that time of the year again to estimate your yield prospects. It's easier to estimate yields from the seat of your pickup, in air-conditioning, rather than walking through corn in 100° temperatures. Although your pickup seat is much more comfortable, walking through your fields or hiring someone to do so, is much more accurate. The crop reality is always in the middle of the field, in a representational area rather than along the edge of the field. There are lots of yield reports hitting the web and all the social media venues. This information can be valuable, but you are selling grain from your fields not from theirs.

While individual yield estimates aren't perfect, they can give you some perspective. The more checks you can do, the more accurate your information can become. Having your own individual estimates can give you a number of benefits:
 
  1. Walking individual fields can help you evaluate potential problems or issues which may be managed in future crops.
  2. You have a yield comparison as to how your yields look versus relying on estimates from others.
  3. Improve marketing results; confidence to make additional sales or to hold off on sales.

 

Variability in weather has made it impossible to estimate productivity without capturing an adequate sample size out of each field this year. One effective approach is to harvest 1/1000th of an acre, (In 30 inch rows measure 17 1/2 feet). In past years we've measured out our length and selected three predetermined ears out of that sample. In some areas this process may be adequate to come up with an average kernel count per ear.  Unfortunately, many areas have experienced weather challenges which have created a lot of crop variability. Therefore, the best samples would include every ear.

Here is a picture of an estimate from the damaged field I posted in the previous blog on July 17th (The Storm's After-Math).
 
Crop Reality Check 
 
                            Planting Rate 36,500                                               Sample ear count 32,000
 
This particular field looks great from the road, but it had 70+ mph winds on July 10th. Harvesting every ear in a predetermined sample size rather than randomly harvesting some ears improves accuracy and identifies the true reality!
 
I encourage you to do your own reality checks. In order to manage margins and achieve the best results it's about having the right tools at your fingertips.
Here is an estimate of the above ear sample.

 

 
Corn Yield Estimate 
2011
70,000
80,000
90,000
 
 
 
 
 
Kernels
Kernels
Kernels
 
 
Avg.
Avg.
Avg.
per bu.
per bu.
per bu.
Ear
# Ears
Kernels
Kernels
Kernels
Factor
Factor
Factor
 Count
 picked
Long
Around
per/ear
Yield
Yield
Yield
32,000
32000
27.4
14.8
405.52
185.38
162.21
144.18

 

 
Other people’s numbers or averages plugged into the equation dilute your individual accuracy. Just as you analyze your individual grain marketing, analyze your individual yield reality!
 
If you're interested in this estimate calculator, send me a request and I’d be happy to forward it to you.
 

 

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