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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.

 

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.
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