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Business Matters: Tactics Help Squeeze Out Profits

07:15AM Jul 31, 2013
Chris Barron

After last year’s drought, who would have guessed flooding and torrential rains would follow in many of the same locations? Some farmers continue to experience drought, and others can’t seem to turn off the faucet, while a select few have been blessed with an almost perfect growing season so far. No matter what conditions you’re experiencing, it tends to impact your opinion of the markets and your decisions.

For most, it’s difficult to sell bushels that don’t exist, especially when one can’t even get a planter across the field. For those with "prevent plant" acres and wet conditions, it’s hard to fathom the markets could trend lower. On the other hand, farmers with great-looking crops feel the need to sell as their production confidence increases.

Regardless of which scenario your farm faces, 2013 will require creative business finesse to capture your profit potential. Let’s consider three components that can help you squeeze out profits: crop insurance, production and marketing.

"Don’t expect orwait for high prices; take advantage of acceptable profit margins."

Study Benefits. Crop insurance decisions were made in March; however, there are a few things you can do to capture maximum value. It is critically important to communicate constantly with your agent, especially if you’re in an area that has been fighting wet conditions. Depending on the coverage, there are circumstances that warrant investing more in the crop to improve yield. Conversely, if your coverage level is high, it can become counterproductive to invest in a crop with limited potential. If you have specific scenarios where your crop requires additional expenses, be sure to calculate the cost-benefit ratio. For example, with 80% revenue coverage and an Average Production History (APH) of 180 bu. per acre, the guarantee is $814 per acre. The yield guarantee would be 144 bu. per acre. If crop potential appears limited (144 bu. or below), it is difficult to justify additional expenses unless you’re optimistic the fall price will be higher than the spring price, which is at $5.65 per bushel for corn and $12.87 per bushel for soybeans. If you’re going to invest in a treatment, its value needs to cover the cost plus increase the overall revenue above the guarantee level.

Weather Wildcard. We have several hurdles to clear before we’ll have any idea on final yields. The weather during pollination, rainfall, temperature and shallow roots will affect final yields, not to mention that most of the crop was planted three weeks to a month later than normal. How might immature crops that are rated in good to excellent condition yield in the event of an early frost?

Keep an open mind on production and avoid being overly pessimistic or optimistic due to local conditions. Due to variability across the Midwest, understanding the macro production picture might help your marketing decisions more than ever.
Profits Work. Markets for corn and soybeans have generally had a bearish tone, even with all of the weather challenges. Most of the grain trade is in a wait-and-see attitude with regard to production volume. "Rain makes grain" seems to be the sentiment, but only time will tell.

In the meantime, lower corn prices have stabilized and actually increased the demand picture. Regardless of where the markets go, have a plan in place and work your plan. Understand your local basis, and utilize your grain bin storage this year. It’s likely that we’ll see strong pricing opportunities late in the year (during and after harvest).

Prepare and be ready to take advantage of profit opportunities when they occur. Be cautious and do not let greed play into your marketing decisions. Don’t expect or wait for high prices; take advantage of acceptable profit margins.

Chris Barron is director of operations and president of Carson and Barron Farms Inc. in Rowley, Iowa. He is also a farm business consultant and the author of the blog, "Ask a Margins Expert." To submit questions and comments, e-mail Chris at