Pinpoint Your Target Price and Your Break-Even Price

February 22, 2019 06:19 AM
 
When developing your marketing plan, don’t confuse your target price and your break-even price.

As farmers across the country prepare to put seeds in the ground, many are spending time with their spreadsheets planning out sales for the 2019 crop. When developing your marketing plan, don’t confuse your target price and your break-even price. 

“By the end of harvest 2018, most farmers knew what their cost structure was going to be for 2019,” points out Matt Bennett, Illinois farmer and market analyst with Bennett Consulting. 

To determine your break-even price, pull all costs into a spreadsheet and then add in a prospective yield, he says. “For 2019 yields, we take the five-year yield average, and then take 10% off it. That number is conservative, and it allows us some wiggle room if we don’t end up having a very good crop.”

Price Goals. It’s important to keep in mind that every producer’s approach to a break-even price is different, says Illinois farmer Matt Swanson, who grows non-GMO corn and soybeans for export. “I want to know at what number I’m losing money versus making money.”

After pinpointing his break-even prices, Swanson figures out his profit goal. Then he sets a target marketing price. 

“If I make $0, but I’m paying all my bills, I want to know what that number is so I have a bottom dollar sale price,” he says. “If I want to make $50 an acre, I want to know what that number is.”

All farmers set their target price differently, Bennett says, adding he encourages producers to include income in their target price. 

“Because at the end of the day, it doesn’t really sound all that great if you’re going to just break even,”
Bennett says.

For 2019, Bennett’s initial target price for corn is $4.06 per bushel, which with his basis factored in equals a $3.75 fall price for corn. 

“That works really well because my breakeven is $3.50 per bushel,” he says. “So, if you sell half of your bushels at $3.75 with a breakeven of $3.50 that essentially lowers the breakeven of the bushels you have left to sell. Your breakeven on remaining bushels would be $3.25.”

 

Smart Sales. Knowing when to pull the trigger is essential. To do it well, keep track of sales and how they affect your break-even price throughout the season. 

“Once you know your price and how much forward selling you want to do, then you can pull the trigger with confidence,” Swanson says.

When it comes to the amount of grain farmers should have sold before harvest, strategies vary. Swanson is only comfortable making forward-sales up to his crop insurance guarantee, and only does it when they are profitable. 

That can be a good thought process, but the majority of Bennett’s clients start to get uncomfortable making cash sales above 40% of production prior to harvest. 

“My typical client has no interest in selling physical bushels anywhere close to their insurance guarantee, which is usually 75% of total production, simply because they don’t want to oversell,” he says. “The typical producer I work with will sell no more than maybe 40% to 50% of their average production history. Then we protect the rest on paper.” 

For example, last year Bennett recommended to all of his clients to have 100% protection on soybeans. That meant above the 40% to 50% of physical grain sold, his clients used put options and other marketing strategies to define risk on the remainder of their production.

“The goal is to have a floor in place,” Bennett says. 

Spend time fine-tuning your grain marketing plan and developing a strategy to manage risk. Profit opportunities might be scarce, so a plan is vital. 

Learn about a new app to help you track your profitability in real time at 
bit.ly/ProfitabilityApp 

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