Ryan Bristle: Managing Risk at the Bottom of the Cycle

October 19, 2018 04:45 PM
 
Managing Risk at the Bottom of the Cycle

After five years of record or near- record corn and soybean crops, it’s natural to think we will live with commodity price deflation forever. That’s not the case, though. First, all we need is production problems somewhere in the world and prices could rapidly change. Second, world ending grain stocks, particularly for corn, are dropping which means demand is increasing.

Don’t do anything irrational that has the potential to reduce yields while we sit at the bottom of this price cycle. In other words: Do everything you can to increase yields, which means using high quality seed, fertilizers, insecticides and fungicides.  

Managing labor and machinery costs per acre has a significant impact on your bottom line. We calculate those costs for our clients and then use that information as a benchmark for other operations.

To calculate machinery cost per acre, we use 25% of the market value for equipment used to produce a crop. This represents 10% depreciation, 10% interest or opportunity cost and 5% repairs. Then divide that number by harvested acres. The average for our client base is $126 per acre. However the range from top to bottom is $240 per acre.

The key is attempting to right-size your equipment for your operation. In the Corn Belt, we generally get 10 good days to plant and about 30 days to harvest without affecting yield potential. A general rule of thumb is to size your labor and equipment to be able to accomplish planting and harvesting in these windows.

Consider geographic location, which can make a big difference, when benchmarking your data. If you’re in the southern Corn Belt, you have more good days for planting and harvest. If you’re in the northern Corn Belt, you have fewer days. Then if you add weather delays and challenges as we had this year in some areas, it becomes much more difficult to manage. If it was easy, anyone could do it. As a wise person once told me, you can drown in a river that averages a foot deep!

To calculate labor cost per acre add operator draw to hired labor and divide by harvested acres. The average for our clients is $50 per acre. However, the variation from top to bottom is $148 per acre.

If you’re on the top side of each of these costs you probably will not be competitive. If you’re on the bottom side, you could likely be farming more ground.

Managing business and personal income will be just as important as managing the rest of your operation this winter. Maintaining a balance of “good debt” and positive cash flow is the key.

One metric we look at is personal living expense. This includes mortgage or rent, personal vehicles, food, clothing and even saving for your kids’ college funds. We like to see it at 10% or less of your farm’s gross income. As your income fluctuates year to year so should your personal living expenses.

Recently, many farmers have outproduced price levels that otherwise would be at or near their cost of production. This is why we stress looking at gross income per acre. Gross income per acre drives the bottom line. That is yield x price.

Managing risk also includes agronomics. What risks are you willing to take to protect your crop (defensive) and further drive yield potential? You might have a different risk tolerance for the offensive risks, but lately we have seen yield improvements add critical incremental profits, which adds to your bottom line.

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