Published on: 16:05PM Apr 22, 2011
At some point there will be an opportunity to make a multi-year crop sale. How will you determine if the opportunity is right for your operation? Will you develop a strategic plan or will you just make a decision when the timing seems right? Investing some time now in a plan to manage future margin opportunities is just good business. If grain prices continue to rise it’s likely that inputs will do the same, on the other hand, if grain prices go down our inputs may not move back down as quickly. Margin opportunities this year for most operations are very strong. Don't assume that these opportunities will continue. Stay focused on your cost of production, keep a close eye on the markets, and develop a written strategy so when it's time to make a decision you can do the right things for your operation in a timely manner.
There are many factors to consider before a decision on a multiyear sale can be made. For example, what will input prices be? What external factors could impact grain prices either positively or negatively? (China, ethanol, oil prices, US dollar, growing conditions, or some other Black Swan) What amount or percentage of sales is appropriate for next year? What will the crop rotation be? What marketing tools will be best suited for forward pricing? Do you have a marketing consultant or an advisor who can help you analyze the complexities of the above questions? If you currently do not have a market advisor, now would be a great time to begin working with one. Another set of eyes looking at your operation may see opportunities that you could miss.
There seems to be more questions than answers as we look to any long-term business plan. Therefore, it's important to narrow a strategy down to individual components. There are three primary tasks which will empower you with enough information to feel confident moving forward with multiple year sales. The three components are supplier discussions, crop rotation plans, and an overall cost of production analysis. Once these three components have been fully analyzed you will be able to look at pricing opportunities and make effective margin management decisions.
- Supplier discussions: Have a conversation on input pricing opportunities. Are there any pre-pay opportunities? Is there any loyalty or early pay options for product commitments? If you would be willing to pay cash for nitrogen or fertilizer today, for the 2012 crop, what would your price be? Share your cropping plan for the coming year with your supplier. Ask them their opinions on the current input prices. Having this discussion well in advance will send a clear message to your supplier that you are focused on inputs and have a clear objective in mind for managing the costs.
- Crop rotation plans: You may not know with certainty what your crop rotation plan will look like for next year, however, it's important to put together your best estimate. Once you have your rotation plans made it will give you enough information to determine your needs for, fertilizer, seed, equipment, insurance, storage & handling, herbicides, and capital needed for operating.
- Cost of production analysis: As you make your crop rotation plans and come up with your cost structure it's critical that you do something with this information. If you're going to spend the time working through your crop plans and questioning suppliers on prices, take the next step and put this information together to develop your specific cost of production. Assuming you can lock down some specific input prices you should be able to come up with an estimated cost of production for your 2012 crop. Once you've done your homework and can compare your costs with pricing opportunities, you will be able to make informed margin decisions for the coming year.
In general, high prices do not last for long periods of time. If price opportunities are present and you do not have the information to confidently know what type of margin you have at every price level, it will be difficult, if not impossible, to take advantage of opportunities. Investing some time in a comprehensive cost of production analysis for the coming year will allow you to maximize your profit margin!
If you're interested in tools for putting together plans and projections on your specific cost of production, send me your questions.