You are about to plant the most expensive crop of your career.
“Inflation is real,” says Chris Barron, a national financial consultant for Ag View Solutions and Iowa farmer.
Based on data from his farmer clients in more than 20 states and Canada, the average cost of production for corn is up $120 per acre from last year. For soybeans, it will cost $85 to $90 more per acre to plant.
What happens if corn or soybean prices drop 30¢, 50¢, 70¢ or more?
“Based on current number, if we take 70¢ off a bushel of corn and soybeans, that puts 80% of our clients in the red,” Barron says. “We don’t have much tolerance for downside price levels. We have to be really cognizant of where that line in the sand is for us.”
Listen to Barron discuss marketing, crop insurance and risk management with “AgriTalk’s” Chip Flory:
Analyze, Stress Test and Plan
Farmers can harvest incredible value by stress testing their business margins, Barron says.
“Analyzing different stress conditions such as an increase cost of production, limited marketing price opportunities or decreased yield levels will allow you to determine the amount of stress your profit margin will be able to tolerate,” he says. “Your business ultimately relies on cash in much the same way your body relies on blood.”
Stress testing your margin, Barron says, is not a difficult process. The three variables to study are yield, cost of production and market price. As simple spreadsheet or farm management software can let you manipulate the variables one at a time into levels that would be stressful for your operation.
“There is significant value in understanding how margins are influenced by the changes in grain prices, rather than worrying about price alone,” he says. “The same thing holds true for inputs and yields. You can’t just worry about one of these three variables independently without taking into account the condition of the others.”
Zero in on Costs
On average, four major cost categories comprise 75% of a farmer’s cost of production. Those include:
- Return to Management
- Land
- Equipment
- Fertilizer
Every cost is up from last year, Barron says. He encourages farmers to determine accurate numbers for all their costs.
“Make sure you really spend some time looking at that return to management category because that’s one where we’re seeing a $267 spread from the low-cost producer to the high-cost producer,” he says. “We can help ourselves and not be surprised by costs down the road if we zero in on those now.”
