With higher commodity prices, you may be in the market to make an upgrade or new investment on your farm. Whether that’s iron, software, genetics, buildings, fertility or land, the first step is to calculate the payback. Will that expense offer you return on your investment?
“Many times, when farmers talk about making a change, emotions tend to take over the discussion,” says Shay Foulk, farm business consultant with Ag View Solutions and Illinois farmer. “However, there are ways you can put numbers to these decisions.”
Listen in as Foulk discusses technology investments with Andrew McCrea on the “Farming the Countryside” podcast:
Foulk suggests taking these steps as you evaluate technology investments:
1. Know your cost of production to the bushel.
“You can’t improve what you don’t measure,” Foulk says. “Knowing your cost of production is a very important decision-making tool.”
Dial in your cost of production down to pennies per each bushel you produce.
2. Ask key questions about the potential investment.
While you need to read the promotional information and research done by the companies providing the service or product you’re considering, do so with a realistic frame of mind, Foulk says. Your goal is to pinpoint the minimum benefit your farm needs to see to cover the costs and your time for the investment.
You want to avoid phrases such as, “I know this is going to add 5 bu. to our bottom line,” or “I think this product is going to give us an agronomic advantage.”
Foulk suggests evaluating these factors:
- Grain Price: Projected price for the commodity you will be using to evaluate your margin enhancement.
- Investment Cost Per Acre: How much will it cost to make this enhancement or upgrade?
- Yield Improvement Per Acre: This is your best educated guess for yield improvement.
- Acres: Across how many acres will you use this margin enhancement on?
- Years of Use: How many years do you plan to use this margin enhancement?
3. Run scenarios to evaluate the ROI.
Once you have a handle on the potential benefits of an investment, run a few scenarios changing certain factors. For example, a fungicide application boasts a 4-bu.-per-acre yield jump. What if you only see half of that yield improvement? Is the investment still worth it?
Foulk uses an Ag View Solutions “Margin Enhancement Calculator” to help tweak variables and determine the bushels needed to cover a cost. See an example here.
To get a copy of this spreadsheet or to discuss this topic more, email Foulk at agronguy@gmail.com.
4. Evaluate the intangible benefits.
Of course, investments often provide benefits beyond yield or price. Maybe you can finish harvest faster with a certain investment. Or, by outsourcing spraying on your farm, you can focus on another important element of running your business. These intangible benefits are more difficult to manage.
“But I encourage you to attempt to put numbers to the question to make an informed decision,” Foulk says. “Being able to have number-oriented conversation with your team and family is really powerful.”
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