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Do you know your cost of production?

The other day I was on a large farm operation during a snowstorm. It was snowing so hard that a satellite GPS would have had difficulty finding me. No, it was not south of Buffalo, New York, although they have had record snows this year.

The producer’s operation was large and he had won the land rent lotteries over the years encumbering a considerable amount of acreage, both owned and rented farm ground. In the farm visit, I asked a simple question, and expected a quick response. “What is your cost of production on the various crops and enterprises?” The distant look in his eyes said it all. He did not know. This was very surprising because his lender required audited financial statements due to the size and complexity of this business. While his accountant did an excellent job, this large, aggressively growing producer received an “F” from the professor for his failure to link these financial records to a financial dashboard that could be used to monitor and manage the business. His spouse, who was by his side, had a better idea of cost ranges because she had maintained the books up until recent years when they converted to the more sophisticated system.

The point of this article is that many producers, including larger operations, quickly get themselves into a serious financial condition if they are complacent and fail to monitor financial records. Often their excuse is, “That is my accountant’s job.” A good CEO producer, regardless of the size of the operation, will generally have a good idea where they stand financially at any point in time.

Lenders are going to apply more scrutiny in this winter’s renewal season, not only for quality financial records, but general financial understanding. Regulators who provide oversight to lenders will be much more demanding, so producers must provide and understand the necessary data.

The next key is linking the financial records to production expenses and marketing and risk management plans in a systematic process. For example, “x” bushels of crops at “y” prices, with these costs will provide a debt coverage ratio or generate a certain return on assets or earned net worth. These linkages between marketing, financial and bottom line results need to be emphasized.

This winter plan to attend at least one of the many educational programs offered, which can be a good foundation in unlocking the dynamics of getting financial records to talk to the business, which, in turn, enhances your business’ value and your confidence in working with your agricultural lender.

TAGS: Soybeans Corn
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