In my post last week, I mentioned it’s going to be very important for farm leaders to really understand their costs and breakevens, as they decide whether the farm can take advantage of particular opportunities.

This week, I want to dive into that a little further – particularly around input costs. Input costs can seem like one of those things that we don’t have a great deal of control over, but we may have more ability to impact them than we think.

Our ag finance specialists have been fielding questions this winter from farmers who are asking – if this is my projected breakeven, what can I do about my input costs? How do I go to my input suppliers and see if there are ways I can reduce my costs?

Traditionally, farm financials have been used to capture what happened over the past year. But a forward-looking financial analysis provide different information. It can be used to drive the business while looking through the front windshield – rather than trying to use the past year’s results, the rearview mirror.

Best yield vs. best return

Farmers who are asking these questions have taken time to understand their costs. After looking at the numbers, some have said: if this is my breakeven and this is a realistic yield for me, I need to take a closer look at my inputs.

They’re going to their suppliers to explain their situation and ask: Is there a way I could decrease my overall cost while still getting the best return for the money I’m putting in?

One way to think about this is considering what it means to get the best yield versus the best return. These are two very different things, but sometimes we might confuse them. Or we might let one way of thinking guide our decision-making versus the other.

The big question is: Is this dollar I’m planning to put into my crop going to give me the best yield or the best return? ‘Best yield’ means you might be planning to spend quite a bit on a particular input because you think it will give you the highest yield. But you’re not sure if you’ll get your money back in terms of a full return on what you spent.

On the other hand, ‘best return’ means that this particular input may not necessarily bring the highest possible yield, but from your analysis, it looks like you’ll get the best level of return out of it.

Next steps

Here are a few questions to consider:

-When I make input purchase decisions for my farm, do I tend to look through the ‘best yield’ or ‘best return’ lens?

-Have I challenged my input providers to find out how my farm can get the best return on all of my input purchases this year?

-What changes might I consider when examining my inputs through the ‘best return’ lens?

If you’d like help putting together an accrual-based, forward-looking financial projection for 2016 and ideas of actions to take based on your farm’s numbers, you might consider working with someone who is knowledgeable in that area, such as an ag financial specialist.

If you’d like more business and management ideas for today’s farm leader, read the latest Smart Series publication to find articles on land rent negotiations, farm transitions and more, or visit us at www.waterstreet.org.

The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.