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Ag Marketing IQ: Knowing your break-even – and tracking that moving target – provides a basis for making profitable decisions.

Tyler Schau, Hedging strategist

March 25, 2024

4 Min Read
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I had the opportunity to go to Commodity Classic in Houston, Texas, this year. It was great to visit with producers from all over the country. Most of the conversations led to marketing. In general, many felt they could have done a better job in 2023 and so far in 2024. We had good discussions about what to look for in the upcoming marketing year. One particular discussion, however, has been replaying in my head ever since.

One of our philosophies at AgMarket.Net has been and will continue to be “to know your break-evens and cost of production information,” and then use that data to make informed sales and hedging decisions. During the conversation that’s haunting me, I was informed that was not a correct way of marketing.

The heart of the argument was that since break-evens are a function of costs and yields, and yields are a function of weather, it is impossible to market effectively around a moving target. I could tell that a change of heart wasn’t likely, so I let it go. But I have heard this argument from some folks over the years and want to address a few thoughts.

I worked in higher education for 16 years teaching farm finance, commodity marketing and general economics. One thing that I have long argued is that there is no right way to run your business. There are ways that may work better in certain situations and not in others. At the end of the day, the owner of the business gets the final word.

The gentleman’s statement was correct: a break-even is a moving target. We begin the marketing year estimating costs and using APH as a benchmark for yields. As the year progresses, those numbers become more concrete and thus the target moves less. The key is that they give us a jump-off point.

If I estimated last fall that my cost of production was going to be $4.50 per bushel on corn and saw that I could sell December 24 futures at $5.20, I might have been able to convince myself that was a good spot to make a decision and get a sale made. Another thing happens when you make that sale, the break-even on the remaining bushels drops as a result.

I have a few customers that remind me that they don’t farm to break even, and I agree with them. Nobody should farm to break even. But the hard truth is something I spent many years teaching about: production agriculture is as close to a perfectly competitive market as we have in the world.

I won’t go full econ nerd here, but the reality of perfect competition is that supply and demand forces will drive the economic return to the average producer to break-even prices over the long run. To unpack that sentence; above average producers will operate at a profit, while below average producers will operate at a loss.

One of the questions I have posed over the years is: “what does the average producer look like?” I have never received a great answer. To generalize, the average producer lowers costs while maximizing production through efficient uses of capital and labor. How is that for an economist’s answer?

So, how does this help with your marketing? To put it succinctly, marketing grain or livestock is often simply the act of making a decision. Of course, we want to sell our products at the high, but the truth is we won’t know the high until after we make – or don’t make – a decision.

When we have the cost of production drilled down to a per-bushel level, we can look at prices differently. We can make informed decisions about how a sale or a hedge strategy will affect our bottom line.

Reach Tyler Schau at 701-987-6009, the AgMarket.Net staff at 844-4AG-MRKT, or visit AgMarket.Net. AgMarket.Net has tools to help producers refine their numbers and make decisions based on their operation.

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About the Author(s)

Tyler Schau

Hedging strategist, AgMarket.Net

Tyler Schau joined AgMarket.Net, the farm division of John Stewart & Associates, as a hedging strategist in 2021. He was previously at Kluis Commodity Advisors. Tyler earned his B.S. degree in Agricultural Business and his M.S. degree in Agricultural Education from Iowa State University. In 2009, his family moved to Almont, ND where he became the agricultural economics instructor and the Farm and Ranch Management degree advisor at Bismarck State College. His teaching focused on risk management for producers.

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