To say we live in uncertain times right now is an understatement. When the whole world is in such a state of uncertainty, it’s normal for you to feel uncertain about your farm operation. You probably find yourself thinking – What if prices don’t recover? What if there is a weather problem on top of all of this? What if, what if, what if???
Well, I’m here to tell you there is an analysis you can run for that.
Some call it a sensitivity analysis, some call it a risk analysis, but it really is a “what if” analysis. Today I am going to help you get insights into some of the many questions you have running through your head.
Some of you may already run this type of analysis at the beginning of every year. Well, don’t click away too soon; I might give you some new ideas on how to use the analysis you already have in hand.
Let’s get started
For those who don’t already run such an analysis, let’s get you started. First, you will need to put your projection for the year in an excel spreadsheet. Keep everything in its own cell – so your formula for income would look like this (Acres*Yield*Price) for each crop.
Once you have that in, we can begin to stress each category.
So, your projection already has in the lowest prices of today and you still breakeven - but barely. What if a weather event hits your yield as well? Take your yield down by 10% (multiply the yield cell by 0.9). What does that do to the bottom line? How much would you be short of breakeven?
Don’t just use this technique to obsess over only the negatives. For example, if you already have ‘penciled in’ the lowest prices you think are possible to be conservative, see what it looks like when you take the price up 10%. Also, plug in an increase in yield. See how the bottom line changes.
A simple spreadsheet can truly help you answer your “what ifs” and quantify your worries. What if this weather takes yield down by 10%? Instead of constantly worrying, plug the numbers in. You may be surprised that you will actually still be okay.
You can also use this technique to help you make decisions throughout the year. I know so many of you already run sensitivity analysis as a part of your operating line renewal process, but why stop there? If you see a problem on the horizon, plug the numbers in to quantify your worries and get ahead of the problem!
Will this spreadsheet be down-to-the-penny correct on what will happen? No. Will it let you see a range of what to expect so you can better plan? Yes.
In a time of massive uncertainty and worry, it really is remarkable how something as simple as a spreadsheet can help settle your mind, or help you build a plan for addressing what might be coming.
Don’t walk around worried and not sleeping because you are so focused on “what if.” Quantify your worries and make plans to address them.