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Profit matters more than price

You need to know where to start so you can finish.

Now that we have digested the highly anticipated January USDA report and Phase 1 of the US/China trade agreement has been signed, producers’ attention should focus on the 20/21 crop year. There are both existing opportunities and challenges lurking ahead; we suggest producers ask themselves five basic questions as they lay the groundwork for their marketing plan.

  1. How well do I know my farm?
  2. Will my farm income support the farm and my lifestyle?
  3. What am I willing to do if it doesn’t?
  4. How honest can I be with myself?
  5. Can I make money at these prices? 

Now is the time for producers to take a dive into their production cost. Most operations have a handle on cash rent/land, chemical, fertility & seed cost. But have you probed costs in certain categories that are tougher to track? Labor, maintenance and repair are costs that are often underestimated and aren’t tracked precisely throughout the year. The category that is quite possibly the hardest to determine or to be internally honest about is family living expense. How much did that trip to Las Vegas cost on a per acre basis? Be honest with yourself to find a true figure. Once you have nailed down your cost per bushel or per acre, ask if your operation truly supports your lifestyle. If you ascertain that it does not, what will you be willing to do to make up for the shortfall and how can you cut back on your expenses? It’s easy to realize you’re overweight and buy a membership to the local gym, but showing up every day and doing the work is where most fall short. Is your operation overweight?

Develop a true marketing plan. While developing that plan, I want to emphasize profit is much more import than arbitrary prices. I’m not saying don’t establish target prices, Please do, but be cognitive of your breakeven throughout the year and adjust your targets as need be. Don’t let price projections from the “experts” sway sound marketing decisions for your operation. Unforeseen expenses must be accounted for and remain current. Remember every profitable sale affects the break-even on remaining bushels. The more bushels you have sold at levels above your breakeven, the more flexibility you’ll have with your unpriced bushels that can be sold at a level lower than initial sales. Having a way to track the impact of sales that have been made on bushels that are unsold is a powerful thing. As the growing season develops, your perspective of your operation’s yield potential will also change, which in turn will have a big difference on your potential breakeven price. Keeping your spreadsheets, profitability calculators or marketing apps up to date is imperative for keeping your marketing plan on track.

To summarize, profit matters more than price. What is $4 corn? It’s not the same to you as it is to your neighbor.  Has your neighbor taken his operation on the treadmill while yours has been on the couch eating potato chips? Determine costs, be honest with yourself, develop a plan to manage risk and lock in profits using available tools. Know how your breakeven levels are fluctuating throughout the marketing year and stay precise while keeping track of them.

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

TAGS: Management
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