Knowing the Numbers Gives You Control - and Profitability

Monday, March 9, 2015

There’s a lot of talk today about how tight your margins will be in 2015. While it’s true we don’t have the market conditions of 2008 to 2013 with their 70% to 80% returns on investment, there is a lot of evidence that farmers can still do well—if they plan.

Many Cargill Farm Marketers and Origination Specialists working with producers across the nation say that, despite the market’s downturn last year, margins for most Cargill customers are averaging 7% to 15% for 2014—an ROI that outperforms most other investments people are earning.

The key is in knowing your numbers and controlling what factors you can—instead of letting the market control you. Farm purchases during the boom years have added up. Now, with the cost of equipment and inputs, cash flow dictates that farmers reassess their current strategy of chasing the markets and instead, understand the income target they need to earn a margin.

To walk through the process, we talked to Kevin Loeffler, who grew up on a Nebraska farm and is now a Strategic Marketing Specialist with Cargill in the southwest region of the U.S.

1. Get in the Right Mentality
Planning starts with budgeting, says Kevin, and the process itself mitigates emotion and fear. “When you sit down and finally do a budget, fear of the unknowns is removed and clarity is gained,” he says. “As a business, you’re finding out what’s realistic, what’s attainable and what do I need to focus on. You get the courage to move forward.”

2. Calculate Your Input Costs
A producer’s break-even is estimated yield times estimated price, less the cost of production. So one of the first steps is compiling a rough idea of costs, which will vary from farm to farm.

“What’s key is to figure out what’s relevant to your situation,” says Loeffler. “Generally, it’s the costs of seed, chemicals, herbicide and land. Those four variables get us started in the right direction, and then we can build upon that.”

If you need help, there are resources at FINBIN, a database of average production costs in a number of states, regions, and counties. And as you do research, other line items will emerge.

“A lot of it’s going to be historical, using the data you have today,” says Loeffler. “What have you got locked up for equipment, and what are you paying for land? Are you share-cropping, or do you own? How about inflation, and what are your taxes? Should you figure in a salary?”

Of course, include crop insurance. “Insurance is a set amount of revenue—a guarantee,” says Loeffler. “But farmers need to realize that crop insurance expires at harvest and that un-marketed bushels carry no income guarantee.”

3. Project Your Yield
The next step is estimating yield for each crop and its acreage. You can base it on last year’s Annual Production Yield (APH) or production history—the number your crop insurance uses as its guarantee.

“Most farmers walked away last year with a 20% to 30% increase in corn yield,” says Loeffler. “So figuring that against an APH last year of 180 bushels, your assumption for 2015 might be in the range of 215 bushels.” The number can be adjusted up or down throughout the year as the crop matures, which will be one factor—but only one—in the profitability equation.

4. Set a Profit Goal
Be bold and declare a target. If you can’t, watch for it to surface from the rest of your planning: What percentage above your expenses would you realistically like to make? Choosing a profit margin will focus all your other decisions and provide a trigger for action.

“Many farmers say, ‘Well, as much as I can get,’” says Loeffler. “After we put the budget together, though, we can arrive at a realistic goal we want to achieve.” Having a targeted number to hit allows farmers to track the markets and sell grain with discipline—another way to remove the fear of missing the market high.

5. “Try Out” the Market
Next, test some marketing scenarios well before your crop comes out of the field. To help do this, Loeffler relies on a new Cargill iPad application that makes it a whole lot easier to move from raw data to a sensible plan. Using the Cargill app, you can see how a price shift of just 20-cents, for instance, might mean a $24,000 loss or gain to your overall revenue. That information can help you choose a portfolio of contracts that will spread your risk, while having the best chance of hitting your targets.

“Many farmers just focus on yield and take whatever the price is when they need to sell their grain,” says Loeffler. “But linking those two—yield and price—really separates a successful long-term operation from the rest.”

October loads indicate that most farmers still sell at harvest, when prices are historically at their lowest.

“A traditional farmer says he doesn’t like to take risk—but risk is hanging onto everything until harvest,” says Loeffler. “That to me is a big gamble—not doing something, is doing something.”

6. Work the Plan
Calculating your break-even is not a one-and-done exercise in the spring. Just like a household budget, your calculations only matter if you track them as the year plays out.

At pollination, plug in your adjusted yield and see if you’re still hitting your goals. If you’re in the field, your Cargill Farm Marketer can run the new numbers and email you a status report—in time to adjust costs or your contract plan, if needed.

“Market planning is an important habit to start today,” says Loeffler. “But most growers aren’t receiving the guidance they need to exercise the process. Fortunately, we have a tool that’s a step above to help.”

Get Counsel with Help from Technology
Yes, farming is more challenging this year. But it can still be profitable. And removing the emotion from financial decisions lets you enjoy what you do best—getting your hands dirty and seeing your crops grow.

“Together with risk management planning, contracting today is not about spec’ing the market’s highs and the lows,” says Loeffler. “It’s about diversifying risk for long-term success.”

Working side by side with your local Cargill Farm Marketer, you’ll be able to understand your break-even and develop a diversified marketing plan to hit your profitability targets. Do this early in the year, and you’ll have more peace of mind throughout the growing season and the years to come!