Common Goal: Profit

Being an ag lender, I get the privilege of talking with several farmers in many different locations with many different sizes of operations.  This also means different soils, different yield potential, and different costs and returns.  No matter how different they can seem sometimes, they all share one common goal: profit. 

Although I find myself engaged in several different conversations in on day, there is one common question I hear – “what do you think this market is going to do?”  Unfortunately, I do not know where the grain market is going.  There are a lot of people who spend a lot of time researching and evaluating fundamental and technical factors to try and take an educated guess what direction the market is going to go.  However, as we all know, nothing in the market is ever certain.

Profit margins in agriculture have seen some historical highs in the last few years.  Even with less than favorable yields in 2010 and 2011, there is still profit to be made.  Factors contributing to this have included but are not limited to the increased demand for corn for ethanol, export demand, weather conditions in grain producing countries and investor interest in the ag sector.  Looking forward into 2012, there are factors that some say could suggest an increase in our supply and therefore a lower projected price in the coming year.  Of these factors, the most common is the projected acres to be planted next year.  The National Agricultural Statistics Service (NASS) will publish the prospective planting report on March 30, 2012.  There are early estimates suggesting that the US will plant 94 million acres of corn in 2012.  Some of these acres could come from acreage that will be coming out of preventative planting from 2011 along with 1.6 million acres that are coming out of the Conservation Reserve Program (CRP).  If this prediction holds true, a favorable growing season could lead to record corn production and suggest a potential drop in grain prices, due to increased supply.  Of course there are several other factors that play into the price discovery process, but increased supply is at the top of the list.

Along with a common goal, every operation shares the reality of the inevitable – expenses.  There is no denying the relationship between profit and expenses and if we do see prices drop for 2012, it is essential to manage expenses.  Each individual farm should evaluate its cost structure and budget, not just annually, but several times throughout the year.  Annually, Purdue puts out a Crop Cost and Return Guide to help estimate what to expect for the coming year if you have not priced or purchased your inputs.  This can be extremely helpful to utilize when working on your marketing plan for 2012.  Based on a 1000 acre farm using a corn/soybean rotation on average soil, it produces and average of 163 bushels of corn and 54 bushels of beans per acre.  Following these guidelines, 2012 variable costs (fertilizer, seed, chemicals, fuel, hauling & insurance) are estimated up from 2011 at $64 per acre for corn at $461 and $43 per acre for soybeans at $243.  Keep in mind that this does not include land costs/cash rent, machinery cost or family living and labor costs.  An increase in input expenses and a decrease in price creates the perfect storm for lower profit margins.

So how do you cover your risk?  As you are purchasing your inputs for 2012, it is a good idea to lock in profit now to cover your costs.  Contrary to popular belief, this does not take a magical machine or computer, just a plain old pencil and paper.  The first step would be to determine what your operation will consist of in 2012.  Once you have mapped out your enterprises and acreage for each, estimate a yield that is reasonable to achieve.  Now you know how many bushels you will need to sell in the coming year.  It is never a good idea to sell 100% of your projected production and especially not before it is in the ground.  Historically, the growing season can fuel extremely volatile markets.  At this point in the season, it is a good idea to just try to cover your operating costs as you incur them to lower your potential risk.  As you price bushels, keep track of the amount you sell and at what price and maybe even keep a running average for bushels sold.  This can also be helpful for making other decisions on the farm such as machinery upgrades, improvements to equipment or increasing acreage, to name a few.

Marketing has always been and will continue to be a challenge for each and every operation.  It is always good to approach it with some type of plan to help your operation work toward a positive profit margin.  With all of the changing factors that influence agriculture markets, going into harvest with no sales or marketing plan is no different than playing the lottery – keep in mind you have a better chance of being struck by lightning than winning the lottery! — Submitted by Krissy