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Do You Farm Like A Business Owner?

10/23/2015

 
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If you answered yes to the headline, then our next question should be simple. What is your farm's biggest profit sensitivity under your control? In other words, from year to year, what input or variable makes the biggest impact on how much money you make? If you answered average marketing price, congratulations. But, like most farmers today, you likely spend most of your time managing all the other inputs. Here's our perspective on costs vs. profits.
Punchline: The average marketing price you achieve has the largest impact on your farm profits compared to any other variable or input you can manage. Hence, you should work HARD to maximize it, whether by hiring a marketing service or doing it yourself.

Basically, your three elements of profitability are yield, costs per acre, and average marketing price. Over time, you master the art of farming. You'll know the in's and out's of pesticides, fertilizer, soil fertility, and even some weather tips and tricks. More likely than not, you'll also fully understand your machinery costs, building costs, and labor costs too; Weather is the only yield or cost/acre related item you cannot nail down. Excluding this, all other inputs can be accurately estimated.

Some may say, "Well, fertilizer and seed companies raise prices every year. How can I forecast that change?" The answer is, you can't and should not waste much energy trying, aside from finding the lowest prices. Instead, we recommend you keep a close eye on inputs that ARE in your control. But instead of focusing on how high prices are, shift your attention on the effectiveness of the product. What is it's impact on profit for every dollar you spend on it? 

The point is, if you've already minimized your costs/acre and have done as much as you can to maximize your yield, the only unknowns are weather and price. And since a bumper crop due to perfect weather isn't something you can count on year after year, Crop-Side recommends that you focus on price and here's some data to support our suggestion:
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The University of Illinois' Farmdoc publication summarized 2014 for the average Illinois corn farmer. In the upper left hand corner of the image above, you'll see some data points representing the farmer in the publication (Acres, Yield, Cost/Acre, etc.). The table above shows what would happen if one of their main profitability inputs was changed. 

For those of you who looked closely, a $50 change in costs per acre saved the average farmer $40,000. Likewise, a yield increase of 5 bushels/acre raised nearly $34,000. What the table above also shows is a 30 cent move in price increased the same farmer's profits by $43,200. That type of price fluctuation may have been unheard of in the past, but easily occurs in a months time today. 
Since you've likely been farming for many years, you'll have already minimized costs/acre and maximized yield. This is why its easy to see how the illusion of importance is on the other factors.

If you haven't found a trustworthy marketing service or marketing plan, we'd love to help you. Crop-Side has a proven track record at a fair price and can answer any question you have. See our website or other articles for more information.

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