The breakeven point

Agriculture.com Staff 07/06/2010 @ 5:08pm

This winter there was much producer angst as to whether or not 2009 would be a profitable year. Commodity prices tumbled hard, with some feeling no bottom would be in sight. Fortunately, the sideways market has offered some prices that are at a profitable point for many.

In the Women in Ag discussion group, some of you have commented on knowing what the true breakeven is for your crop. You are right to want to know the specifics of input and production costs, as even the smallest details can add or take away pennies or dollars from your bottom line.

Actually, the market does not care what your breakeven is. First of all, until you know your yield, there is no way to accurately calculate an exact breakeven per bushel or per acre. Selling at a reasonable margin can be a good idea, but you must have a buyback strategy in place if prices go substantially higher. And, in years of massive supplies, the market may never approach your breakeven. Holding out for that elusive breakeven number could position you to end up with bins full of grain at the absolute worst price levels.

So, instead of breakevens, think about maximizing any opportunity the market gives you. You deserve to get $5.00 corn when you can get it, because there will be times when you will have to suffer through $2.00 corn. What if your breakeven price on corn was $3.90 per bushel and the best price the whole year was $3.80? Isn't it smarter to sell most of your crop at $3.80, rather than wait for a price above your breakeven?

Farming is a tough business. You need all the money the market will give. Knowing your breakeven area can be helpful for many reasons, but do not base your marketing upon it. Instead, put your energy into understanding marketing strategies that will allow you to take advantage of every opportunity -- everything the market will give you.

If prices are consistently only approaching or slightly surpassing your perceived break-even level, your profit margins are going to be very minimal or non-existent. If it is going to be a tough time financially, as was the outlook this winter, keep the following in mind as a possibility as to what can be done to make the most of it when prices are low.

I believe that the best way to try to capitalize in these volatile marketing times, with extreme high and low prices, is to watch the rallies up to your perceived break-even area and use them to aggressively price either with cash sales or hedging on the board using futures or options. Therefore, once you get priced and should the market then drop off fairly hard, the odds of a continued downward follow-through and further declines become quite limited. In that situation, it makes sense to lift hedges that were placed with futures or options, capitalize on the profit, and take your chances on the market and wait for a recovery.

When prices do recover, once again realize that upside potential is pretty limited; downside risk is much greater than upward potential, and it is time to get priced again. You are now, in a strategic, structured way, "working the market."

Yes, this approach could be considered a bit aggressive, but quite frankly, in a sideways market, there aren't many choices. Pennies count. If at the end of the year you are profitable and in business, then you've done so with a calculated, structured approach to your marketing. You can feel good about your business and its future.

If you have questions, you can e-mail Naomi, or post a marketing question in the Women in Ag forum.

This winter there was much producer angst as to whether or not 2009 would be a profitable year. Commodity prices tumbled hard, with some feeling no bottom would be in sight. Fortunately, the sideways market has offered some prices that are at a profitable point for many.

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