Measuring margins by the bushel
To outsiders, Jeff Taylor's picturesque farm near Gilbert, Iowa, looks idyllic. It has a pond for his passions of fishing and water skiing, and sheds for his kids' livestock projects. Yet, as Taylor and all growers know, farming's risks aren't carefree.
“It probably takes 85% of a decent crop to cover costs,” says Taylor, who farms 1,800 acres with his father, Robert. For the cost of fertilizer and other inputs, “the real driver is the price of corn. It's what the market will bear, more than anything,” he says.
Taylor recalls the last time corn and input prices skyrocketed – in 2008 – only to have corn fall faster than fertilizer later. He remembers just as well in June 2010 when corn hit a low, and says, “I think there was one day when corn dropped under $3.”
This year, the cycle could repeat. But now Taylor and other members of Key Cooperative of Roland, Iowa, are ready. The co-op's new Web-based tool, AgroMetrix, helps them decide when to buy inputs and when to sell corn and soybeans. It's a Web-based spreadsheet that converts all inputs – even crop insurance and labor – into the number of bushels needed to buy them. Until the farmer locks in a margin between an input and selling part of a crop, the number of required bushels floats with commodity futures and the co-op's input prices.
In June, Taylor bought 32% liquid nitrogen at a price of 20¢ a pound and sold corn for October 2012 delivery to the co-op at a price of $5.60 a bushel – or 15.6 bushels per acre.
“Today I've sold probably 65% of this year's crop and 25% of next year's crop, and I've locked in the fertilizer for next year's crop,” he says. He makes a sale “when it takes the least amount of bushels to lock in my input costs.”
Cutting risk for farmers and co-op
Frank Rydl, the co-op's agronomist in charge of the AgroMetrix project, says it evolved from members wanting daily position reports on fertilizer prices. After meeting with seed and fertilizer companies around the Midwest a year ago, co-op leaders saw benefits to everyone in the supply chain if there was more certainty about demand for input purchases and if growers could be offered ways to lock in favorable margins. Co-ops and dealers, too, are struggling with volatility and risk.
“This tool, in reality, protects farmers on both fronts” Rydl says. “It protects them as an owner of the cooperative, and it protects them as the owner of their farm business.”
Key Co-op hired ACS, Ltd. in Des Moines to build a computer program that ties into the co-op's accounting system and is available to members at any time, at no cost, for now at least. It went online on October 28, 2010, for 2011 inputs.
“What it boils down to is it's a platform for the growers to lock in fertilizer, chemicals, energy, seed, everything,” Rydl says.
Adds Boyd Brodie, another co-op agronomist, “We have trend data back to 2006. AgroMetrix automatically captures the local trends as they are established.”