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Selling value

Agriculture.com Staff 03/26/2010 @ 12:43pm

If you have read the Top Farmer Perspective in the past, you know that we have discussed value a number of times over the years. Producers of commodities, especially row crops, set the bar higher every year for production. You do a great job! Yet, just as important is a structured and consistent marketing strategy. An important approach to marketing should be to reward a portion of your expected production on value.

So what is value? From a static view, value may be defined as a return on your investment. Often we hear producers say it is important to know your breakeven point. Rarely do we hear the other side of the story. What do you do once you know your break-even point? From a long term perspective, making sales at levels that increase your bottom line should be sales that you are comfortable with and based on revenue returned to production costs.

As an example, in the corn market, we wrote extensively about selling value this past winter when December futures were trading at $4.50. If cost to produce a bushel of corn is $3.50, and using a $0.40 basis, that would provide a value of $0.60 per bushel profit. This assumes normal yield. If you take $0.60 and divide it by the cost of production ($3.50), that provides a return on your investment of 17%.

Considering farming, in general, is a margin business, prices frequently fluctuate near the cost of production. A 17% return is not only attractive but historically is something that rarely occurs. Preliminary research on our part indicates the corn market spends only about 15% of its time trading at a value that provides a 15%+ return on investment. This is from 24 months prior to harvest to 12 months after.

The knowledge to know what return on the investment means to you is imperative, especially when recognizing marketing opportunities. A historical sense of what markets typically offer is also important to know. This may then provide, in a numerical sense, where your farm operation can financially be. This can go a long way reducing marketing stress. In a recent survey, about 90% of farmers indicated they felt marketing decisions were stressful. Recognizing and rewarding value can be financially and emotionally beneficial.

If you have questions or comments, contact Bryan Doherty at Top Farmer, 1-800-TOP-FARM extension 129.

If you have read the Top Farmer Perspective in the past, you know that we have discussed value a number of times over the years. Producers of commodities, especially row crops, set the bar higher every year for production. You do a great job! Yet, just as important is a structured and consistent marketing strategy. An important approach to marketing should be to reward a portion of your expected production on value.

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