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Across The Editor's Desk: Managing margins

Agriculture.com Staff 03/30/2010 @ 12:00pm

One of my favorite speakers to listen to and learn from at farmer meetings is Michael Swanson, vice president with Wells Fargo Ag Industries Group. He earned his Ph.D. in economics, and he's worked equally hard to make his presentations both entertaining and highly useful to your business.

In speeches to producers in Sterling and Ft. Morgan, Colorado, in February, Swanson got right to the point regarding access to credit amid tight bank regulations and economic uncertainty.

"The more certain the cash flow, the more certain the loan," he says. "If you want money, prove your worthiness."

He urges credit-seeking farmers to take the same quality management approach as big businesses do to meet internationally certified standards, such as ISO 9000. Those standards, he says, can be boiled down to this: Say what you do. Do what you say. Be able to prove it.

Your records and other documents are essential, but the loan decision is still about you as the manager and leader of your business. "Banks do business with people, not balance sheets," Swanson says.

While all of us would like to know the future and what to do, you won't hear predictions from Swanson. "Planning isn't about predicting. Any plan that requires you to know the future is foolish."

Swanson suggests that farmers learn to manage margins and risk by first converting their units of cost from dollar signs to bushels. For example, a fertilizer cost of $80 per acre is equivalent to 21 bushels of corn at $3.80 a bushel. When you price your fertilizer, hedge or forward-contract the equivalent bushels at the same time.

When analyzing a land rental expansion opportunity, Swanson suggests starting with what he calls "buy the five and sell the five." Meaning: Add up the cost of your five major cash expenses -- land, fertilizer, seed, chemicals, and drying fuel -- then convert those expenses to a bushel equivalent based on forward-pricing bids.

With a per-acre yield expectation, you will know where you stand and how you must price remaining bushels for profit. "It is not what you produce but what you get to keep that matters," Swanson says.

I will end with this caution regarding impact of rising interest rates. "I don't believe most people understand how much low interest rates have influenced the rise of land values," Swanson says. "Assets are only worth what they can generate in income."

One of my favorite speakers to listen to and learn from at farmer meetings is Michael Swanson, vice president with Wells Fargo Ag Industries Group. He earned his Ph.D. in economics, and he's worked equally hard to make his presentations both entertaining and highly useful to your business.

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