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Strategies to Help Keep Your Farm Afloat
When the price of corn was $8.28 and beans were sitting pretty at $17, producers gave lip service to calculating their break-even costs.
“They didn’t have to pay as much attention,” says Linda Cruikshank, Progressive Farm Marketing (PFM), Inc. Financial Services. That is changing.
“Without an improvement in grain prices, we’re seeing farmers squeezed financially,” she says. “They’re reconsidering their marketing, storage, and input costs for next year. It’ll come down to yields. For now, pricing strategies and risk management are foremost for them – how to lock in small profits and protect themselves from further price declines.”
Cruikshank is a firm believer in calculating break-even costs. She recalls her first client 13 years ago. “His first question was, ‘At what level do I start to sell corn?’ ” she says. “When I asked his cost of production, he said he didn’t know.”
That confession led to her immediate creation of what she calls a relatively simple formula. “Most farmers know their cost per acre, but they don’t always break it down to cost per bushel,” she says. “Farmers sell by the bushel, not the acre. At that time, many of my clients had not done this calculation.”
Cruikshank, who is a commodity broker, farms with her husband’s family near Arcadia, Nebraska. She offers her clients help in filling out this formula. (See her formula and profit objectives at bottom.)
Break-even costs vary for many reasons. Debt load plays a key role, she says.
“Interest payments on operating loans need to be added in, and machinery, land payments, and cash rent have to be absorbed into the cost per bushel,” she says. “Certainly, if interest rates increase by the fourth quarter or next year, it’s one more expense that producers will need to consider regarding their breakeven.”
Cruikshank and her clients pencil in profit objectives. “Once we know the break-even cost per bushel, we project where the market’s heading and how much profit would be realistic,” she says. “Some years, we set a goal of $1 per bushel. This year, we haven’t had any significant rallies, so the best goal might be 50¢ per bushel. It’s pretty close to breakeven this year.”
She advises a stair-step sales approach: 5,000 bushels at $3.75; another 5,000 bushels at $3.80; and so on, leading into rallies.
Some of her clients prefer to call the elevator themselves when it’s time to sell.
Greg Royle, who farms near Central City, Nebraska, has worked with PFM for about six years. “I have a handle on my breakevens, but Linda is a good sounding board on marketing because she follows it 24-7,” he says.
Banks often refer farm customers to Cruikshank, and she also presents web-
inars and workshops for lenders. “Going forward, lenders are expecting farmers to know their cost of production,” she says.
Breakevens can be a hard sell for some, she says. “Farmers say breakevens change too often,” she says. “Yes, they do change – for every business. Agriculture is unique because we don’t set our own prices. Clothing is commodity-based, too, but Walmart doesn’t sell a shirt on the rack without knowing the cost of production – even though it’s complicated to calculate the freight, fuel, materials, and labor.”
Recalculating breakevens may also lower your average some years. “A major repair of $10,000 to put a new engine in the tractor will raise your breakeven for a year,” Cruikshank says. “It hurts for a year, but it’s depreciable. Within five years, it doesn’t change your breakeven. Your actual profit is intact. You don’t buy a tractor for only one year; it’s an ongoing process.”
Breakevens Reinforce Marketing Decisions
Jeff Swanhorst, AgriBank’s chief credit officer, agrees. “Farmers have to adjust their cost of production,” he says. “This gives them the opportunity to set prices or to sell before their crops are produced, as long as forward sales are limited to a certain percent of annual production. There are lots of ways to hedge commodities. AgriHedge is one way.”
AgriHedge is a Farm Credit association loan with a commodity swap from Cargill Risk Management. It fixes the commodity price over a specific period, and the loan covers all margin requirements during the life of the swap.
“It doesn’t use up a producer’s revolving loan,” Swanhorst says.
Royle relies on his break-evens to market two or three years out, if he can do it at profitable levels. “I have an advantage because my land costs are fixed, and I can take cash rents out of the equation,” he says.
He expects his 2016 seed costs to remain flat. “I was able to lock in my nitrogen for next year at 12% less than the year before,” he says. “I now know my cost of production is going down a bit – nitrogen is a big-ticket item. I can start my marketing level in 2016 at about the same level as 2015.”
Cruikshank uses the price-averaging graph above to show clients how price averaging into rallies allows them to ensure profitability (even in a poor market). “Farmers have to defend prices and lock in profit when they can, even if it’s minimal,” she says.
More Help on Breakevens
Steve Johnson, Iowa State University Extension farm management specialist, says knowing cost of production and breakevens also helps determine if paying a higher cash rent rate for one farm or purchasing a farm can be justified across the entire farm operation.
“Knowing your breakevens and at what price you need to sell your crop at a profit puts perspective into an emotional decision,” he says. “For many farmers, capturing this data can be difficult and time-consuming. We have new tools to help determine breakevens and to establish goals.”
Ag Decision-Maker (extension.iastate.edu/agdm) makes it easier to project crop-production costs when planning this year’s income and expenses. Decision Tool spreadsheets for each crop budget perform the calculations electronically and allow you to save the analysis to your computer.
Although most producers can sustain a year or two of low/negative profit margins, it becomes more serious over time, Cruikshank says. “Many are somewhat over-extended on high rents/land prices and recent equipment financing. We’re hearing of banks turning loans away.”
Marketing can play a key role in keeping your operation afloat. “Understand your risk-management strategies, review your crop insurance and hedging (if you utilize it), and take advantage of forward-pricing opportunities,” Cruikshank says. “It’s critical to calculate specific breakevens on your crops and to base 2016 planting decisions on profitability, not necessarily on keeping the status quo.”
1. DETERMINE YOUR BREAKEVENS AND COSTS
- Include all input costs – tangibles
- Include long-/short-term debts, interest, land payments, etc.
- Determine cost per acre and cost per bushel
- Utilize B/E for each crop, type of livestock, etc.
2. DETERMINE YOUR PROFIT OBJECTIVES
- Project bushels
- Project prices
- Project profits per bushel
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