You are here
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.”
That lets members see when margins are nearing a floor. For nitrogen, it's about 15 bushels, growers say.
Brodie and Rydl say the program is changing the way co-op agronomists work with farmers. When an agronomist meets to go over recommendations, those recommendations have already been added to the spreadsheet. Both have access to past practices archived in the system. And it simplifies cost/benefit analysis. For example, are the extra bushels needed to pay for stacked traits in corn seed offset by higher yields?
In essence, the bushels needed to buy amount to a ratio. “It's quick,” Brodie says. Otherwise, to judge fertilizer's true value, “if I tell you fertilizer is so many dollars a ton, you've got to divide the price by the rate to get dollars per acre. And to calculate the bushels required, you have to divide by the price per bushel.” The program also calculates projected revenue, using the farm's APH, or crop insurance yields.
Key Co-op's approach is just one of many that farmers use to lock in a margin. Others have brokerage services that make similar recommendations. Still, others are using off-exchange swaps. Some of those methods will be discussed in future issues.
Obviously, the co-op seeks maximum input sales and grain origination. But farmers can make crop sales elsewhere and still lock in inputs. “We're not restricting anything,” Brodie says. “The only thing we do restrict is we won't purchase grain more than 12 months out, unless it's done through AgroMetrix.”
Limits to locking in
So far, about a tenth of Key Co-op's members are testing this new program. They include leaders like Taylor, a past board member, and Ryan Forth, who has been an associate board member.
Forth and his father, Steve, raise 4,000 acres of corn and beans not far from Taylor. In June, Forth locked in 2012 anhydrous ammonia at about $800 a ton by selling 20,000 bushels of corn for $5.19 a bushel. It, too, was close to 15 bushels an acre. They hadn't bought diesel fuel for 2012.
“We usually do that at the wrong time,” Forth jokes. They bought diesel last January for spring needs but held off on more, with fuel prices high this summer.
Steve Forth says a computer program can't guarantee the best margins or take away tough decisions. “Probably the biggest thing is it's giving you some real numbers to work with. It could be the wrong move, too, but at least you know where you're at,” he says.
On a hot afternoon at his farm near Roland, Iowa, Brian Sampson takes a break from mixing feed for his cattle to describe his use of AgroMetrix.
“What I've done the last two years now is buy a portion of my fertilizer early. I've got half of it paid for and I sold a portion of my crop,” he says.
Will he use it for seed? “At this point, probably not, because the seed industry comes out with their prices and that's about it,” says Sampson, who is also on Key Co-op's board.
One difference between crops and cattle feeding (where he has hedged margins for years) is that some crop inputs can't be hedged. Another difference is uncertainty. With cattle feeding, “you're going to sell a 1,300-pound animal. You know your yield, so to speak,” Sampson says. A fertilizer margin “doesn't do anything about the question, ‘Do you know how many bushels you have?’ ” Still, some input margins may be a necessary new tool against risk.
“That's a new concept for farmers,” Sampson says. “We really don't think in margins the way businesses do.”