Running the farm like a business

On Mar 31st (11AM CST) the USDA will announce the 2017 US planting intention estimates. Arguably, this report could have the biggest impact on the market in 2017. Until next Friday, there is little else to talk about.

Many are expecting estimates of 91 million corn acres and 89 million bean acres. If the report shows a more narrow range (i.e. 90 million acres each), corn prices could get a bump, while beans may slide. Right now prices favor beans over corn, so the report will show if farmers have made any adjustments based upon this.

 

Thinking of the farm as a business

A profitable farm is more complicated than planting crops and hoping they pay the bills at the end of the year. Farmers should consider their operations as a company with multiple profit centers working to a common goal. Each profit center must “pull its own weight” without drawing profits from another division. Successful farmers understand each profit center independently and how it maximizes profit for the farm operation.

There are four large divisions (some with smaller subsets):

• Land ownership

• Custom operations

• Grain storage

• Farmer.

 

Land ownership

Since farmers are naturally passionate about working the land, this is where I see the most “cheating.” I ask all my clients, “Are you paying yourself a fair market rental price for use of your land?” In theory, some farmers could spend all their time on the beach, while hiring people to do the hard work of farming the land. Considering the typical farmer’s mentality, few think like this, but they should. The most successful operations understand the profit of ownership comes from a long-term investment.

Regardless of when the land was purchased, 20 years ago when land was cheaper or recently, there is a fair rental price based upon the local market conditions. From the start this needs to be calculated to understand the possible guaranteed income. Often farmers are surprised about the cost of their time and energy.

Custom operations

Profitable farmers also understand the cost of every piece of equipment. Most mid-sized farmers today have over $1 million invested in equipment, so it’s important to be as efficient as possible. Plus, farmers have more choices than ever, so why not take advantage? Following are questions that should be asked of every piece of equipment (i.e. planter, combine, sprayer, semi, tractor, etc.)

  • What is the local custom rate for each piece of equipment you need if hired done?
  • What is the yearly maintenance cost for each piece of equipment needed (e.g. 5 year avg)?
  • What are the yearly depreciation costs?
  • Is there profit potential in owning equipment and doing custom hire work?
  • Is renting or leasing a better option?

Often farmers “mine” the equity on their equipment by not paying themselves enough per acre to use the equipment. This may be fine for a while, but years later replacing equipment becomes too expensive, leaving the farmer in a difficult position.

Generally speaking most farmers prefer to own their own equipment, because often it can cost less, but it’s important to consider alternatives. Sometimes it makes sense to hire work done, while other tasks can be accomplished (i.e. office work) or even second jobs.

In the end, while some equipment is nice to own, and can even look impressive to your neighbors, if it doesn’t make financial sense and puts a strain in this division, then your operation’s profits can easily slip needlessly through your fingers.

 

Grain storage

Grain storage is a profit center many producers use incorrectly. Most farmers store non-contracted grain, hoping for a market rally, because storing unpriced grain at their local elevator means hefty charges. Between storing unpriced grain at home for “free” or storing it at an elevator for a charge, it can make a little sense I guess.

However, many farmers are missing out on all of the profitable benefits of storing grain at home and selling forward – taking advantage of carry and basis appreciation. By considering on-farm grain storage as a separate cost center, analyzing the expense to build new storage becomes a practical one. One just needs to analyze the premiums received from carry and basis optimization against the expense of building new bins. Almost every time I walk a client through the numbers, having on-farm grain storage is a profitable venture. Actually, I find grain storage can have the best return on investment above every other investment in a farm operation.

 

Farmer

The “farmer” is the part of you that makes management decisions each year. One could liken it to the CEO position, but it also includes the titles of CFO and COO. Strategic decisions need to be made on crop inputs and farm operations:

• Fertilizer – What kind? How much? When to apply?

• Chemicals – What kind? How much? When to apply?

• Seed/Agronomy – How much corn vs beans? On which fields? Which brands/hybrids/traits?

• Insurance – How much? What program?

• Hired Help – How much? Where do I find these people? How much to pay?

• Marketing – When to sell. Was that a profitable price? What I too greedy in my goal?

• Strategic Planning – Should I rent or buy more ground? Should I drop a low producing field?

 

There are so many decisions for farmers to make it can be overwhelming. To help in budgeting, I ask my clients – How much do you want to make on each acre and what kind of ROI is needed to be profitable? Each farm is different and has its own challenges, but these questions can be answered by the big established family farm down to the small young farmer who is renting all of their land.

 

Putting it together

Finally, the farmer puts all of these profit centers together to form a budget (or business plan, but farmers don’t usually call it that). Then a marketing plan is developed to ensure the farm is profitable. If each profit center is optimized, the biggest opportunities for the farm operation can be achieved regardless of all the variable factors (i.e. weather, market volatility, etc).

Some may think all of this means just being a farmer, but breaking up the divisions/profit centers independently and then optimizing each one can help maximize profits. Perhaps there is a weak division/profit center that was only exposed after doing the analysis. Farmers can then take steps to maximize each area.

Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

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