Growing Farm Profits | Improving Farm Business Performance™

Free Land

March 7, 2017/0 Comments/in Business Planning, Equipment Costs, Financial Management, Fixed Costs, Informed Decisions, Operating Costs /by Kim Gerencser

Getting farm land for free, whether it be purchase or rent, still won’t be profitable if operating and overhead costs are too high. If overall farm operations require high yields and prices to cover your break-even point, then you’re running way too close to the line.

Ask yourself if your 2017 break-even yield is near, or well below, your 5 year production average. If it is near, then there isn’t much wiggle room, is there? Everything needs to go right, including the external factors you cannot control, like weather.

Does your 2017 crop plan include a sensitivity test? What is your sensitivity to a 10% decrease in yield? What is your sensitivity to a 10% decrease is price? How close do either, or both combined, bring you to break-even?

To Plan for Prosperity

To quote my old friend Moe Russell, “What rabbits are you chasing?” Using Moe’s analogy, the rabbits you should be chasing are found in your operations costs: machinery, labor, repairs & maintenance, fuel, etc, and in your overhead costs: interest, carrying costs, etc. These are the internal factors, the factors that you can control. And if these have gotten out of control, even free land won’t be profitable.

Are You Renting Farmland?

May 10, 2016/0 Comments/in Business Planning, Financial Management, Fixed Costs, Growth, Informed Decisions, Profitability /by Kim Gerencser

An online article published by Country Guide about land rent contained some points that many of us have pondered. Much of the article centered on a lack of useful data on rented land, such as recent crop rotation & yield, pest pressure and pest management, soil type, residual fertility, or recent rental rates.

While this poses a challenge to those who insist on making the most informed decision possible, recent history indicates that the appetite for more land to increase a farm’s size and scale has grossly overshadowed rational analysis when making a decision whether or not to rent a piece of land. The article quoted a 2012 survey that was funded by the Saskatchewan Ministry of Agriculture which tabulated approximately 2,000 cash and share rent agreements. The article reads, “The company hired to do the survey found an astonishing range of rental rates, ranging from an almost unbelievable low of $6.25 an acre to a high of $140.60 an acre.” It’s probably fair to say that $6.25/ac isn’t “almost unbelievable,” but straight up unbelievable. My vote is that some wise-guy wanted to skew the data and provided a false figure. It’s the high figure, the astronomical $140.60/ac, that is the head-scratcher. I have lost count of the number of pencils I have used to try to pencil out a profit at that rental rate. It requires the perfect storm of yield and price to marginally make it work. The guys paying this kind of rate must have some sort of magic pencil I have yet to find.

Here’s where it really gets good. Another excerpt in this CG article reads, “In the short term, taking on more land that won’t necessarily pay for itself might still be a winner in the farmer’s eyes in that light, especially if it allows them to spread fixed costs and labour costs over a larger land base.”

So let me take a shot at paraphrasing:
“Our fixed costs are really high, so in order to justify the bad decisions we made when we took on too much debt and allowed other fixed costs to rapidly increase, we will make another bad decision by overpaying for land that won’t make us any money so that it makes our fixed costs look better by spreading them out over more acres.”

What?

OK, that was wordy, let me shorten it:
“We’ve got all this equipment so we need to run it over more acres to justify having it.”

Still too long and soft? Alright, one more try:
“Pride is more important that profit.”

Eww, ouch! That stings!

But if the thinking is that we must take on more land in order to justify high fixed costs (usually for shiny new equipment) then it is clear that the pride of possessing such equipment and the pride of farming “x” number of acres is more important that being profitable!

Here are my 3 “Growing Farm Profits” Tips for renting land:

Know your costs.
By knowing your costs, you can easily determine what is or is not a reasonable rent to pay and still remain profitable. Without knowing your costs, you’re shooting from the hip…in the dark.
Invest in assets in the correct order.
Taking on more equipment than you need, then frantically trying to “spread it out” over more acres to justify the decision is backwards. It’s like buying a seeding outfit before buying a tractor: you might end up paying more for the tractor you need, or buying more tractor than what is required because of a lack of available selection. Secure your horsepower first, then find the drill to pair to it.
Secure your land base first, then invest in the iron to work it.
Nurture your landlord relationship.
Let them know how your year was. Explain your farming practices. Help them understand how profitable their land really is. This goes a long way to establishing goodwill at renewal time.

Direct Questions

How much at risk is your working capital if your fixed costs are too high?

What steps are you taking to ensure your investment in rented land accentuates your profitability and not diminish it?

Is the goal to be the biggest or the most profitable?

From the Home Quarter

“Better is better before bigger is better” is a phrase that I hang my hat on quite regularly. While I cannot take credit for coming up with that one, it is so remarkably accurate in its simplicity.

If we can all acknowledge that threats to working capital should be our greatest concern in the short-to-medium term, then we must also acknowledge that adding unprofitable land in an effort to justify fixed costs will only accelerate the bleed of precious working capital.

Farm Profitability Indexing

February 9, 2016/0 Comments/in Analysis, Business Development, Equipment Costs, Financial Management, Fixed Costs, Gross Margin, Operating Costs, Profitability /by Kim Gerencser

Farm Profitability Indexing

Late in 2015, I picked up on some interesting farm financial info during a presentation I attended as a part of CAFA. This information represents farms from a geographically vast cross section and revealed some interesting trends:

1. Gross Revenue per Acre has Trended Up

With 2007 being the base year with a value of 100, and also being the first year of the bull run in commodity prices, we can clearly see that while gross revenues are trending up, there is still great volatility in gross farm receipts. True, weather anomalies had a significant effect, but that’s farming, isn’t it?

2. Investment in Crop Inputs per Acre has Trended Up

While gross revenue has seen volatility, and for three years including 2009-2011 gross revenue was at or near 2007 revenue levels, investment in inputs has only once seen a reduction year over year. In 2013, investment in inputs was 77.5% higher per acre than it was in 2007.

3. Gross Margin per Acre has Trended Up

While gross margin is trending up, there was a significant decline in 2009 from the previous year that extended right through 2011. Even by 2012, gross margin had not returned to 2008 levels.

4. Operating and Fixed Costs per Acre are Trending Up

This figure would represent operating costs such as fuel, labor, and equipment costs, as well as fixed costs such as interest, land, and building costs. Notice the steady increase that has never went down year over year, even through the low margin years of 2009-2011 operating & fixed costs continued to rise.

5. Net Income per Acre has Rebounded from Significant Reductions

Net Income represents what is left over after operating your business, that profit which remains to cover administrative costs, make principal loan payments, and cover that other insignificant cash requirement: living costs (that was sarcasm if you couldn’t tell.)

In this illustration, we have calculated Net Income simply as Gross Margin LESS Operating & Fixed costs. Here we see that the low margin years of 2009-2011 actually extend right to 2012 with net income still below that of our base year 2007. This is the residual effect of increasing costs during a period of low margins (2009-2011) by continuing to have a negative effect on what would otherwise be a successful year in 2012.

Everything Dips but Expenses

This chart illustrates a dangerous trend: even when income goes down, operating & fixed expenses are allowed to continue to rise.

By the end of 2011, net income had dropped to less than 30% of 2007 levels, yet operating and fixed costs were over 145% of 2007 levels. It took 2013 bringing about the largest crop in maybe forever to elevate net income back to 2007 levels.

Direct Questions

If Net Income represents the funds you have generated to cover living costs and make loan payments, how well does your worst net income from the last 10 years cover your living and loan payments in 2016?

What does the trend of your gross income, input costs, operating costs, and net income look like since 2007? Is it similar to what’s been presented here? What changes have you made to your operation based on your own information?

Gross margin should ideally be in lock step with operating and fixed costs. If you aren’t increasing your gross margin, why are you increasing your costs?

From the Home Quarter

This is a very telling experiment, but it is not the rule on all farms. The information presented here is an average across a list that spans all regions of the prairies, but heavily weighted on Saskatchewan. The experiment gets more interesting when you apply it to your own business. To lean on the 5% Rule first promoted by Danny Klinefelter, if in 2013 you could have been 5% better than the average in gross revenue, input costs, and operating & fixed costs as presented here, your net income would be 44% better than information presented, and index to 152.14% of the 2007 base year.

How does that sound?

Innovation in Agriculture

November 3, 2015/0 Comments/in Business Development, Equipment Costs, Financial Management, Fixed Costs, Operations, Opportunity /by Kim Gerencser

Innovation
Noun | in·no·va·tion | \ˌi-nə-ˈvā-shən\
: a new idea, device, or method
: the act or process of introducing new ideas, devices, or methods
(Source: http://www.merriam-webster.com/dictionary/innovation)

No one could ever decry the innovation of Canadian agriculture. Often looked favorably upon for
consistently being on the leading edge, Canadian farmers are typically the envy of other nations’
producers for our advanced processes and our willingness to constantly strive for something better.
Innovation takes many forms. It need not be monumental. It does not require a farm to re-identify itself.
While significant innovations like direct seeding and minimum tillage required major capital
investments, many others do not. If you’re like virtually every farm, there is innovation all around you…if
you take the time to look.

Consider the changes you’ve made to your farm since you began farming. Again, not just the big obvious
changes, but the little things too. The little things often make the biggest difference, and yet they are so
easy to overlook. Just think about the positive effect of doing your own grain moisture tests on farm.
I was having a conversation with a client recently about the impact of grain sampling and how the
grading at delivery points can sometimes be a bone of contention. He described in detail how and why
he samples every load as it is being augered from the bin onto the truck. This is an innovation he has
employed to ensure he has taken appropriate measures to protect himself during a dispute. It has paid
off several times in the past, and will likely be of continued value in the future.

An interesting conversation, to which I was privy, among a group of very progressive farmers was about
how each of them managed the challenge of “feeding their help” during harvest. Crews that number
well into the teens require more than a cooler full of sandwiches and donuts. One innovation that I
thought was most creative was the customization of an old Class C motorhome into a quasi food-truck.
While we automatically focus on operations when considering our success with innovation, we cannot
ignore the management side of business. A common issue among my clients this fall is land rent
renewals. Many of them are seeking better ways to access their rented land without taking on so much
risk with these high cost all cash arrangements. As with land prices, rents have also increased
substantially over the last several years (thank you Captain Obvious for contributing to this week’s
article.) Farmers, generally, are becoming less comfortable with the $70-$100+/ac they’ve added to
their LBF (Land, Buildings, Finance) costs for land rent over the years and are now recognizing that they
often can’t make money on that rented land. Unless you’re running a charity, one that benefits your
landlords, “re-think profit” becomes an innovation all on its own.

Innovation is refining your record keeping, automating your payroll services, or focusing on improving
your working capital. While innovation also includes variable rate, advanced water management, or
specialized grain monitoring systems, it need not always be BIG and OBVIOUS. I think the best
innovation for every farm is to examine how it views profit, growth, and wealth.

Direct Questions

How do you view profit, growth, and wealth? I define each as,

Wealth: – discretionary time.

Profit: – that what is required to fuel “wealth.”

Growth: – not necessarily “expansion.” Growth is innovation at any and all levels.
(Remember “always grow; grow all ways!”)

How can you bring about innovation in your management arsenal?

How does innovation make its way into your business? Do you invite it in, or does it have to force its way
in?

From the Home Quarter

I am a firm believer that change will continue to be rapid and drastic in the future. In terms of record
keeping and data management, it will one day be mandatory, so why not get on board before you’re
forced? Regarding my client’s issue on his grain sampling, I believe that future farmers will be forced to
manage their inventory similar to that of a food processor today. And if you have not heard the term
“social license” yet, then let this be the first. A farmer’s social license to farm could face scrutiny like
we’ve never seen before. All of this will require significant innovation. But, don’t fret over the big issues
yet. Start small with manageable innovations today.

Our proprietary Farm Profit Improvement Program™ includes analysis and advice on negotiating land
rental agreements. Please call or email for further details.

Knowing Your Costs – Part 2: “Misplaced Priorities”

August 25, 2015/0 Comments/in Business Planning, Equipment Costs, Financial Management, Fixed Costs, Operating Costs /by Kim Gerencser

Last week, this article weighed in on the trend of increasing costs in certain areas of the farm, namely
Operations (equipment, fuel, people,) and Facilities (buildings, land, financing.) These are the two most
controllable expense areas in farm management. These are the two cost areas that have seen the
biggest increases.

Over the winter, an old colleague and friend made the following tweet through @RCGFarmWise:
Moe Russell has spent well over 30 years in farm finance
and management, and he has been tracking this kind of
info for a long time. I trust his integrity and his
information. Essentially over 5 crop years, this says that
farmers have increased equipment costs 100% faster
and land costs 400% faster than they’ve increased input
costs. In a time of high commodity prices with yields that
were typically above the long term average, this was not
uncommon.

Recently I took part in a Farm Business Development Initiative (FBDI) seminar that brought together
approved consultants and learning providers (of which I am both) to discuss updates to the program.
(Lean more at https://fbdi.gov.sk.ca/) During a conversation there, I overheard one attendee saying
how he listens to farmers “bemoaning the $60/ac they spend on seed, but nary a word to the $60/ac
increase in equipment costs they just took on.”

It is not surprising to see farmers looking to inputs first when trying to find ways to cut costs. We justify
it by lamenting increases to seed, fertilizer, and chemical prices. We validate cutting inputs by
acknowledging that inputs require the highest cash cost per acre of anything else on the farm. There are
sound ways to cut inputs; I was enjoying listening to many clients describing how they are using generic
herbicides this year, focusing heavily on scouting to verify the need for fungicides versus just spraying
anyway, etc. But when I heard one who wanted to eliminate a broadleaf herbicide in his cereals to cut
costs, even though I’m no agronomist, I quickly brought risk management to that conversation. Every
decision needs to have a risk/benefit or cost/benefit consideration. There is too much at stake!
More to the tweet above, looking under the right rock is not easy because it will force each of us to
acknowledge how and where we’ve allocated our capital. If we know we should not have increased our
“operations” cost, it’s difficult to face that reality, swallow pride, and make a better (or corrective)
decision. This is magnified in year like 2015 when excess moisture ahead of seeding turned into drought
for most of the growing season, and adding to that the late spring & early fall frosts, we could find that
many will miss their production targets. Are you confident you were using the most efficient agronomic
plan possible? Will your “operations” costs be harder to manage with missed production targets? Will
you be looking under the “inputs rock” to find ways to cut costs?

It has been said many times that “you cannot shrink your way to greatness.” Cutting inputs for the sake
of reducing costs is “shrinking” your ability to generate strong revenue. Even the best marketing cannot
make up for lost production. Your priorities need to continue for you to be:

1. The most proficient manager you can be to build a strategic and tactical plan that maximizes
ROI, personal wealth, and family values;

2. The most efficient producer you can be to lower your Unit Cost of Production;

3. The most equipped marketer you can be to hedge market risk, and generate sufficient gross
margin.

By misplacing your cost cutting priority onto the critical facets of your business as listed in the 3 points
above, you would be doing more harm than good, despite best intentions.

Direct Questions

Where have your costs experienced the greatest increase (inputs, operations, facilities)?
In recognizing the 3 critical facets above that require your full investment (management, production,
marketing,) where can you find costs that can you live without?

How confident are you in your awareness and abilities to enact appropriate cost management
strategies?

From the Home Quarter

You won’t hear me condone a general prescription of “more fertilizer,” but you will hear me advocate
for “better use of fertilizer.” It’s not about the producing biggest yield; it’s not about producing at the
lowest cost; it’s about producing the best yield at the most efficient cost. And the most efficient cost
also refers to “operations” and “facilities.” The allocation of your finite resources to those costs also
needs to be highly efficient. As a banker friend of mine likes to say, “Your crop doesn’t care what color
your equipment is.”
…or how new it is.
…or how much rent the landlord is squeezing out of you.
The purpose of your business is to grow your profits, maximize your ROI (return on investment,) and
increase your wealth. Spending over $200/ac on “operations & facilities” costs will not get you there.

Knowing Your Costs

August 18, 2015/0 Comments/in Equipment Costs, Financial Management, Fixed Costs, Gross Margin, Growth, Operating Costs /by Kim Gerencser

My clients continually educate me on the regional anomalies relating to land prices, and specifically land
rents. The common opinion among most farmers I speak with is that some of their neighbors just don’t
understand how to measure costs, and this leaves many farmers (including some of those I speak with)
feeling left out in the cold as they watch land get snapped up by someone willing to pay a rental rate
that can appear astronomical.

Based on third party feedback, meaning info shared with me by a farmer from his/her conversation with
a friend/neighbor/competitor, most decisions to take on land are being justified under the guise of
“reducing equipment costs per acre” and/or “the drive to be bigger.”

Popular ag-economics has drilled in to everyone’s head that fixed costs, like equipment, need to be
spread out over more acres to reduce the fixed costs per acre. This is simple arithmetic, and is
mathematically correct if we stop there. Stopping there allows us to feel good about the decisions we’ve
made to increase our fixed costs because “over ‘X’ acres, we’re only spending ‘Y’ dollars per acre.”

Of all the costs that farmers face, the costs they have most control over seem to be the costs that are
least controlled. MNP has coined the term LPM, and what I’ll call “operations” are a farm’s labor, power,
and machinery costs which have ballooned in recent years. Next in line is Land, Buildings, and Finance
costs, or what I’ll call “facilities,” which have also grown significantly. Increase land costs (rent) to justify
increased equipment costs: think about it, we’re increasing costs to validate increased costs…
We expect to make a profit from taking risk. The more risk we take, the more profit we expect. My
concern comes from witnessing decisions that magnify risk and leave the expectation of profit as a
secondary, or even tertiary, consideration.

Direct Questions

Take a look at your expected gross margin this harvest. How much gross margin will you have available
to contribute to “operations,” “facilities,” administration costs, and PROFIT?

What is your “operations” cost? What are your target costs for “operations?” Did you know the most
profitable farmers keep their “operations” cost below $100/ac?

Have you traced your line from gross revenue and gross margin through to costs and down to profit?
Where can you improve?

From the Home Quarter

We cannot eliminate risk, we can only manage it. We cannot eliminate expenses, we can only manage
them. We cannot manage what we do not measure. If the purpose of your business is to increase profits
and grow your wealth, should you not ensure that the risks you take and the expenses you incur fit into a plan
for profit?

Understanding Costs – a graphical simulation

In the example above, which illustrates a generic but common scenario on average grain farms in 2015,
a net loss of $9/ac is expected. But the top 10% of farms with a similar gross margin could show a net
profit of $40/ac, simply from excellent management of their controllable expenses: operations, facilities,
and admin.

Austerity

July 28, 2015/0 Comments/in Business Planning, Equipment Costs, Fixed Costs, Operations /by Kim Gerencser

We’ve been hearing the word “austerity” in the media for quite a while now. Whether it be issues in the
EU, or right here in Canada (Quebec), it’s become a “buzz-word” as of late.

Merriam-Webster defines austerity as “a simple and plain quality; a situation in which there is not much
money and it is spent only on things that are necessary; austerities: things that are done to live in a
simple and plain way.” http://www.merriam-webster.com/dictionary/austerity

Based on that definition, I like what that word represents. Maybe that’s because I grew up on a small
mixed farm in Saskatchewan in the 80’s. There wasn’t a lot to be had that wasn’t “necessary.” Don’t get
me wrong, we never went without the necessities, but I wore $20 running shoes from Army & Navy, not
Nike Air. I guess I was raised under austerity.

There was an article published in Country Guide this spring titled “Have Higher Farm Incomes Changed
the Way You Think?” It opens by describing the near perfect correlation of rising farm income to rising
new farm equipment sales. The fourth paragraph reads; “So the question is, do those periods of high
incomes create a kind of euphoria or recklessness that induces farm managers to make longterm financial decisions that could seriously reduce profits in future years, especially if revenues
fall?”

I think we know the answer to that question. And, so what now?

Well, who is considering an austerity plan for their farm?

Remember, austerity is spending only on things that are necessary. It’s easy for us a humans to blur the
lines between “nice to have” and “need to have” because we allow emotion to interfere with our
decision making.

Needs

Bushels.
You need to maximize yield in the most efficient way possible to produce at the lowest Unit Cost
of Production your farm can provide. An Agrologist can help and should prove his/her value
every year.
Cash Flow.
You need positive cash flow to meet debt and lease obligations, pay for inputs, land rent, wages,
etc, etc, etc. Grain marketing is often where the best gains can be had, or can be lost. Diligent
marketing with quality information (or lack thereof) can make or break any farm.
Above Average Management.
As you read in Growing Farm Profits Weekly Issue #17, average management was sufficient in
the boom years, but it won’t get you through the next business cycle. Even above average
managers find confidence in having a business advisor offer independent, unbiased advice on
current situations, strategic plans, and risk management.

The list of “nice to have” could fill more pages that you’d care to read, or than I’d care to write. The list
of NEEDS is not exhaustive either, but in the spirit of austerity, those are the big 3 that NEED focus
(pardon the pun.)

Direct Questions

Production alone will not keep every farm afloat through the next business cycle. Are you able to
elevate your management abilities (no matter what level you’re currently at) to offer your farm its best
chance to thrive (or at least survive?)

Somebody shared a quote on Twitter that I read today: “Successful people are like a turtle on a fence
post. They didn’t get there by themselves.” -Michael Pinball Clemons
Do you have an arsenal of trusted advisors working for you to ensure you do everything it takes to be
successful?

Will your austerity plan be cutting the right costs or just the easy ones?

From the Home Quarter

It’s been said “You can’t shrink your way to greatness.” When it comes to cost cutting in an effort to
preserve cash, there is a wrong way to do it. Similar to the thinking of “good debt and bad debt,” there
are costs that should be cut, and costs that must not be cut. Interestingly enough, my phone has been
ringing lately with the voice on the other end saying, “Things are looking tough, I can’t afford to make
any mistakes. I need your help now more than ever.”
That’s what I’m here for, glad you called.

If you want help with building an austerity plan or just guidance on daily strategic decisions, call me or send an email.

How Interesting is Interest?

March 17, 2015/0 Comments/in Credit, Financial Management, Fixed Costs /by Kim Gerencser

“The peak bank prime rate in the ‘80s was 22.75%…10x what it is now.” This was a tweet I read last
week from Lyndsey Smith while she attended the Smokey Lake Ag Conference. Interestingly, I heard
yesterday that there may be another rate cut ahead; we didn’t even see the last one coming.

Q.1 Take a look at the current amount you spend on annual interest, and multiply it by 10. How does
that number make you feel?

Q.2 If you faced interest rates that are 1000% higher than what you pay now, how much debt do you
think you’d have?

Is it accurate to say that we generally don’t give a lot of thought to interest costs? I mean for the cost of
about 600 gallons of diesel fuel, you could cover 2.75% annual interest (prime rate) on $100,000
principal debt. So for those who can burn 600 gallons of diesel fuel per day over 20 days of seeding, that
fuel cost matches the annual interest (at prime) on $2,000,000 principal debt.

What?

Yes, very few burn 600 gallons per day, and fewer yet can have prime rates on all their borrowing, but
you get the picture.

There are many farmers out there today that are still being held captive by the memory of paying 18-20% interest on their business debt. That nagging fear has likely lead to business decisions that are
overly conservative and risk averse, leading to missed growth opportunities and insufficient wealth.
Anyone who has loaded up on debt based on the low rate environment we currently enjoy may want to
take a look at things. If the business plan only works when grain prices are high and interest rates are
low, then it’s not a viable plan. We’ve already seen grain prices stumble significantly from a year ago…

This just might be the best time ever to do an interest sensitivity test. What is the financial impact of
interest rate increases or decreases; use a few different values to compare. If you’re highly sensitive to
increases, your time to negotiate a favorable fixed rate is now.

Direct Questions

What is your borrowing strategy? Do you carry an appropriate ratio of fixed and floating rates?
How sensitive are you to changes in interest rates?

Are you able to determine how much of a spread you can weather if you were to move from floating to
fixed?

From the Home Quarter

Debt fuels growth. Growth (if you read last week’s issue of Growing Farm Profits Weekly) can be realized
many ways, but certain to say that growth fuels profits. Profits fuel wealth. The bridge between Growth,
Profit, and Wealth is built with the help of good debt; bad debt often leads to Retraction, Losses, and
Poverty.

Why Precision Farming Should Start in the Office

January 27, 2015/0 Comments/in Business Planning, Fixed Costs, Gross Margin, Operating Costs, Operations /by Kim Gerencser

We’ve been hearing about precision farming for quite a number of years now. It’s common practice
among early adopters. It’s getting a lot of face time in the media. It is a strategic decision that should
elevate a farm’s production efficiencies to new heights not seen before.

Proponents say that variable rate is not a treatment, but a management practice. They would be correct.

I’ve watched in awe the business men and women who recognize the benefits of increasing their
acumen in a certain aspect of their farm. One of those is precision farming/variable rate and it is
awesome. In fact, I believe that in the future VR will be the second greatest determining factor affecting
gross margins, second only to marketing of course.

But what is more awesome is seeing those farms that have taken precision farming into the offices and
applied it to financial management practices. Think about this: it was early December 2013, right after
the largest harvest in almost forever, as commodity prices were already on a crazy carpet for a ride
down the trading charts. I was in a conversation with an aggressive 30-something farmer when he said,
“I’m looking forward to $8.50 canola and $4 wheat, because I know I can still make money at those
prices and a lot of guys can’t. That’s going to create opportunity for me.”

You’ll recall Issue #3 of Growing Farm Profits Weekly on Cost of Production? Well, this guy knows his
costs on everything, right down to the penny per acre. THAT is precision farming!

Now imagine how easy it is for this farmer to make the decision on if he should invest in variable rate
right now or not, considering he knows his costs to the penny across his whole farm. He can quickly and
accurately calculate the projected benefit against the capital cost to invest in the technology. He isn’t
making decisions on emotion. He isn’t making decisions on pride (being the first guy in town to VR his
whole farm.) He’s making decisions on an expectation of profit. And trust me, his net worth statement
shows that he’s made several profitable decisions.

Direct Questions

Your farm requires excellence in 3 areas: production, marketing, financial management. Are you
focusing heavily on one or two areas to the detriment of the others?

Are you meticulous where your skills and interest lie, and improvident elsewhere?
Would decisions be easier to make if you knew exactly your financial position at all times?

From the Home Quarter

It’s been said time and time again that “you can’t manage what you don’t control.” Precision farming,
whether it’s in the field or in the office, is all about taking full control; it’s about collecting and using
data. It is projected that when under full VR, your farm can reasonably expect to gain ~$35/ac in a
combination of costs savings and increased yields once the practice has been in place for a number of
years. How long will it take to achieve a $35/ac benefit from implementing precision farming in the
office? I’d say pretty quick, depending on how committed you are to it. Plus, the capital investment will
be a lot less too.

Cost of Production

January 20, 2015/0 Comments/in Business Planning, Financial Management, Fixed Costs, Gross Margin, Operating Costs /by Kim Gerencser

I got a little worked up last week when I saw a tweet that read “Cost of production matters in 2015 –
The Western Producer” and included a link to the article. Even though that wasn’t the article’s title, I still
had to sit down and scribe this.

Let me be very clear: cost of production matters every year. Period.

Cost of Production is the most basic principle that must be employed when making marketing decisions.
If you don’t have a clear understanding of your COP, then you are putting the survival of your business
at grave risk. Why? Because how would you know if you’re selling for a profit or not?

venne2

The WP article states, “A 38 bu. (canola) crop and a $9.45 price could yield $70 per acre before labour
and equipment costs.” That’s nice, but why would we not include our labor and equipment costs? Will
the crop magically seed and harvest itself?

COP only begins with your seed, chemical and fertilizer costs. It must also include all other operating
costs AND your fixed costs.

Now work back from your actual, or projected, yield and we come to the real figure that matters: unit
cost of production.

If you know that it costs your farm $6 to grow a bushel of canola, isn’t a $9/bu selling price a nice
target? By the way, that’s 50% ROI.

Direct Questions

What was your gross margin per acre in 2014?

Do you include your fixed costs when working out Cost of Production calculations? If no, why not?
How do you know what is a profitable selling price for your crop if you don’t know what it cost you to
grow it?

Do you discover whether or not you’re profitable only when you receive the accountant prepared
financial statements?

From the Home Quarter

In the simple calculation of “Revenue – Costs = Profit,” how can we be expected to make profitable
decisions without intimately knowing our costs? Every business that produces anything, from ocean
freighters to widgets, knows exactly what it costs to produce one item. Why doesn’t every farm know
their costs the same way?

As a special offer to the readers of this blog, I will conduct a Farm Financial
Review™ for up to 5 qualifying farm businesses at $475 (normally a $875 value.) This will include a
review of your 2014 financial results and a Cost of Production Analysis. Work must be booked by the end
of January and completed by the end of February. Please call or email for details.