The financial practices of successful
operations in this environment of compressed
margins offer important insights to improving
profitability. Below are the financial
practices we consistently find among profitable
producers.
Enterprise-Level Analysis – Understanding your cost of
production of, say, corn versus soybeans, provides valuable
information for rotation decisions. But more important to your
profitability is applying production cost by commodity to your
marketing decisions. Enterprise-level analysis also aids decisions
regarding the expansion or contraction of individual enterprises.
Cost of Production – In today’s tight margin environment,
many producers are making adjustments to enhance profitability.
Without a clear understanding of your variable costs, fixed
costs and family living demands on the cash flow, the impact of
contemplated changes can’t be accurately assessed. When you
know all the costs that need to be covered by income from your
operation, you are better able to make constructive management
decisions.
Input Cost Optimization – Adjustments to variable costs –
particularly the input costs for a specific commodity – are
too often executed as a one-sided, cost-reduction process.
Producers who optimize costs project how decreasing or
increasing an input will impact income. For example, increasing
fertilizer expense by $40 an acre to achieve an increase of $60
in income is a good investment. But a $60 an acre decrease in
fertilizer would be the wrong cost adjustment if it cuts income
by $75 an acre. The right cost reductions increase rather than
decrease income.
Fixed Costs versus Variable Costs – Once their variable
costs are optimized to achieve the highest return per acre
(gross margin), successful producers assess their operation’s
ability to pay for the costs of fixed assets (land and equipment).
If the gross margin doesn’t cover the cost of fixed assets, the
operation needs to either add a source of income or reduce fixed
asset expenses by negotiating lower cash rents, restructuring
debt or selling assets to deleverage. Each operation needs to
calculate and understand its fixed and variable cost structure to
determine the level of debt payments or cash rent it can afford.
Defined Marketing Strategy – Successful marketers start by
assessing their full cost of production, including fixed, variable
and living expenses, for each enterprise. Only then can they
project a true breakeven and identify the trigger prices for sales
of each commodity.
Having a written plan with target prices based on true
breakevens enables producers to maintain the appropriate
discipline when the market provides sales opportunities. Plans
can and should be modified throughout the year based on
changes and additional insights.
Willingness to Adjust – Today’s tight margins create the need
for many operations to make changes that include but are not
limited to: reducing machinery and equipment investments,
negotiating lower cash rents or eliminating high cash rent land,
reducing living expenses or deleveraging the operation through
the sale of non-income-generating assets or lower-return assets,
such as land or excess equipment.
Producers who are willing to make significant and impactful
changes, no matter how difficult, have reduced their cost of
production, enhanced liquidity and reduced their debt load.
They are the ones who are positioned for long-term viability and
success. Operations that haven’t made significant changes and
continue to lose money are jeopardizing their future.
