Want to make more money farming in 2019? Step one is to know your true cost of production (TCOP).
By knowing your TCOP, you can set price targets that allow you to lock in profitable prices. You may not know what the markets are going to do in any given growing season, but knowing your TCOP can make sales decisions easier and more profitable.
No two farms will have the same TCOP. You can’t just get these numbers from an extension service and plug and play. The good news is that, once you’ve done this exercise for your farm, you can review the numbers annually and make quick changes by tweaking any necessary information about your operation. I’d recommend taking this information and placing it in a Microsoft Excel file while referring to it often.
Before you begin calculating your TCOP, you’re going to want to do a few things. First, brew about a gallon of coffee. Second, take your cell phone and turn it off. The farm will still be there when you’re done. Third, get your production history together. Fourth, get the previous year’s tax records. Now you’re ready to crunch some numbers.
You’ll need to calculate per-acre crop budgets for the crops you grow. If you keep detailed financial records and can determine how much you spend on inputs for each crop you grow, then great! You will use these numbers to get your TCOP. If not, you’ll want to begin categorizing your input purchases for each crop and, ideally, each practice for that crop (for example, Corn > Fertilizer > Nitrogen). If you don’t have these numbers right now, you can start by printing off enterprise budgets from your local extension’s website. Remember, those budgets are just a starting point. You’ll want to take a pen and mark up the budgets, adjusting things to make them reflect your operation. For example, the extension’s crop budget may show a seeding rate of 28,000 for corn, but you might only plant an average of 25,000 seed per acre. Note such differences and then update your crop budget to reflect your particular operation.
Remember, your TCOP is going to be different from your neighbor’s. The reason I said to have your tax records on hand is that you’ll need a reference (unless you keep meticulous accounting records) that show you your total parts, maintenance, labor, machinery and land costs. Use some common sense to divide these numbers up.
If your local extension has done a good job keeping crop budgets up to date, use them as a benchmark to see how your operation stacks up. Are your interest costs way out of line compared to the university’s budgets? That may be a red flag. Are your labor and machinery costs much less than what the university’s budget shows? Good, this means you’re running an efficient operation.
Use your production history to determine what yields to use when computing your TCOP. Again, these numbers will differ from what’s in the university’s budgets. Ideally, you will take your farm’s ten-year average for the relevant crops and use those numbers to determine a good average yield to use when computing your TCOP. Your actual production history (APH) yields for crop insurance purposes will also do the trick.
Now, add your variable costs to your fixed costs and divide this total by the average yield of the crop you are computing. The result will be the TCOP per unit (meaning bushels, pounds or tons) of the crop.
Once you know this number, you’ll be armed with the information you need to maximize your marketing choices every year.
Most farmers will tell you that marketing is one of the hardest parts of their job and, easily, the most stressful. No one can predict what prices will be in the future. Hindsight bias is a real thing and it will especially rear its ugly head when your favorite obnoxious BTO (big-time operator) crows at the local coffee shop about how he sold all of his corn production at this year’s peak price even though, in reality, he didn’t.
We’ve never had more information at our disposal when it comes to marketing decisions. There is a platform for every talking head to make predictions and how you should act with YOUR crop. However, remember two things when it comes to talking heads: (1) While they may have the best intentions, they don’t know your personal situation (concerning risk aversion, etc.) and (2) If they really knew what the markets were going to do, then why aren’t these heads posted up on the beach in the Caribbean, placing orders using their smartphone while drinking Mai Tais? Hence, it’s good to be skeptical.
So, to avoid making poor decisions, we need to create a plan. But, as Mike Tyson once pointed out, “Everyone has a plan until they get punched in the mouth.” In other words, a plan is great, but if you get emotional and deviate from it, then all bets are off. There are so many emotional factors that come into play with marketing and these can cause you to miss the forest for the trees. Luckily, with proper preparation, we can create a plan and put systems in place to take the emotion out of our decision-making process.
Remember the true cost of production (TCOP) number that we learned how to calculate in Part 1? This number will be the key ingredient of your Emotionless Marketing System.
To fully implement this system, you’ll want to do two things: create a Marketing Matrix that is based on your TCOP and share the matrix with an accountability partner who keeps you in check so that you won’t listen to your worst (emotional) self down the road.
Our version of a Marketing Matrix is a spreadsheet that shows two factors in order to make a grid.
In the columns across the top, we will place target prices. The first column will be your TCOP plus 5% and then every subsequent column will show an increase of 5% based on the preceding column. Parenthetically, you should note that these target prices include your local basis.
In the rows of the matrix, we will put months of the year while skipping a month when populating each additional row. So, the first month shown should be the first month after you traditionally have marketed/harvested all of the previous year’s crops. For corn, we start with January because we try to have everything sold/marketed by December.
Now comes the magical part of the matrix, the part that takes emotions out of the system. In the top-left intersection of the rows and columns (which, in the following example, is the intersection of “January” and “$4.41”), we want to place “0%.” Then, for every column over, we want to add 10% until we reach a total of 50%. Next, we want to do the same thing for the rows as shown in the example below. The resulting percentages will tell us how much of our crop to sell depending on the given situations.
|Corn Marketing Matrix|
To determine how much of our crop to sell, we need to have an idea of how much of our crop will be available to sell. This figure can be adjusted as the year goes on, but a good starting point is to take the total number of acres you plan to plant for a specific crop and then multiply that by your actual production history (APH) yield. Doing so will give us our marketable inventory.
Now, when a crop’s futures price intersects with a predefined timeline, we know we need to act. In the example below, on 3/7/18, I got a price alert that Dec Corn futures had hit $3.89. We have a +$.80 local basis so my effective price was $4.69. One look at my matrix told me that, since it was March and the effective price was above $4.63, I needed to sell 20% of my expected inventory. As a rule of thumb, once you’ve made a sale, you’ll wait until the next month in the matrix, which is two months away, before making another scheduled sale.
|Marketable Units||Date||Action||Units Marketed||Price|
Here are a couple of tricks to further keep your emotions out of marketing.
First, set price alerts on your phone so that, when a futures price hits a certain level, you’ll be notified. I’m a big believer in not checking the markets every day. Some will disagree with this, but my goal is to be as unemotional as possible when making decisions and I find that, the more I look, the more I experience paralysis by analysis. I will, however, set new price alerts every time I make a sale. Since I made a sale at the $4.63 marketing level, I’ll set a new price alert at $4.86. If I get an alert on my phone that corn has hit this price, I will update my monthly sale and will sell an additional 10% of my inventory.
Second, in addition to the price alerts, I’ll set my calendar to check the prices once a month. If I don’t have any price alerts and a new marketing month has come into play, my calendar reminder helps with making any necessary defensive sales.
The last piece of the puzzle to take your emotions fully out of your marketing plan is to have an accountability partner built into your system. Once you have designed your matrixes for each crop, explain the system to someone that you trust will hold you to the plan. This could be a spouse, family member or even a close advisor like a loan officer. Schedule a standing five-minute phone call with this person for the day after each monthly alert that you have set on your calendar. In most cases, just having to check in with your accountability partner will keep you from straying from the plan. If a time arises where you do steer off course, if you’ve chosen this person wisely, this partner will bring you back to reality.
Yes, setting up this plan requires a little effort. You also need to recognize that you’re not going to hit the top of the market with each sale. Be ok with that, since it isn’t the goal. The goal is to make consistently profitable sales throughout the year so that you can take advantage of what the market is giving you relative to the timeline you have to sell your crop. I’m very confident that, if you stick to this system, you will have your best marketing year yet. And, you won’t even have to stress over it.
Ride by any farm operation, whether it’s active or inactive, and you will see one thing in common with almost all of them: old equipment parked in the treelines, surrounded by weeds growing up. Some of this equipment has been retired fairly recently while other pieces have been out of service for decades, but there’s one thing these pieces all have in common. At one time, these items of equipment had some liquidation value that was never realized.
The equipment described above is what we call dead assets, which farmers are reluctant to part ways with for a variety of reasons. Oftentimes, there’s a sentimental reason such as the equipment being your grandpa’s last tractor. Other times, some farmers prefer to save a dead asset for parts. Then, there’s my personal favorite, which also happens to be the worst reason to keep dead assets: “We won’t get that much for it if we sell it.” Regardless of your rationale, if the equipment has any kind of value beyond that of scrap metal, it’s a good idea to explore selling the item while it still does have value. A good rule of thumb is this: if you haven’t used an item in two years, the item is most likely expendable and still has value, beyond scrap metal, to someone out there.
Farming is a game of compounding that favors those who make the best series of little decisions over the long haul. In a medium-sized row-crop operation, there is a good chance that you can identify five or more dead assets that could be sold for at least some value. Look, maybe you’re the kind of person who has a polyester leisure suit saved because you hope that it’ll come back into style one day. You probably also have a few cultivators sitting in the weeds that haven’t been used in a decade. It’s time to get rid of those things.
Now, it’s true that you’re not going to get enough proceeds from old equipment to buy a new tractor or the equivalent. But, oftentimes in farming, even the best operators only plan for large purchases like harvesters and tractors while ancillary items are an afterthought. If you sit down and make an equipment wish list, you’re going to have a lot of big-ticket items up top. So, what about smaller purchases that you know will make you more efficient, purchases that you’ve been putting off because times are tight? You can easily become more efficient by upgrading your nurse tank capacity or buying a portable welder. These aren’t necessarily things that you dream about buying at the end of a good year, but they are things that can make your life easier and that will get a lot of use. In other words, these are called productive assets.
I’d urge anyone reading this to take an inventory of the dead assets that you have on your property. Then, make a separate list of farm items under $10,000 that would make your operation more effective--items that you’ve been putting off purchasing. Your bottom line will thank you.
What do tech startups and farm operations have in common? They both have very unpredictable cash flow cycles. A cash flow cycle is simply the ebb and flow of when you receive revenue versus when you have bills that are due. If you use an operating loan to farm, then managing your cash flow conversion cycle is a very simple but effective way to put more money into your pocket.
How does the cycle work? There are really three simple rules here: (1) You want to get paid as soon as possible when you sell your crops and (2) You want to pay your bills when they are due but no sooner. (Of course, we are not advocating that you ever miss any bill payments or that you do anything to avoid paying someone, especially a trusted vendor.) (3) You want to pay your revolving operating loan down as often as you can provided that you don’t have any bills immediately due.
To get paid as soon as possible, follow these tips.
Remember, you want to pay your bills no sooner than you have to. Following these steps can help.
Pay your loans off as early and often as possible following these recommendations.
These three basic principles seem very simple and obvious. However, it’s easy to get complacent with your cash flow conversion cycles and to pay much more in interest than is necessary. Implementing these tips can save you hundreds or even thousands of dollars each year. That’s real money.
Almost all farmers agree that cover crops are a great way to build your land up. However, many farmers shy away because they aren’t sure how soon they’ll get an ROI from implementing cover crops into their operation. Although it’s true that the benefits of cover crops compound over time, the good news is that you will see benefits starting the first year you use them. And, even better, there are USDA programs that will cost share when implementing such practices.
Here’s how to get started.
NRCS cover crop conservation programs are there for a reason. The requirements aren’t outrageous and the cost share will more than cover your seed, machinery and labor costs. This is a great way to improve the soil on your farm, help the environment and add to your bottom line.
What’s the best way to upset a fertilizer salesman? Tell the rep that, even though you still plan on buying from them, that you’ve decided to start taking your own soil samples. In our opinion, this is the highest ROI activity that can be done on any farm. Why? To answer that question, let’s answer another first. Would you let the fox guard the henhouse?
Incentives rule the world. When you outsource your soil sampling to a fertilizer dealer, it’s in their best interest to (1) sell you fertilizer and (2) sell you more than you need. To be clear, in my personal experience, my local fertilizer dealers have always been fair and transparent. But, there are plenty of horror stories out there of dealers leading their customers astray by overapplying, overcharging or taking poor samples.
I would highly recommend that you get your own apparatus to take samples with. This equipment can range anywhere from $2,000 to $10,000 and will most likely pay for itself within a year. Partner up with a neighbor farmer, if you’d like, and get to work. There are a ton of online programs and apps that can get you started with either traditional, zone or grid sampling. Many co-ops charge over $5 per acre to take samples so there can be huge cost savings realized when you do the work yourself.
Get some good headphones and take off. It’s actually a pretty relaxing activity! If it’s not your cup of tea, then you can consider getting an intern or even training a high schooler to do this job. Chances are, they will enjoy driving a side-by-side or ATV all over your farm.
If you’re intrigued by the idea of separating your soil sampling activities and fertilizer purchasing but still aren’t sold on getting your own sampler, there are plenty of precision ag consultants who will do the job for you. While it will still cost, you have the advantage of decoupling sampling and fertilizer sales. In many cases, these professionals will also provide agronomic recommendations that don’t require you to purchase any inputs from them.
Anecdotally, I have found that, after doing my own samples and fertilizer recommendations, there are two constants within each field: I need less fertilizer than was previously recommended and more lime. This has caused my overall fertilizer and amendment bill to go down. It can be a good idea to get an independent agronomist to help with your recommendations, but I’ve heard many other growers repeat the same story: fertilizer requirements magically decrease when you make your own recommendations.
Once I have my fertilizer recommendations for my farms, I can price out the fertilizer from various local co-ops and fertilizer dealers. Based on when each organization bought the fertilizer or lime, it is quite common for there to be a 5-10% difference between prices amongst those dealers. If I farm 1,000 acres and my price per acre on fertilizer/lime has typically been $75, then a 10% savings would pencil out to be a total of $7,500 across the whole farm. I can think of a lot of things that I’d like to buy with that amount of savings.
Soil sampling is often an afterthought on most operations. This is a mistake. There are a lot of savings to be had and you will improve your land if you apply the correct amount of nutrients. Hence, taking your own soil samples is an easy way to keep more money in your pocket and help your farm in a variety of ways.
Question: When was the last time you bid out your crop inputs? If the answer is never, then listen up. Bidding out your crop inputs is one of the easiest ways to save money big time on your farm.
Selling inputs is definitely a relationship-based business. We are friends with all the reps who sell us inputs and they do well when we do well. But, like so many other things in life, it’s good to have options. We recommend having a least three dealers that you communicate with on a regular basis. Why? This will allow you to regularly bid out crop inputs and save a significant amount of money each year.
There’s a right way and a wrong way to obtain multiple bids. Let’s get that out of the way, up front. The relationship you have with your vendors is a two-way street. And, believe it or not, even though they’re competitors, they talk to each other more than you’d know.
So, here are the ground rules.
This is a very simple process and it’s very fair to your vendors. If approached correctly, you’ll notice that you get better prices up front and sometimes you’ll even have some special deals come your way. It’s easy to get complacent and just pick up the phone and order from the first person you talk to. However, if you bid out your inputs and continue to analyze such costs, you’ll easily save thousands of dollars with only a minimal effort.
If you want to use precision ag tools to take your farm’s profits to the next level, the best way to do this is to manage your fields by productivity zones. Variable-rate technology gets a ton of buzz these days from farm media and this is rightfully so. However, variable-rate technology is only one part of the puzzle. By creating productivity zones within a field, you can optimize the rates that you variably apply within the field. And, this works whether you’re talking about applying seed, chemicals or fertilizer.
Most precision ag software has a way to create management zones that are based on a composite of yield maps over time. We recommend having at least three years worth of data to start with productivity zones. When you use one of these software programs, you will aim to create at least three levels of productivity zones: high, medium and low. If there is some variance, that’s ok and expected. This will allow for a fourth zone called variable.
The key with productivity zones is that you assign a yield goal to each of these zones. If you don’t have a lot of yield data but are confident that the zones are accurate, you can start by assigning the medium zone an average yield goal. High and low can then be plus or minus 10% of that average goal. As you gather more yield data, you can make these zones’ yield goals more wide-ranging up to the point of plus or minus 33%. Having more zone levels, up to seven, also makes the system more precise.
Once you have your productivity zones created along with yield goals for each crop, there are three basic ways to use the zones to increase your farm’s bottom line.
So, the system is designed to help you either improve yields or save money depending on the given zone. These benefits all add up. In our experience, we have been shocked at how accurate these zones are in the long term and how variant the zones really are. Of course, once you learn how to follow the program, it’s not that difficult to repeat on an annual basis when you set up your zones for soil sampling and application purposes.
Zoning sounds like a small thing to be worrying about, right? Well, let’s take a look at an example of productivity zones in action.
On a hypothetical 1,000-acre corn farm, we spend a total of $72/acre on seed, which is a total of $72,000, and $92/acre on fertilizer and lime, which is a total of $92,000. Let’s assume that the farm is divided up into three equal low, average and high productivity zones. This means that on the low zones, we are going to reduce inputs by 10% while producing the same yield as before with the low zone yield goal of 135. On the high zone, we are going to increase our inputs by 10% but increase our yields also by 10% with the yield goal of 165. Our average zones will stay at the same input level and our base yield goal is 150. The inputs that we reduced in the low zone were effectively added to the high zone so the cost savings is canceled out there. But, the 15bu/acre increase in the high zone effectively adds $60/acre (at $4 corn) in profit to ⅓ of our acres, which is 333 acres. So, by adopting productivity zone management, we have effectively increased the profit on our farm by $20,000. And, this was only by changing inputs and yield goals by 10%. Imagine how much the profitability changes as you get more confident in your productivity zones.
If you aren’t currently using productivity zones in combination with variable-rate technology, then you’re leaving money in the field. Over multiple years and crops, this technology can really pay off.
Farming is a capital-intensive industry. It takes a lot of capital and machinery to produce a crop. The problem is that this machinery has to be kept up and eventually replaced. So, many farmers try to grow their profits by growing their acreage. Often, that approach does grow their profits, but it also increases the farmers’ capital expenditures. Furthermore, if this new growth isn’t funded with current working capital, then the cost of capital can negate the profit seen from pure growth. With that in mind, most growers would be doing themselves a favor if they focused on efficiency first and growth later.
In most cases, gains in efficiency cost little to nothing compared to the increased capital requirements to add more land. Adding land is a headache. It’s more landlords to deal with. It’s more employees to hire and manage. It’s more ground to cover using your equipment. And, it costs more money to raise your crop.
Look, some farmers want to be the biggest around. We had a local rogue neighbor who tried to hire one of our truck drivers away from us under the premise that they were the biggest farmer in the county. Congratulations! However, I’m trying to be the most profitable.
When you focus on efficiency, you are focused on growing your profits on a per-acre basis, not just growing total farm revenue. There are two categories of efficiency to grow your profits per acre: (1) increase revenue and (2) reduce costs.
To increase your operation’s revenue per acre, consider these tips.
To reduce your operation’s costs per acre, follow these recommendations.
Remember, your scale magnifies your level of profitability. A smaller-acreage, high-profitability farm is in much better shape than a larger, low-profitability farm since the margin of error is less when your profitability levels are low. So, once you get the profitability levels right, then you can scale if you want to.
For example, profit-boosting methods like bidding out inputs, reducing interest expenses, controlling transaction costs and improving your marketing aren’t necessarily exclusive to smaller farms. In other words, if you do grow your acreage, then these aspects will help you increase profits on those added acres, too.
Additionally, there is an intangible benefit that comes with increased efficiency. You get to spend more time with your family and enjoy the quality of life that so many associate with farming. Don’t flame out because your ego is so big that you have to be the biggest. Focus on efficiency first to build the farm of your dreams.
We’re big believers in getting the profitability and efficiency aspects correct before chasing scale. Remember, scale magnifies profitability--not the other way around. If you try to grow an unprofitable farm, you’re most likely just going to go broke. However, once you get your farm to a highly profitable level, you’ll see that increasing the size can actually make you even more efficient, especially on an equipment level.
There is an optimal size for your farm based on whatever acreage capacity your equipment currently has. When you add in the fact that rotating crops is good for both the land and your wallet, you begin to understand that your crop allocation needs to be planned out --and not on the back of a napkin.
There is a so-called “Goldilocks” factor to how much equipment a farm runs. If you don’t have enough equipment for the acres you farm in a particular crop, then you can run your equipment, and your operators, ragged. You may think that you are being efficient with your equipment, but there’s no room for error. Conversely, if you have too much equipment, then you may be able to do your fieldwork in a timely manner, but your equipment costs are likely out of control. Hence, there is an efficiency sweet spot that is juuuuuust right regarding how much equipment to have for each crop. Here is a great article from the Iowa State University Extension on how to estimate equipment efficiency.
Keep in mind, row crop farms are built around self-propelled machinery: tractors, sprayers and harvesters. To gain field capacity, you want to optimally go wider with these machines rather than adding additional units. For example, you would rather upgrade your sprayer from a 100-foot spray boom to 120 feet then add a second sprayer with a 100-foot boom.
You also have to take into account when this machinery is needed. A 2,000-acre corn farm is going to need roughly double the machinery that a 2,000-acre farm needs if the operation is half corn and half soybeans. At the end of the year, the hours on the machinery may be the same, but the field efficiency will be much improved in the second scenario.
So, in reality, how can we optimize our scale? Look at your field operations and determine where you have bottlenecks. Once you’ve identified these, ask yourself whether you should (A) increase the width--or speed--of the equipment units, (B) shift some of that crop’s acreage to another crop or (C) add additional units of machinery. Ideally, you’ll want to explore Options A and B first while only considering C as a last resort.
There are also biological considerations to take into account with scale. As you increase the diversity of your crops, it allows you to rotate fields from year to year. This can reduce disease and pest pressure that is associated with single crop systems. It will also provide a yield bump in many cases, especially if legumes are part of your cropping system. Of course, your cropping system and farm’s scale should be built around your most profitable crop.
On our farm, peanuts are the most profitable crop. We currently are maxed out at 800 acres based on the equipment we have. Since peanuts can only be grown in a field once every four years, we know that we need at least 3,200 acres to maximize this scale. That leaves us 2,400 acres each year to put into other crops. Cotton is a great crop to grow in combination with peanuts. However, we like to rotate a field every year out of the previous crop. So, that means that we will plan to have 1,600 acres of cotton and 800 acres of corn to go with the 800 acres of peanuts.
When we look at this cropping system annually, we ask ourselves where the bottleneck is based on our current equipment capacity. We have a bottleneck with peanuts and corn because of harvesting equipment. The 800 acres for each is optimal based on our current equipment capacity. However, if we were to add land, we can’t just add acres to these two crops. We either need to shift that acreage to cotton, increase the capacity of our current harvesting equipment--getting a wider corn header or adding a grain cart--or increase the number of self-propelled units. The cheapest route is always going to be to shift the acres. That’s how you optimize scale. Once you have your acreage optimized, then you can look to see how increasing the capacity of your equipment would affect things.
Ultimately, if you hit a plateau with your acreage diversity and equipment capacity, you can always look to add additional equipment units. However, keep in mind that, when you do this, you reduce the efficiency of your operation because--unless you add a substantial amount of acreage--it is likely that your equipment costs per acre will actually increase. There is a point where, instead of adding equipment units, it makes more sense to increase the efficiency of your farm on a field level by adding irrigation, tile or some other value-added practice.
Farms are basically manufacturing plants at heart. You need to sit down and take stock of where you currently stand with your equipment efficiency and how you can grow your farm profits in the most optimal way. Remember, you’ll want to pay attention to scale and to your crop allocations.