Mastering Your Operation
When you have to make big decisions about your farming operation, what are some of the factors you think about? Do the latest headlines swirl through your head? You might wonder about market trends or external factors in the economy and trade. What about your home life? It may be things like the bills on your desk, the needs of your family or even upcoming vacation plans that come to mind.
Farming is a complicated business that’s constantly evolving. When it comes to managing your business, cut out the outside noise and focus on what you can control. Managing your operation by the numbers will help take the emotion and guesswork out of decision making.
Do you have a clear picture of funds coming in and going out of your farm on a monthly, quarterly and annual basis? By completing a cash-flow projection each year, you’ll better understand your unique cash-flow demands. Remember that cash flow and profitability are two separate measures. An operation needs both to survive and thrive from one generation to the next. To create a cash-flow projection, estimate when you need to pay cash expenses and when cash income will come in. This projection will help you anticipate in which months your cash inflow meets your outflow needs and which months it might not. Now, you can plan ahead to cover cash shortfalls. Compeer has an online cash-flow template, which you can find here.
The best time to create a cash-flow statement for the upcoming year is in the fall. Then, update it monthly as your projected numbers become final and cash-flow demands change. The cash-flow statement will help you make decisions such as when to sell grain, if and when to expand your operation, or when to make equipment purchases. It also helps keep your interest expense down by better managing the funds you borrow on a month-to-month basis.
Cost of Production
The best way to know that you’re making the right marketing and input-buying decisions is to calculate your cost of production. Knowing this number is key in managing profitability. There is no riskier business than farming, and it starts even before that first seed goes into the ground. What are the best- and worst-case scenarios for your farming operation? There’s only one way to find out: Measure it!
You’ll want to calculate your breakeven numbers using 10-year historical Actual Production History (APH) yields. Be sure to calculate your production and input costs on a per-bushel basis. Compeer’s Margin Manager tool helps to calculate costs for your operation. Remember to include the following:
• Family-living costs
• Non-farm income
• Equipment payments
• Real estate loan payments
• Additional interest expenses
• All input costs: seed, fertilizer, chemicals, insurance, labor, fuel, etc.
After you know your cost of production, develop a written marketing plan to keep your operation at a profitable level. When marketing your grain, you may have the urge to gamble a bit or overanalyze. Too many of us get to our target price, then hold on as we hope for another 10 cents or 20 cents. Before we know it, the market swings the other way and we end up below our target price.
The best way to approach a marketing plan is to write it down. Create a timeline for when you would like to have 25%, 50% and so forth of your grain sold. You will be amazed at how much easier it is to make decisions when the time comes because it was part of your plan all along. Set a price, and when it gets there, pull the trigger. Plans can change, evolve and grow, but you need a starting point. You have so much information at your fingertips today. Between social media, market news, weather apps, acreage reports and local coffeeshop chatter, it can be hard to manage it all. Just remember, you can only manage what you measure. Know your cost of production, project your cash flow and stick to your marketing plan to rest assured you’re managing your operation to its fullest.
Thank you to Elizabeth Kempel, Compeer Financial senior credit officer ag lending, for contributing to this article.
This article was originally printed in the Fall 2023 edition of Compeer Financial's Cultivate magazine.