Beware Of Being Shortsighted With Your Budgetqtwebhostdemo43235435
Putting 2017 in the rearview mirror is a relief for many of us in farming. Although yields for most producers were outstanding, prices fell short to such a degree that even with high yields, gross income per acre remained short of 2016 levels.
In the dry pockets of the country, some producers got a double whammy of poor prices and poor yields. In 2016, many producers yielded their way out of an economic hole, as prices were just good enough with outstanding production to still have somewhat positive cash flow. One of the big issues for 2017 was few producers priced ahead grain. Even with strong yields, declining prices robbed many of a profit.
This year also appears to have many fundamental challenges on the horizon for profitable price opportunities. Even if we see some sort of market rally in 2018, it’s likely to be limited on the upside and even more likely to be short-lived.
Buckle Down. Assuming commodity prices stay under pressure, fine-tuning your budget is more important than ever. An accurate budget will help you discover a margin target instead of just a price target.
For example, many of us held back on marketing with price targets in our minds at, say, $4 for corn and $10 for soybeans. In many cases, these prices never arrived. Yet, many producers could have sold at prices much lower than that and achieved some level of profit margin.
This is precisely why an accurate budget can help drive your decision-making. Why are $4 and $10 magic numbers? Or any other price projection? Maybe your number is $3.47 for corn and $9.23 for soybeans. The point is, keep your budget current and use your five-year proven production history as a guide to keep your breakeven in front of you during the growing season.
For the 2017 crop, everything is an absolute at this point. You know your exact cost of production. Now, it’s just a matter of determining an acceptable margin for your operation and targeting the opportunity. For some producers, that might not necessarily be a positive number. For others, the reality might be targeting a profit margin per bushel of only 10¢ or 20¢.
Every operation is different, which is more reason to dial your numbers in accurately and often.
Line By Line. Budgeting accurately isn’t a difficult task. It just takes discipline. Calculating production costs in today’s world is easy with the abundance of online tools and spreadsheets online. Focus less on the tools or programs and more on the numbers.
Start by separating out each line-item expense into its own category including land, seed, fertilizer and equipment. The tool or spreadsheet you’re using should automatically calculate several factors based on your estimated or actual yield. Those factors include percent of cost, bushels required to cover the expense and cost per bushel. These three factors are all direct moving targets that depend on yield.
Once you have your individual line-item expenses identified and accounted for, scenario planning becomes much easier. You can look at total expenses and ensure these numbers match up with cash-flow expenses in your cash and accrual accounting systems.
For those with robust accrual accounting systems, this might seem like doubling up. But manually placing numbers into a scenario-planning tool forces you to think critically about the numbers. It gives you the opportunity to consider how to adjust expenses and income by line item. When you plan scenarios with these numbers, you will be enlightened about what’s going on within your operation. You won’t just be looking at numbers your accounting system spits out.
One final note: There is a commonly overlooked line item expense called return to management. This category should include all overhead expenses such as family living costs, taxes, payroll, etc. In my next column, I’ll discuss budgeting and return to management and share three simple principles for your budget.
Chris Barron is director of operations and president of Carson and Barron Farms Inc. in Rowley, Iowa. He is also a financial consultant for Ag View Solutions and appears regularly as a guest on Farm Journal Media radio and TV affiliates.
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