This time of year the question I get asked the most from producers is “what are the markets going to do this coming year?”
I suspect I might have a better chance of trying to explain the meaning of life than trying to accurately answer this loaded question, but I am not one to shy away from a challenge. This winter I gave them an answer that at first seemed to shock them, likely because they weren’t expecting an actual real answer from me.
Why the change? Why would I dare try to answer the unanswerable question?
I wanted to give producers a useful answer. I wanted it to be believable and challengeable, and I wanted it to prompt them to think about what it means for their farm.
What was my answer? “I believe grain markets are going to head in a sideways pattern for the next nine to 12 months, trading in a range that is $0.30 per bushel up or down from today’s new crop price quotes.”
In that moment of shocked silence I took the opportunity to ask some questions back, with the hope of turning the conversation into a learning event. Then I was so bold as to suggest that when they got home they should to sit down, crunch some numbers and answer these questions: What will your Gross Projected Revenue (GPR) be for next year based on current new crop price values? What will your input costs (seed, fertilizer, chemical) be? What will your fixed and variable costs be? What will your farm’s projected Gross Margin be (Gross Projected Revenue less input costs)? Will your GM cover your fixed and variable costs?
This is the process that I would use when working with a client to do a risk management assessment and build a marketing plan.
The hard part of this exercise begins where you try to determine what kinds of changes you can, or are willing to, make to these numbers to improve your farm’s bottom line profitability.
Are there some obvious or easy changes that would have an immediate positive impact? Are there some longer-term strategies that might reduce costs or increase revenues?
What are your production risks? What can you do to further reduce those risks and what would that cost? (For example, consider crop insurance, hail insurance, the spring price endorsement, revenue insurance).
Before you can decide what kinds of coverage will work best on your farm you need to know all your numbers: GPR, GM, fixed and variable costs.
Then, you can determine what level of coverage you need or want on your farm. Do you want to insure up to your GPR value, or do you want to insure only to a level where all of your costs will be covered? Or, you could choose somewhere in between those two levels.
There may not be just one single insurance product that can offer you the coverage you want. You may have to use a blend of different products to get the best and most cost effective coverage possible.
Knowing your numbers and what kind of insurance coverage you are going to use will enable you to build a far more effective, aggressive and profitable marketing plan for your farm.
Now that you have answered these questions with your own numbers, you can start to build your marketing plan. Now you know your break even numbers, and you use them to set your pricing targets.