“Cost per bushel grown” is also becoming an increasingly important measure of value creation. It isn’t in PMG’s software yet, but it’s coming.
Even if you have a business plan on paper, be prepared to make revisions and maybe make a couple more contingency plans. We’re looking at another roller coaster ride for 2010.
The January 12 USDA report, a fundamental tool that producers use to position their cropping and marketing plans, is being revised or, in economic lingo, resurveyed. I think this may be the first year in history that the USDA has completely resurveyed a report. I’ve never seen this before, and I don’t think a lot of other people have either. The announcement of the resurvey
contributed to downward market movement in corn and soybeans. Add in the huge wheat carryover, and this has fuelled even more confusion for people who already had concerns about market directions this year.
Prepare to make some wholesale changes to your business
and cropping plans if we start seeing dramatic changes in the USDA numbers that are expected in March. Drive your plans with real numbers. As global forecasts start to come in this winter, a quick crop shift this spring could add to your profitability in 2010.
Some PMG members are starting to rethink how many acres they want to farm and are considering alternatives to wheat. Since we’re facing a sizeable wheat and durum carryover, growers might want to consider oats or lentils. If you’re in a durum-growing area, try to delay that cropping decision as long as possible — at least until you know what the global durum carryover situation really looks like. If you can afford it, it might be a good idea to have some extra seed around so you can change your seeding decision quickly.
Margins are a constant worry, but a timely, well-crafted business plan based on real numbers — and the ability to make quick adjustments — could help keep that margin from shrinking.
PMG is seeing a lot of wheat growers struggle to stay profitable. Sometimes even when fixed costs are decent, wheat just won’t pay. Create your cropping plan around identifying profitability. Then think about your rotation and whether you may have to push it this year to be profitable. You don’t want to go out of business because you stayed in rotation. In some cases, you can get away with pushing canola, in particular. Don’t set your plans in stone then put your head down and think, “We can’t do this or that.” Stay flexible and consider the true value of profitability.
MEASURE YOUR VALUE CREATION
Many companies are starting to measure the true value of profitability a little differently. Where companies have traditionally used a return on equity as a measurement, companies are seeing that return on equity can be boosted through borrowing, which isn’t always the best course of action for the health of the company. In fact, the wrong ratio of leverage can kill a company. A lot of firms are now using economic value added (EVA), which measures value creation.
Let’s say a company increased its EVA sales by $10 million, and sales the previous year were $1 billion, EVA momentum is considered to be 1.0 per cent. Analysts report that the EVA figure for many companies is around zero. An EVA measurement could help the producer get a read on what aspects of the farm operation are actually making money and creating value momentum.
“Cost per bushel grown” is also becoming an increasingly important measure of value creation. It isn’t in PMG’s software yet, but it’s coming. We want to find out why some people get a better bang out of their agronomic package than others. We see comparable producers right next door to each other spend the same amount of money on inputs, but end up with fewer bushels. Sometimes it’s a function of rainfall, but we think adding a water-efficiency coefficient could level the playing field.
There’s a lot of hesitation around what to plant this year, and that may be a good thing. If you’re saying, “Well, the market just isn’t high enough to make money,” I say the market isn’t going to give you your costs. To figure out your profitability, get a handle on your numbers, and be prepared to make some quick adjustments come spring.
Change is the only constant, but there is a good business with good margins in several crops.
Gary Pike is president of PMG. PMG provides management, marketing, business-planning advice and coaching to members who represent 1.5 million acres in Western Canada. To find out more about PMG and how to become a member, visit www.pikemanagementgroup.comor call toll free 1-877-410-7595.