Farm Finance and Higher Profits

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Growers who say “there’s a lot of money out there in that field” know what they’re talking about. They also know that today’s high prices for a particular commodity may be tomorrow’s low ones.

There’s a lot of talk out there about futures prices and game theory. If everyone pursues the crop with the highest prices there will be an oversupply and prices will collapse--the basic rule of supply and demand.

When you sign a contract and lock in a certain amount of commodity at an anticipated price, you have to deliver the crop promised. What happens if you can’t deliver it and have to buy product from another grower to fill the contract? The charge for undeliverable futures contracts can have a significant negative impact on profitability. Growers need to constantly monitor the market and play the game of trying to lock in a contract at the best price.

Storage:

Is it better to be locked into a futures contract or to take your chances after the harvest? In many cases the outcome of your decision is determined by your on-farm setup. Do you have the capability to store grain on-farm? It gives you flexibility at harvest time, and allows you to store grain and sell it at a time when the market is more favorable--possibly making a futures contract less attractive.

If there is no on-farm storage, the crop must be harvested and sent off-site. Elevators will store grain, but charge a fee that eats into profits. Growers also have the option to sell right away at the elevator, but for the present spot price. Growers with grain storage have flexibility to choose when to sell and maximize their profit. They are also able to preserve the identity of their grain and command a premium for it. 

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Some tactics for raising yield:

- planting better wheat varieties
-using Indigo's endophyte seed treatment
- watering more throughout the season
- applying the right fertilizer
- weed control
- insect control
-disease control

 

Some tactics for maximizing price:

- optimizing sale timing
- locking in your sales price
- selling to the highest-paying buyer
- managing input costs

Maximizing yield and profitability are linked but they are not always the same.

It might seem intuitive that higher wheat yields will mean better profitability, but if everyone has the same high yield, the market will be oversupplied. That oversupply can cause prices to collapse, pushing down wheat profits, no matter how many bushels are in storage. To maintain profitability, growers need to manage input costs through smart seed selection, efficient use of fertilizers and pesticides, and careful investment in tools and technology.  Consider cost, yield, and profit per acre, and investing in inputs for acres with the highest yield potential, while minimizing input costs on acres with lowest yield potential.  A crop will only produce what the soil, environments, and inputs will allow. 

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Too many sleepless nights

A look at the historical farming picture is interesting. For example, prices for cotton are the same as they were in the early 1970’s – almost 50 years ago. In that time, input costs have gone up 300%1.

Some of the largest input costs are seed, water, fertilizer, and other chemicals. To cover the rising costs, many farmers use operating loans to cover expenses until after harvest. Some operating loans are at 8-15% interest over the “plant to harvest” season, though most seed companies offer 0% financing. After harvest much of the farmer’s paycheck goes to loan repayment. Concern about looming payments is another worry for growers, along with weather, pests, equipment upkeep and more.

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Farming & Finance Synergy

The truth is, the relationship between farming and finance – or profitability – is synergistic. Funds are needed for farming, farming generates funds, the wheel – like the seasons – keeps on turning. 

“Producers who see today’s environment as an agriculture efficiency cycle and find ways to drive down cost per unit of production can position themselves for continued success,” says Jeff Swanhorst, AgriBank’s chief credit officer2

Does this mean you have to think like a financial expert or economist? Perhaps. You definitely need to understand the break-evens of your operations. Growers should align predicted income with expenses while managing the most expensive input costs like seed, fertilizer, pest control, and water.

Shared investment + improved yield

There are already numerous varieties of hybrids and improved seeds across all crops. GMO is a household term (with all the consumer opinions about it). There are also microbial seed treatments that can increase yield.

Just like there are microbiomes in humans–think of good bacteria in the human gut and probiotic supplements–soil and plants also have microbiomes. By isolating these, replicating them, and using them as a seed treatment, growers can optimize the health of plants, leading to higher yields. Among the positive outcomes of applying microbiomes to seeds is that it makes plants more efficient at using expensive resources like water. 

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New consumer demands

In most industries, businesses that meet consumer needs better than others can command a premium. The business of farming is no different. Never before have consumers been so interested in the source of their food and its impact on their health. This heightened concern means growers are being asked to increase their sustainability, transparency, and traceability to meet consumer demands. And those consumers are willing to pay more for it.

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What does sustainable farming mean to a consumer? Generally, farming that’s good for the environment. To a grower, sustainability means the ability to continue farming year after year: running a profitable farm, being a good steward of the land, paying fair wages to workers, and using practices that are good for the environment. How can you use less water and chemicals with less disruption and have increased yield? And how can those achievements be marketed to consumers? Once wheat goes into an elevator, it’s mixed with other producers’ crops and there is no traceability. Maintaining identity and traceability has the potential to be more profitable for growers in the long run, while also meeting the consumers’ demand for sustainably grown food.

Increasing profitability

Farming is a team effort: If you’ve got eyes on the field and know your field, you can make more timely decisions and use better management practices to help minimize input costs. Controlling weeds early in the season while they’re small reduces their competition for resources with the crop. The same can be said for insects and diseases. For example: if you’ve got weeds in an early stage of growth, you can spray a less expensive herbicide and take care of the problem. This approach tops coming back later and having to deal with larger weeds that only a very expensive herbicide can knock down. Keeping eyes on the field is vital to minimizing input costs, minimizing operating costs and maximizing price post-harvest.

Finding people who can help make decisions also helps. Many growers leverage experts like agronomists when assessing soil reports and making decisions. This ensures they’re implementing the best management practices and minimizing operating costs.

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There’s also selecting which crop to plant. One approach is to look at what the market is doing and plant the crop bringing the best returns. There are operational limitations to this--climate, soil type, and equipment availability. Market spikes aside, growers also follow the practice of crop rotation for numerous reasons: it improves the health of the soil, allows you to rotate pesticides, decreases pest pressures and increases biodiversity on a year after year basis. To plant two or three years of soybeans or a legume crop might offer a short-term win if prices are really high, but in the long term you may spend a lot of money on input costs to rejuvenate the soil.

To ensure profitability, growers need to assess all their costs, long and short-term, and balance them against the expected profits. 

Maximizing price post-harvest: Grain can be pre-sold by contract, taken to the elevator for the present price, stored at the elevator for a per bushel fee, or stored on-farm. New models are emerging that allow growers to market grain directly to buyers. Some buyers are willing to pay a premium for single-source grain that has not been blended with grain from many growers in an elevator.

This allows them to purchase grain with specific characteristics like protein content or milling quality that meet their particular needs. Like consumers that are willing to pay more for healthier, sustainably grown grains, buyers will also pay a premium when their quality requirements are met.

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As the agricultural supply chain becomes more efficient, growers will find that they will have more options where they can sell their grain. And more options generally means that growers will have more power to select the highest bidder, thereby boosting their profitability. 
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