Friday, December 31, 2010
Increasing profitability in a farming operation
Most farmers will say that marketing is the hardest task on the farm, because it is hard to pick a price and remain emotionally comfortable with it, knowing there may be a better price in days ahead. With the recent volatility in fuel and fertilizer prices, settling upon a price with a dealer and booking your needed inputs is also a gut-wrenching experience. Does that mean that picking a price, either for buying inputs or selling an output is the only route to profitability? Maybe not.
No matter when you buy an input or sell a commodity, you are always second-guessing whether you did the right thing at the right time. A few farmers will make a decision and never look back, and then move on to the next challenge. Psychologically that is tough, and it may take expertise in some oriental mind-bending practice to be able to do it successfully. But is there not a better way, at least in business practices? There is, says Kansas State University ag economist Kevin Dhuyvetter. His 10-year research into the practices of over 700 Kansas farmers separated their management traits into degrees of persistent success. To understand what he was driving at, consider farm size and price. Since most farms are the same size year after year, their size is persistent. But prices either received or paid from year to year are significantly different, so price is less persistent.
Dhuyvetter also looked at productions costs, yields, technology used, planting practices, and acreage rented as primary management factors. Those were compared to a profitability ranking of those farms.
He found that farm size has the largest impact on profitability, indicating economy of size is still relevant, and that larger farms are more profitable than smaller farms. He says the second most important determinant of profitability is cost of production, followed by planting intensity, and technology adoption. Regarding price, any producer regardless of profitability, will be more profitable with a higher price received for their commodities. The Kansas State economist says since it is much less persistent; it is difficult to be better than the average year after year. And he adds that because of the difficulty of getting a high market price, it is best to spend less management time on that area and focus on other areas of profitability.
Dhuyvetter compared farms with high and low profitability, and determined how much impact yield, cost of production, and marketing price contributed. Over a variety of 6 crops, yield contributed 20% to 49% of the profitability. Production cost contributed 82% to 9%, and market price contributed 7% to 29%.
You may ask what production cost factors can be managed that would have significant impact. Dhuyvetter suggests machinery costs per acre, which can quickly shift a given farm either into the high or low profitability range. He says, “A major decision in the current environment is whether or not to invest in the many precision ag technologies (e.g., auto-steer, section controllers, etc.). In some cases these decisions are quite obvious, but often times they are very farm specific and thus each individual producer needs to analyze what is best for their operation.”
He says another area is fertilizer, because of the price volatility. “As fertilizer and crop prices continue to exhibit tremendous variability it is important that producers make informed decisions about the rates of fertilizer they apply. That is, likely it is inappropriate not to reduce rates if fertilizer prices are increasing significantly. However, blindly cutting back on rates also may be inappropriate, especially if crop prices have also risen.”
Summary:
Focusing management efforts on “picking prices” does not seem to be a wise use of limited management time or resources. Rather, producers should focus their efforts on those areas that impact profitability and are persistent. It is believed that making decisions based on a quantified approach (i.e., “crunching the numbers”) is better than simply making gut feel decisions.
Posted by Stu Ellis on 12/31 at 07:34 AM | Permalink