As you continue to make marketing decisions this year,
you’ll want to keep an eye on your breakeven price. Our ag finance department
has watched average breakevens trend upward for the past three years straight —
a total 44 percent rise for corn and a 26 percent increase for soybeans.
A few different pieces have bumped breakevens up. Overall,
farmers are paying more for cash rent. There’s also more expense from
depreciation as you have invested profits into updated or additional
Debt payments have risen from recent land purchases. And
farmers have taken advantage of low interest rates over the past few years,
using more financing to make purchases.
Higher breakevens mean tighter profit margins. They also
mean it’s more important to have a proactive marketing plan and risk management
strategies in place.
To figure your breakeven, take your cost of production
divided by your yield. The result tells you the exact price you need to cover
your production costs.
Your breakeven also should include your costs across the
board, not just your direct inputs for the crop. If you only look at inputs,
you’ll get an artificially low number.
Our ag finance specialists calculate all your costs into
your breakeven: family living expenses, energy costs, the fuel you put in your
trucks. They build in replacement costs for your equipment line because you’ll
probably want to buy a new piece of machinery someday.
Your main source of revenue is selling your grain or
livestock, so you need to know that it can cover all of your costs.
I think that if we start to see these tighter profit
margins, there’s more risk exposure for larger operations. When a large
operation is profitable, you’re making money faster, but losing money also can
Some farms may have grown by being very aggressive in cash
rent bidding in recent years. If that’s the case for you, you’re going to have
to decide what you’ll do about your cash rent levels.
You could try to negotiate rents downward with your
landlords. It’s a good idea to make those relationships as strong as possible
Also think about how you’re going to plan to be profitable
in this new environment. If we see weaker margins, what can you do to stay on
the path to profitability in your operation?
There are four main areas you can focus on. The first one is
production — become the lowest-cost producer on a per unit basis.
Make sure your insurance is right for all of the perils that
could affect you, your crop and your operation as a whole. Get a sound marketing
plan in place that ties in with your insurance.
Stay financially strong. Keep an eye on your working capital
and equity and make sure they stay at good levels.
Don’t be tempted to grow too quickly. Don’t expand in areas
where you’re not going to be able to make a margin.
Let your balance sheet and income statement tell you whether
you’re able to grow. Allow it to show you how aggressive you should be.
It’s tempting to have a mindset of “I’m aggressive right
now, so I have to grow.” You might even start to think you’ll always have poor
That could work for a period of time, maybe even up to 10
years. But eventually something will go wrong, perhaps bad weather or something
else that’s out of your control. Suddenly you don’t have the ability to
financially recover from it.
We all want to expand and build our operations. But as we
grow, let’s be mindful of guiding and planning that growth by using financial
Many farmers have reinvested profits into their businesses.
That’s good, but can impact your short-term cash flow.
Depending on what happens with yields and prices over the
next few years, it could become tough to keep funding these investments. You’ll
want to be deliberate about watching your operation’s finances carefully.
As you’re doing your strategic planning, get the help of an
expert who can run various scenarios on your financials based on different
commodity prices and yields.
Find out what has the most impact on your breakeven. Have a
backup plan for what you would do if you ever got into a negative cash flow
Knowing your breakeven and financials — and using them to
make risk management decisions — shows what it’s going to take to “make it” this