You’ve likely heard or thought something similar to the following statement, “the market doesn’t care what my breakeven is!”.
And it’s true! The market doesn’t care what your exact farm’s breakeven price is.
That doesn’t mean it isn’t important!
Let’s look at another industry….
When you walk into the grocery store, do you care about the store’s breakeven prices?
If you’re like me, the answer is no!
How does this relate to farming? Good question!
I recently had an interesting conversation with a farmer about the financial side of his farm.
I asked him if he calculates his breakeven prices on a per enterprise basis for his farm. He said, “yes”.
After a few more prodding questions, he admitted that he hadn’t updated his numbers since his bank renewal meeting more than 6 months ago.
His response, “The market doesn’t care about my breakeven!!”.
And he’s right, the market doesn’t care about his individual breakeven.
Let’s compare this thought process to a business outside of farming. Bank to the grocery store analogy….
You walk into your local grocery store with your shopping list. As you proceed to pick out your groceries, do you think at all about the grocery store’s breakevens? I’m 99.99% sure the answer is NO!
Why does it matter then? Let’s dig into that….
We’re going to focus on two key reasons why breakeven analysis is important on your farm.
1 - Which product to put on the end cap?
Looking back at our grocery store analogy, store managers are faced with many merchandising decisions. No, these are grain merchandising decisions!
These are focused on maximizing the store’s total gross margin. They know that certain placements of products (end of shelves, eye-level, etc) will increase the likelihood of more sales volume. Furthermore, they also know that a lower price will increase sales volume.
But the key piece of data in this analysis is the cost of the item. If you sell more of something at a loss, you are actually digging yourself a hole.
You’re likely asking, “Nick, my farm is so much different than a grocery store…what is your point!!” I know, I know.
Let me tell you a quick story.
I was talking to a Harvest Profit customer recently. They thanked us for building the software. I wanted to dig into why they liked the product.
They had recently shown the older generation in their farm their profitability on a per-crop basis over the prior two years. Their father really liked to raise wheat and one of his big arguments was that the crop simply required lower overhead than other crops.
They showed him that corn had out-earned their wheat by an average of $80/acre/year. *Every farm is different so obviously take this with a “grain of salt”.
Their father immediately said, “Well the wheat is paying for part of that dryer that we never use on wheat! That’s not a fair analysis.”
The son then showed him that 100% of the dryer expense (among others) was being allocated solely to their corn enterprise.
The take away was that given their current cost structure and market prices, they probably shouldn’t put wheat on their farm’s “end cap”.
As shown above, overhead expenses play a huge role in farm breakeven analysis. Too often, I’ve seen only variable costs being factored into crop vs. crop (or insurance) decision making.
Having your breakeven numbers at your fingertips allows you to make numbers-based crop vs. crop decisions on your farm.
At the end of the day, with so much outside of your control on the farm, your job is to do whatever you can to try to maximize the probability of profit and your breakeven analysis is an essential tool to complete the job.
Let’s review another reason why you should track your farm’s cost of production.
2 - Breakeven Analysis’ Impact on Your Grain Marketing
I hate to be the bearer of bad news but, in my opinion, no one can accurately predict just how high/low commodity prices are going to move over the next month, year, etc.
It’s very easy for this uncertainty to lead to indecision.
Indecision can lead to excessive storage costs, basis contract rolling, and selling large chunks of grain at harvest (historically the time for both weakest futures prices and basis).
Historically, futures prices for ag commodities tend to fluctuate around cost of production.
Knowing your breakeven allows you to build objective marketing targets.
Let’s go back and look at the comment that was made to me at the beginning of this post.
“The market doesn’t care about my breakeven!”
Once again, this is a true statement!
So why is it a vital component of a grain marketing plan?
Let’s take a look at a scenario.
You have a soybean breakeven of $9.00/bu and expected production of 60,000 bushels.
You decide to forward contract 10,000 bu. at $9.50 cash price the winter before the growing season.
The market stagnates for nearly 6 months but the onset of a drought leads to a sizable rally.
You get a second chance at $9.50 so you sell 5,000 bushels. The market promptly rallies to $10.00 so you sell another 5,000 bushels.
The market then fades to $9.00 and you are feeling comfortable with your sales.
But then the USDA releases a bullish crop report followed by a “heat dome” building over the central US. Soybeans rocket higher to $12.00 cash. You are frustrated with all of your grain sales.
You ask yourself, “What was I thinking?!”
Let’s take an objective, numbers-based view of the situation.
- You shave 10% off your estimated yield due to the weather. Your breakeven is now projected to be $10/bushel.
- You have 20,000 bushels sold at a $9.62 cash price.
In a lot of situations like this, it’s hard to make any more sales. Looking at your previous contracts and dwindling crop prospects you say, “No way am I selling any more production! Fool me once shame on you. Fool me twice, shame on me!”.
Every year is different, but odds are high that the market will put in its high before harvest (at least until the next growing season).
Rather than feeling shame regarding your past sales, which can’t be changed, you should look at it as an opportunity to greatly improve your average sold price. Put yourself in a position where you have a much higher likelihood of profit.
The key in this analysis is to actually know your numbers! They don’t lie and they don’t have emotions!
Knowing your numbers allows you to remove emotion from what’s an emotionally charged area of many farm businesses.
I should add a note of caution here. You need to be aware of price anchoring when using your breakeven price as a marketing aid.
Price anchoring is the tendency for the first price to be mentioned having an outsized effect on your perception of all future prices.
How can you fight price anchoring in your grain marketing decision making?
- You can systematically spread out your sales/hedges during the seasonally strong time of the marketing year. It varies from year to year obviously, but these tend to be the months that make up the first half of the growing season.
- Instead of thinking in terms of price per bushel (or unit of production), you should also break things down to total revenue and expenses.
- Building on the point above, would be analyzing how much of your expenses are uncovered by sales/hedges/crop insurance and focus on making incremental grain marketing decisions that “de-risk” that expense exposure.
- Focusing on a metric that’s a few layers removed from the price per bushel and oftentimes makes it easier to make grain marketing decisions. Working capital is a prime example. Having a working capital goal and tracking that over the long-term can remove the focus on day-to-day volatility.
At the end of the day, knowing your breakeven isn’t going to magically make your farm an extra $100/acre/year.
I’m confident that if you do it consistently, it will allow you to make more objective and numbers-based decisions that will ultimately increase the probability of profit on your farm.
And at the end of the day, that’s your job across all areas of your farm (agronomy, equipment purchases, financing, etc.)!
If you’re interested in seeing if our software’s full-season revenue/cost/profit tracking tools are a fit for your farm, sign up for a full-access free trial below.
In addition, check out the blog posts below for more content on grain marketing.
Grain marketing is hard! Volatile commodity markets lead to frustration, greed, and indecision. Today's farmer needs to work hard to find a risk management system that allows them to make less emotional, and more profitable, grain marketing decisions.Read More »
In this blog post, we are jumping into the world of cognitive biases. In particular, we are focusing on how our biases can screw up management decisions on the farm.Read More »