We’ve covered a lot of ground since my first column. I’ve written about forage sorghum, biomass sorghum for cellulosic ethanol production, the new Renewable Fuel Standard (RFS2) and active marketing. Each of these represents an opportunity to profit from some facet of a market.
But what if growing a forage sorghum crop isn’t profitable, even with a seemingly solid deal with a dairy? What if forward contracting your grain at an ethanol plant for a great basis and then selling futures at a historically good price isn’t profitable either? And what if you don’t find this out until you’re reconciling your last bank statements in January?
Those of us that grew up on the farm can relate to these types of winter surprises. Farming is very risky, so it’s impossible to avoid being surprised completely, but knowing your costs helps minimize this risk. This month I’ll cover some basic terms for cost-tracking, and next month, I’ll step through a real-world example.
Accounting systems vary in agriculture more than in any other industry. Many still prefer to track costs strictly with paper, while an increasing number are integrating more complex accounting systems into their operations. Though these systems can be costly, they allow for management decisions that incorporate up-to-the-minute financial, marketing and agronomic data. For producers already using precision agriculture technology, these systems are a natural next step.
Your system doesn’t have to be sophisticated to be effective. The keys are tracking your costs in some way and having a protocol in place for keeping things consistent. This is important for a couple of reasons. First and most importantly, it makes active marketing possible.
In the winter surprise examples, you were caught short at the end of the year but didn’t see it coming. You thought you had a good price locked in, but your costs were up more than you thought. This illustrates the importance of knowing, down to the dollar when possible, how much it costs to produce each bushel. If you know your cost of production is $3.50 per bushel, anything above that means profit.
This also allows for profit targets. If your goal is $1 in profit on every bushel, you can start looking for opportunities to price grain at $4.50. Even in bear markets, short-lived rallies put opportunities like this in reach.
Categorizing expenses correctly and consistently is also important. For example, if government payments are recorded as cost offsets instead of added revenue items, production costs will necessarily be understated. How can you be sure if you’re marketing your crop at a Tracking costs is vital to marketing profitable price if your production cost might be 50 cents per bushel higher? And how can you compare financial performance across years if government payments are recorded as cost offsets one year and added revenue items the next? You can’t.
Distinguishing between profit and cost centers is also important for cost-tracking purposes. A lot of sorghum producers have custom harvesting and hauling operations, and many of them need to start thinking about how they’re tracking these costs. If you are also a custom operator and you find yourself custom-cutting or custom-hauling more often than farming, you probably need to think about separate accounting systems.
I know — these tracking exercises can be boring. But the ability to do more active marketing alone makes the investment worth it. We’ll take a look at some sorghum numbers next month to see why.
Chris's columns appear in Kansas Farmer magazine monthly. You can view this column published in the online edition here.