All of our clients face two questions, regardless of their farm size: 1) Is there a way to take some of the emotion out of making marketing decisions?
2) How can we most effectively make decisions that will allow us to meet our financial goals?
One of the most effective ways we have found to accomplish this is to target marketing plans to a gross dollars per acre goal. As we've discussed in previous articles, the needed gross dollars per acre is arrived at by adding all your payments, operating expenses, living costs, depreciation and your profit expectation.
There are two major reasons to use gross dollars per acre. First, if you were to take a five- or 10-year trend of prices received on your farm vs. gross dollars per acre, you'd find there's less variance from top to bottom if you look at gross dollars.
Often, the reason is that yield may be less but the price is higher. Other years the opposite may be the case; yield is higher but the price received is lower. I realize this is not always the case. In some years your yields may be low and the price low, but that's generally the exception.
The following data from Iowa State University substantiates that gross dollars per acre has less variance than price. The data consists of season-average prices and state-average yields. The percentage change in prices in the last six years, before government payments, from the highest to the lowest, is 47%. However, if you consider the gross dollars of price times yield, the percentage from the highest to the lowest is 36%, nearly a third less variance.
The second reason that we use gross dollars per acre as a goal? It's easier to make marketing decisions in years when the price you're looking at today is lower than the price you received last year. Psychologically, it's more difficult to make a sales decision in this environment, even though, considering yields, your gross dollars per acre is as much or more.
This was the case in 1998 when yields were generally better than in 1997, but the price per bushel was lower. If your gross dollars per acre at a certain price meets your goal, it's easier to make the sales.
The final advantage of using gross dollars per acre is that you have only one figure to track. The emotion of weather, price, high costs, your needs and everything else can impact your decisions. So weighing all these against the gross dollars you need to meet your goals and stay in business makes for less stress.