At our summer conference in Panora, IA, I shared data (with names removed) of five clients of ours. I had completed their yearly plans just a few weeks prior to our conference. They had returns on assets of 6-10% and returns on equity results of 10-24%.
The interesting point was there was no profitability to size correlation, and that is consistent with all of our clients throughout 17 states.
However, four key areas do effect profitability results. A fifth area is less important but can still add to your bottom line.
These five areas are outlined in the chart below.
In the last issue, I wrote about three of the five areas that separate those who make good returns on farming from those who do not. Those three areas were marketing, equipment cost management and inventory management.
I'll now address the two remaining leverage points to improve profitability.
The fourth area of increasing profit margins is agronomic management. There are many excellent consultants to help you in this area.
One example I've used in our seminars is proper seed placement. A study completed by Heartland Co-op in West Des Moines, IA, compared 59-61 farms during 2000 and 2001. Eliminating skips and doubles in seed placement increased yields from 2.63 to 16.89 bu/acre.
Another example is the potential for increased yields with genetic improvements that are on the market or waiting regulatory approval. This summer, my partner Terry, several key clients and I toured a research facility near St. Louis where rootworm-resistant corn was developed.
Tests of this product show significant enhanced production and profits. My guess is that this type of technology will continue to be developed. Our experience is that those who adopt the technology quickly benefit most.
The last area that separates those who make good returns from others is reducing input costs. I estimate up to $12/acre, which is significant. It pales in comparison to the opportunity in “chasing the top four rabbits,” however.
There will be cases where more will be saved per acre, but the interesting point is that this is where most producers spend most of their efforts. Our experience shows there is more to be gained addressing the other issues.
Producers spend much of their time trying to reduce input costs for several reasons.
First, it's the most visible. You write big checks for these items. You do not write checks for shrink, quality deterioration and bushels lost in handling grain, but those costs add up. Nor do you write checks for lost opportunity in marketing or agronomic management.
Second, input suppliers are the closest to let out some frustration on because they're such an important part of your business. And you likely work with them more than anyone else in your operation.
Third, everyone talks about cutting costs in order to survive in this environment, but it needs to be balanced with a strategic look at your entire business.
Finally, cost cutting. If done in the wrong areas and on products that are not high quality and backed by assurances and knowledgeable sales staffs, it can cut into your bottom line.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free 877-333-6135.