Farmers are at a disadvantage compared to major agribusiness companies. That's because growers don't have a finance department to run the numbers when making key decisions. Farmers have to do it all, and it can get mind-boggling as they are bombarded by salespeople who all claim they can make them wealthy.
How do you make quick, informed decisions that make good risk management sense?
We've found that analyzing decisions based on the impact of your return on assets (ROA) and return on equity (ROE) can help you make key decisions with less emotion.
Corn and soybean yields have been surprising this fall. Soybean yields were disappointing, but in many cases corn yields were better than expected. For many, good corn yields were due to improved genetics from stacked traits such as Bt, corn rootworm and Roundup Ready technology.
We've developed a spreadsheet to help our clients make more informed decisions on the new genetic technology available from seed companies.
These new technologies may or may not be right for your operation, but this allows you to run the numbers based on assumptions for your operation. It also helps you determine the potential impact on your bottom line. It's particularly helpful in getting you over “sticker shock” on seed prices.
After filling in the numbers, you can look at the financial advantage and then evaluate the potential risk and reward.
Each of you has a different ability, financially and psychologically, to take risks. Only you can determine what is right for your farming operation.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 15 states. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.
The table below is an example from one of our clients in southeastern Iowa. This client estimated different costs for conventional technology and then put numbers in for a three-way stack of Roundup Ready, corn borer and corn rootworm resistance. He put his net worth and total assets at the top. He has 1,200 acres of corn, 1,000 of which could be planted to this technology.
Seed costs for the new technology are significant. But notice, as you look at ROA and ROE, that the technology pays if you get the yield boost.
We assumed the same planting population, but input different chemical costs based on different options with the stacked hybrid. The other costs were machinery and rent — and we kept them even to make a comparison. You can use any yield boost you want, which makes this process fun, since there are many “what if” options.
In summary, an estimated 12-bu. yield boost would increase the return on equity nearly 3% and means a potential $19,400 additional profit. In most scenarios we've run, the results show that using the new technology has a big payback, but it depends on your individual yield numbers and estimated costs.
You also need to consider channeling, storage and other factors, but this helps narrow the issues.