My column in recent issues has concentrated on four major points growers have had success in significantly improving return on assets and return on equity.
The four areas are marketing, labor costs, equipment cost per acre and agronomic management.
This fall we took a deeper look at 10 cash grain operations from a similar area that ranged in size from 800 to 3,400 acres.
We analyzed net cost per acre, which is the total of all cash and non-cash costs minus any other income from custom work, commissions on seed sales or other off-farm income. This is important since these offset labor costs that are allocated to the grain operation. We also subtracted the direct payment received from the government.
In the box below is a summary of the average. The net cost per acre averaged $332 for corn and soybean production.
The range was from $415 to $255, or a difference of $160. It was interesting to note the highest and lowest numbers came from 1,000- and 1,200-acre operations. This is additional empirical data to support previous conclusions that profitability is not a function of size of operation.
Net income per acre may be different because of yield differences, timeliness and other factors, but this cost range is very large. Eighty-three percent, or $133 of the $160 variance, was the combined cost of labor and machinery. This points out that many of the other input costs don't vary much from one operation to another. That gives you great leverage in these two areas.
The average costs in these categories were not out of line with labor at $35/acre and machinery at $55/acre. Note that we combine labor and machinery costs. One producer can be very efficient with higher machinery costs coupled with low labor costs and the same efficiency can be gained with higher labor and lower machinery costs. The total is what is important.
The total average cost of $90 for labor and machinery is good. We've seen some as low as $37, but a good goal to shoot for would be $60. If you can accomplish that, along with best management practices in agronomy, you should be profitable and out-compete most of your competitors.
As a reminder, the formula we use for corn and soybean growers to determine labor cost per acre is: take the total of your net family living draw for the year, including medical insurance payments and self-employment taxes, and add all your hired labor costs. Total this figure and divide it by your harvested acres. This will give you labor cost per acre.
In summary, you can't manage what you can't see. Just knowing where you are is the first step to leveraging your ultimate return on equity.
|Auto Expense||$3||Land Rent||$111|
|Custom Hire||10||Professional Fees||6|
|Average Net Cost/Acre||332|
With a bumper crop in most areas this year and perhaps the largest total crop ever in the nation, many growers will store grain. That may be the correct decision to capture carry in the market, price rise or basis improvement.
However, keep in mind that there are costs associated with storage. The most obvious cost is off-farm storage, but there are on-farm costs of storing grain that include interest, shrink and quality deterioration that can add up to 2-4¢/bu. for corn and 6-8¢/bu. for soybeans per month. Some of the costs you don't write a check for — shrink, handling loss and quality deterioration — can really add up.
Just six months of these average costs on 200-bu. corn can be $36/acre. For 55-bu. beans it can cost $23. On a 1,700-acre operation the total cost could be $50,000.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 20 states. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.