Managing With Tight
Operating Margins
Ron Haugen
North Dakota State University
Extension Service
2016 Extension Risk Management Educational National Conference
Fort Worth, Texas
April, 2016
Profit vs Cash Flow
•Recognize the difference between net
income and net cash income
•Do not have to make a profit every year
•Must meet cash obligations every year
2
Profitability or Net Profit
•An accounting of the value of all resources
used to produce a product
•Some costs are non-cash
•depreciation
•unpaid owner/operator and family labor
•Inventory adjustments (whole farm)
3
Cash Flow
•Cash sales must be adequate to pay all
cash expenses
•Any shortfall must be made up by
borrowing
4
What is the Typical Response to
Tighter Operating Margins
(lower prices)?
5
Reduce Expenses
•Which expenses?
•How will they be reduced?
6
This strategy would work much better if it
could be retroactive
We have principal and interest payments
today due to purchases in previous years
that were financed
7
Remember the Nemesis
of the Mid 1980’s
“Leverage”
The ability to use a small amount of your
money, added to a larger amount of the bank’s
money to purchase assets
8
North Dakota Crop Budget Regions
9
North Dakota Land Rents by Region 2008, 2013 and 2016
NW
$28.00
$36.80
$35.00
NE
NC
$36.50
$50.20
$50.00
NV
$38.00
$55.50
$56.50
$55.50
$92.70
$90.00
EC
SC
SW
$27.50
$37.70
$38.00
Source: North Dakota Ag Statistics Office of USDA
$30.00
$57.10
$62.50
$39.50
$66.80
$70.00
SV
SE
$52.50
$94.00
$96.00
$71.00
$117.00
$123.00
10
Projected North Central Budgets, 2013
Spring Wheat
Corn
Canola
Soybeans
Per Acre
Per Acre
Per Acre
Per Acre
Market Yield
Market Price
Market Income
37
8.68
$321.16
90.00
5.57
$501.30
1480
0.245
$362.60
28
12.350
$345.80
DIRECT COSTS
Seed
Herbicides
Fungicides
Insecticides
Fertilizer
Crop Insurance
Fuel & Lubrication
Repairs
Drying
Miscellaneous
Operating Interest
Sum of Listed Direct Costs
19.80
24.50
5.50
0.00
61.09
16.70
17.68
17.05
0.00
1.50
3.76
$167.38
66.74
17.50
0.00
0.00
80.56
31.30
25.82
20.97
18.00
1.50
6.04
$268.43
47.00
19.00
0.00
0.00
78.90
14.70
18.13
17.44
0.00
1.50
4.52
$201.19
64.75
17.50
0.00
0.00
8.14
16.20
14.61
15.23
0.00
7.25
3.30
$146.98
6.86
19.84
11.68
50.20
$88.58
8.91
30.29
16.99
50.20
$106.40
6.91
20.64
12.16
50.20
$89.92
6.36
18.44
10.29
50.20
$85.29
$255.96
$374.83
$291.12
$232.26
$65.20
$126.47
$71.48
$113.54
$6.92
$4.16
$0.20
$8.30
40.00%
10.00%
30.00%
20.00%
INDIRECT COSTS
Misc Overhead
Machinery Depreciation
Machinery Investment
Land Charge
Sum of Listed Indirect Costs
Sum of all Listed Costs
RETURN TO LABOR & MANAGEMENT
TOTAL COSTS PER UNIT
Percent of Rotation
WEIGHTED RETURN TO LABOR & MANAGEMENT
$82.88
11
Projected North Central Budgets, 2016, Difference from 2013
Spring Wheat
Per Acre
Difference
Market Yield
44
7
Market Price
5.26
(3.42)
Market Income
$231.44
(89.72)
DIRECT COSTS
Seed
Herbicides
Fungicides
Insecticides
Fertilizer
Crop Insurance
Fuel & Lubrication
Repairs
Drying
Miscellaneous
Operating Interest
Corn
Per Acre
103.00
3.50
$360.50
Difference
13
(2.07)
(140.80)
Canola
Per Acre
1680
0.148
$248.64
Difference
200
(0.10)
(113.96)
Soybeans
Per Acre
31
7.85
$243.35
Difference
3
(4.50)
(102.45)
15.73
26.20
9.00
0.00
56.66
11.30
10.41
19.24
0.00
1.50
3.19
(4.07)
1.70
3.50
0.00
(4.43)
(5.40)
(7.27)
2.19
0.00
0.00
(0.57)
78.30
21.00
0.00
0.00
70.77
16.70
14.75
22.81
21.63
1.50
5.26
11.56
3.50
0.00
0.00
(9.79)
(14.60)
(11.07)
1.84
3.63
0.00
(0.78)
51.25
21.30
0.00
0.00
67.87
13.10
10.11
18.48
0.00
1.50
3.90
4.25
2.30
0.00
0.00
(11.03)
(1.60)
(8.02)
1.04
0.00
0.00
(0.62)
65.75
20.00
0.00
0.00
7.62
11.20
8.26
16.39
0.00
4.75
2.85
1.00
2.50
0.00
0.00
(0.52)
(5.00)
(6.35)
1.16
0.00
(2.50)
(0.45)
Sum of Listed Direct Costs
$153.23
(14.15)
$252.72
(15.71)
$187.51
(13.68)
$136.82
(10.16)
INDIRECT COSTS
Misc Overhead
Machinery Depreciation
Machinery Investment
Land Charge
7.50
21.90
12.88
50.00
0.64
2.06
1.20
(0.20)
9.65
32.43
18.30
50.00
0.74
2.14
1.31
(0.20)
7.33
21.61
12.72
50.00
0.42
0.97
0.56
(0.20)
6.78
19.89
10.92
50.00
0.42
1.45
0.63
(0.20)
$92.28
3.70
$110.39
3.99
$91.66
1.74
$87.60
2.31
$245.51
(10.45)
$363.11
(11.72)
$279.17
(11.95)
$224.41
(7.85)
$(14.07)
(79.27)
$(2.61)
(129.08)
$(30.53)
(102.01)
$18.94
(94.60)
$5.58
(1.34)
$3.53
(0.63)
$0.17
(0.03)
$7.24
(1.06)
Sum of Listed Indirect Costs
Sum of all Listed Costs
RETURN TO LABOR &
MANAGEMENT
TOTAL COSTS PER UNIT
Percent of Rotation
WEIGHTED RETURN TO LABOR &
MANAGEMENT
40.00%
10.00%
$(11.26)
30.00%
20.00%
12
What Factor has the Greatest
Impact on Net Return Per Acre?
1. Yield
2. Price
3. Costs
13
Wheat on Cash Rented Land, 20052014, Red River Valley Farms
Sorted by Net Return per Acre
Farm Groups
All Farms
Low 20 %
High 20 %
Average Percent of Average Percent of
Yield
Average
Price
Average
57.81
100%
$6.10
100%
47.24
82%
$5.67
93%
65.79
114%
$6.46
106%
source: FBM Reports, Red River Valley
14
Wheat on Cash Rented Land, 20052014, Red River Valley Farms
Sorted by Net Return per Acre
Average Percent of Average Percent of
Farm Groups Direct Cost Average Land Rent Average
All Farms
$190.75
100%
$84.59
100%
Low 20 %
$197.94
104%
$94.18
111%
High 20 %
$183.72
96%
$78.30
93%
source: FBM Reports, Red River Valley
15
Wheat on Cash Rented Land
2005-2014
Gross Income
Direct Costs
Land Rent
ROVC
All Farms
$352.64
$190.75
$ 84.59
$ 77.30
Low 20%
$267.85
$197.94
$ 94.18
$ -24.26
High 20%
$425.00
$183.72
$ 78.30
$162.98
source: FBM Reports, Red River Valley
16
What if All Farms Sold For the
Average Price ($6.10)
Gross Income
ROVC
All Farms
$352.64
$ 77.30
Low 20%
$288.16
$ -3.96
High 20%
$401.32
$139.30
17
If All Farms Had Average Price,
Direct Cost and Land Rent
Gross Income
ROVC
All Farms
$352.64
$ 77.30
Low 20%
$288.16
$ 12.82
High 20%
$401.32
$125.98
18
How Does This Help Us in Dealing
with Leaner Operating Margins?
•Protect yield – yield is the most important
factor in net returns per acre
•Can you cut costs without cutting yield?
19
Three Ways to Cut Costs
•Reduce the quantity of inputs
•Change the inputs
•Lower price for inputs
20
Where Do You Reduce Expenses
Seed
Herbicide
Fungicide
Insecticide
Fertilizer
Crop Insurance
Fuel & Lube
Repairs
Drying
Overhead
Machinery Principal
Machinery Interest
Land Cost
Labor & Mgmt (operator)
(family living)
21
Should You Drop Rented Land?
If gross return is greater than direct
costs plus land rent, keep it, because it is
contributing to ROVC
22
Fixed Cash Rent Methods
1.
2.
3.
4.
5.
6.
7.
8.
Cash rent market approach
Landowner’s cost or desired return
Landowner’s adjusted net-share rent
Operator’s net return to land
Percent of land value
Percent of gross revenue
Dollars per bushel of production
Fixed bushel rent
23
Putting Flexibility in Cash
Rent Agreements
• Crop-share leases were the original flexible rents
–The scale of today’s operations makes share rents
somewhat impractical
• Cash rents may be adjusted by market prices, crop yields and
production costs
24
Advantages of Flexible Cash Rents
1. Landowner shares in additional income from:
•
•
Price increase
Yield increase
2. Reduced risk for operator when:
•
•
Prices drop
Yields are reduced
25
Disadvantages of Flexible Cash Rents
1. Increased risk for landowner
2. Landowner may be concerned about accuracy of reported
yields
3. Higher rent due to increased yields means the operator may
be giving up some of the benefit from managerial input
4. Calculating the rent requires more management and
communication
26
Managing With Tight Operating Margins Meetings 2015-16
North Dakota & Minnesota
MN
MN
Banks
Agent Training
Producer Meetings
Ag Lenders
27
Number of Meetings and Attendees
• 22 meetings at 20 locations
• 1215 attendees
28
Make-up of Meeting Attendees
• Farm operators
• Land owners (landlords)
• Lenders
• Farm managers
29
Take Away Points
• Yield is most significant determining factor for
profitability
• What costs can be cut without cutting yield?
30
Acknowledgments:
Dwight Aakre, North Dakota State University Extension Service,
Farm Management Specialist
31
Thank You!
Any Questions?
Contact Information:
Ron Haugen 701-231-8103
ronald.haugen@ndsu.edu
Dwight Aakre 701-231-7378
dwight.aakre@ndsu.edu
32