By Don Nitchie, U of M Ag Business Management Extension Educator
We have probably all listened to stories from a neighbor who laments about having sold grain or livestock at a modest profit when a more profitable market price was available earlier or later than their selling date. We probably put on our understanding face and consoled them with some comment like; "we have all been there", "hind-sight is always 20/20" or "at least it was profitable".
Too many folks may have forgotten over the last 7-8 years of strong grain prices especially, that limiting losses in more lean times can prove to be a sound part of your marketing plans. One of the most important lessons learned from experienced, long-time professional commodity traders is that eliminating losing positions before they get worse can be as important as when to price in a increasingly profitable market. If you can do this with good self discipline you may help sustain your capital base and be there for the next opportunity. Limiting losses can prove to have contributed substantially to the long term survival of many farming operations and businesses. Nonetheless, it is very hard to do and not always fun to discuss or admit.
We know in commodity markets like corn and soybeans that market prices are always trying to get back to the industry average break-even cost of production. Sellers sell when prices are above their breakeven costs at desirable profit levels. If those profitable price levels persist, they also bid-up the cost of inputs and expand. Few people, including economists, thought grain prices would remain at the level they have, for the length of time they have, for the last several years. Despite six years of record profitability from 2006-2012 for corn on cash rented land, according to Southwest Minnesota Farm Management Association records back to 1993, there were seven years of losses and fifteen total years where profits were significantly less than $100/acre. Soybeans on cash rented land produced profits above $100/acre in six years going back to 2007, negative returns in only two years back to 1993 and profits of less than $50/acre in twelve of those years.
So for 2014, with grain prices hopefully building a bottom or floor the last several weeks, where should a producer start to take advantage of any price increases and at least limit losses on a portion of their sales? From a management standpoint, some good guidance for setting loss-limiting pricing goals is that if you can cover your variable costs and fixed payments in the short-term, (all direct costs & loan payments), you can get by for a short period of time without covering the economic costs, (non-cash), such as depreciation and unpaid labor and management. Re-check your data and costs to estimate what this number is for your operation. Living expense expectations may have to be adjusted. You may have to evaluate eliminating some capital assets that were acquired in recent years that were nice to have but, are not a necessity or did not add to efficiency and liquidate them for cash.
Above all keep communicating, stay involved socially in your community and in organizations. There is always something to learn from others even if it just perspective on life and fellowship. Things will adjust and probably improve.