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Extension > Agricultural Business Management News > Managing Farm Profit Margins Small Improvements Add Up

Wednesday, June 10, 2015

Managing Farm Profit Margins Small Improvements Add Up

By Don Nitchie, Extension Educator

At today’s much lower grain prices, some producers may rightly ask, “What Profit Margins”? Regardless, there are always opportunities to improve profit margins or in the worst case, minimize losses.  This is true for a given year or across several years. The record high prices of the past several years has probably masked some less than best management practices of the past becoming a habit in some cases.

The Southwest Minnesota Farm Business Management Association and the Center for Farm Financial Management, both University of Minnesota Extension programs have examined the difference that small margin management decisions can make.  Don Nitchie, UMN Extension Educator in Ag. & Business Management indicates that they looked at the impact on the average association farm, that a 5% increase in gross income or revenue, through improved selling prices, yields or both-combined with a 5% decrease in costs.  This decrease in costs could be from negotiating lower purchase prices for inputs, more effective use of inputs applied or a combination of both.

It was found that if the average association farm could improve gross revenues by 5% and lowers operating costs by 5% over 2014 for 2015, these small changes result in Net Farm Income almost doubling, Return on Assets more than doubles from 2% in 2014 to 5% in 2015 and Net Worth grows by 9%.  Debt Repayment Capacity also almost doubles.  This is a significant improvement across several key financial measures.  Small changes have a big impact on your bottom line.

Is it possible to achieve a 5% improvement in gross revenue?  Probably.  Doing a little better than average on selling prices, yields or a little of both.  Is it possible to lower costs by 5%?  Probably.  Here is where it is true that successful managers do a lot of little things just a little better rather than doing one thing really well.  Being more effective with expenditures on inputs is the key.  Get the most revenue possible for each dollar spent on herbicides, pesticides, seed, fertilizer, rent, equipment investments and feed etc.  Sharpen your production management skills.  Know where your costs are relative to competitors.  It pays off when profits are scarce!

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