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When Margins Are Tight: Are You Tracking Your Breakeven Point?
By: John Maman
If you’re like most growers in the U.S., you are probably managing some pretty tight margins as we move into the summer months. In February, the USDA issued projections for 2024, noting a steep decline (around 23%) in net farm income compared to 2023. At the same time, because of inflationary pressures, the cost of doing business is increasing, which makes it harder to stay profitable.
So, can you reach profitability?
Even though economists say this is a “normal cycle” in the ag business, we’re coming off a period of high profits, so making these adjustments in 2024 doesn’t feel great. But it’s important to know that, despite the forecast, plenty of growers will still be profitable in this market. Knowing your breakeven point and the key indicators that can change that number is critical for success.
Now is the time to revisit your plan.
We have an opportunity in the early part of summer to evaluate where we are and ask ourselves what’s changed since putting crops in the ground. Has everything gone to plan? Has the weather cooperated for you? If it’s going well, what can you do now to keep that momentum going? In the more likely event that you’re facing some unexpected hurdles and your breakeven point shifted, what can you adjust to add value to your crop?
Know how your profits are affected.
We know farmers have a lot on their plates, especially this time of year, and that includes making good marketing decisions, which starts with understanding the dynamics that affect profitability. Look to folks in your circle of trust – your Crop Consultant, your Financial Specialist – who can offer their expertise. Use those relationships to help adjust and execute your plan with the most profitable outcome in mind.
Make your own playbook to manage your success.
No two farms are the same. No two fields are the same. There is no single prescription to apply to hit your breakeven point, primarily because it’s impacted by many variables that are unique to your situation. This is why it’s important to take some time to gather your trusted team of experts and have a post-plant meeting to discuss your position and how you’re going to make the most of it. Doing this a few times a year, both before and after you’ve made the investment in your crop, will be beneficial to optimize growth and make sure the economics of your operation are aligned with what’s happening in the field.
Look at your numbers, then look at them again.
Many extension websites from universities offer calculators, like this one from Iowa State University that can help growers pinpoint their specific breakeven point and prepare themselves to respond to fluctuations. It’s a good practice to continuously revisit that number and know what levers you can adjust to protect your profits and optimize your cash flow, including:
- Knowing that promotional rates don’t always add up to a promotional price. Sometimes the rate may end up costing you money.
- Keeping your operating line of credit in good standing, and if it’s not, doing the work to clean up your credit report.
- Making sure your equipment and input lines are in good standing and that your payments are where they need to be.
- Aligning due dates with your crop cycle and your payment cycles so you have more options, and you aren’t selling for a lower price because you have to.
Redefine your outlook on cash.
Everyone is familiar with the adage “cash is king,” but there are certain instances when cash may not be the most favorable payment option. Think of cash as another input, one that comes with opportunity costs, risks, and benefits similar to the decision of choosing one crop over another. This way of thinking can help you increase potential ROI because you’re seeing the difference between using a line of credit to maintain (and earn a return on) your cash.
Want to know more?
Farming year-to-year, month-to-month, even day-to-day looks different. That’s part of what makes it an attractive job for many. The most successful growers are the ones who are knowledgeable about the many variables that can impact their profitability and who are prepared to adjust as the season rolls on.
Read more about the current economic environment and how you can be successful in it. Click the button below to learn more about how Nutrien Financial can help with your financing.
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