February 5, 2010

The Price Taker Question

“Hey Doc: I am a price taker and have to take the price that is given for my wheat crop, much different than the value added dairy business you are involved in.” This was a comment at a noon luncheon of Washington wheat producers that I addressed recently.

The gentleman had a very valid point and was questioning how he could improve his profit situation in a proactive manner. My first question to him was, “Do you know your cost of production?” He responded affirmatively indicating that he knows his cost of production to the nearest dollar, which was quite positive.

Thirty-five percent of producers under $1 million in revenue who have completed the best management practices survey for Northwest Farm Credit Services’ Business Management Center do not know their cost. This is contrasted to 20 percent of the producers who generated above $1 million in revenue.

My response to this producer was that one method to improve profits is to drill down and know cost of production to the cent rather than the dollar. Next, really drill down and calculate your cost by enterprise, if the business is more diversified. Doing the incremental adjustments add up in businesses that are margin compressed.

I also suggested that if a producer knows their cost, usually during the year there are opportunities to lock in a profit with the combination of hedging, options, crop insurance and other risk management tools. I quickly noticed how his wife nudged him in the ribs with a wry smile.

Finally, I asked him if his children were involved in the business, which was an affirmative. I suggested that he take time to teach them as well, which was met with a smiling glance from the couple.

Comments

Please send your remarks to AgGlobeTrotter@accountlist.com. I would like to know what you are thinking.

Dr. David M. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University (Virginia Tech), Blacksburg, Virginia. Dr. Kohl has traveled over 5.1 million miles throughout his professional career. He has conducted more than 3,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FmHA, and regulators, as well as producer and agribusiness groups. He has published four books and over 400 articles on financial and business-related topics in journals, extension, and other popular publications. Dr. Kohl regularly writes for Farm Journal, Top Producer, Ag Lender, Journal of Agricultural Lending, and Soybean Digest.

©Northwest Farm Credit Services 2009

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