cancel
Showing results for 
Search instead for 
Did you mean: 
Highlighted
Esteemed Advisor

Business Strategy Thoughts...Iowa State Fails

 REALITY #3: A Professor's Peer Reviewed Idea is only as good as his PEERS!

 

This was pulled form AgWeb on 8/30/13,  Hard to believe this passes as informed work at Iowa State these days.

 

"Iowa State University economists are telling farmers to prepare for a potential market downturn in the "next five years. The economists have developed a series of papers on the Ag Decision Maker website, which can be found under the Ag Cycles heading.

The economists offer different ways crop and livestock producers can ready themselves for the possibility for economic upheaval after multiple consecutive years of increasing grain prices and land values. For example, Chad Hart, associate professor of economics and Extension economist, says farmers should consider the following strategies:

 

Create and follow a marketing plan based on production costs

      NO, NO, NO, A THOUSAND TIMES NO, COSTS ARE NOT RELATED TO SALES PRICE.

 

• Buy inputs when making crop sales

     OK. THIS ONE IS SIMPLY IGNORANT. THEY ARE POSITIVELY CORRELATED.

 

• Move to a fixed-rate loan to protect against higher interest rates.

      OBVIOUSLY A GOOD ONE

 

• Continue to use risk management programs such as crop insurance

      YES, BUT IT HAS VERY LITTLE TO DO WITH YOUR SALES STRATEGY.

 

Dermot Hayes, professor of economics and Pioneer Chair in Agribusiness, took a deeper look into potential prices for the next five years, using an Iowa State modeling method. He predicts the worst-case scenario prices as follows:

Year Corn Soybeans

2014 $3.85 $8.89    2015 $3.41 $7.85

     THIS IS NORMAL, NOT WORST CASE, JUST SYK

25% of the RANGE is $4 & $8 FUTURES minus basis, it is just what markets do, decline to 25% of the range.

 

A real marketing strategy post for you gents to ponder on your "Labor" day off. Not many strategy posts on here anymore, but the Iowa State boys have reached a new low in strategy and someone needs to point it out.

 

Thankfully, our peers at the meeting last week operate at a different level than the professors.

0 Kudos
14 Replies
Highlighted
Veteran Advisor

Re: Business Strategy Thoughts...Iowa State Fails

I think it was Rodney Dangerfield that said a fellow "peer" was the guy standing next to you in the restroom, using the other urinal.

0 Kudos
Highlighted
Honored Advisor

Re: Business Strategy Thoughts...Iowa State Fails

This is the problem with these "strategies" there`s no one size fits all.  If you`re a highly leveraged, high cost producer maybe if you can lock in a small profit you`d better do it.  If you have low debt and a owned land base you can take some more calculated risks. 

 

But now with inputs dropping, don`t stand in their way, see if they drop further regardless if you sell grain or not.  That nitrogen that you buy now will be going into the `14 crop.

0 Kudos
Highlighted
Honored Advisor

Re: Business Strategy Thoughts...Iowa State Fails

Seems to be done by the ones that are want-a-be's at best and doing busy work to justify their paycheck instead of just playing solitaire on the computer ALL the time.

 

I might have more respect for someone that has a real dog in the hunt and one not given to them at the beginning.

 

In my opinion the only strategy that works is buy low, sell high.

 

This year compared to the last 5 hasn't worked yet. We had increased demand and world wide shortages. That lead to the best strategy being to grow it (hard to market something you have no clue of how much will be harvested) then market it.

 

ALL the sell it before you plant or harvest it growers are way behind the G B S farmers.

 

Sooner or later that will have a one year turnaround. You guess which one.

 

Many on these sites (not just this one) CONFUSE  hedging and speculation.

 

My # 1 problem is my land is high risk (not rated) and subject to flooding and so production is always an unknown even this year with all the beans under flood level (if it happens). This is a risk most could not live or deal with but was still the best land that I could afford at the time and has made me very well off. Last year and so far this year I am way ahead of average in the area. Still I have to wait for it to get in the bin to count the potential and be able to sell.

 

Something nobody seems to understand any more.

 

To me the strategy was to get ahead and therefore I can treat my last crop like most do their upcoming crop. Kind of like waiting to buy that new thing until the money is in the bank instead of mortgaging the future and making pmts against future earnings that haven't yet been determined. Yes it took determination and denial but the results are worth it in the end.

0 Kudos
Highlighted
Advisor

Re: Business Strategy Thoughts...Iowa State Fails

So what did your peers suggest, Time??

0 Kudos
Highlighted
Advisor

Re: Business Strategy Thoughts...Iowa State Fails

There is no strategy here because most left for greener internet pastures.  At least the ones with some knowledge.

0 Kudos
Highlighted
Honored Advisor

Re: Business Strategy Thoughts...Iowa State Fails

COSTS ARE NOT RELATED TO SALES PRICE.

 

sorry Time gotta disagree with that one---- at least somewhat.  Grain prices go up and expenses follow---- at least in the monopoly that is fertilizer and seed and equipment etc.  Pricing of inputs are most always affected by "what the market will bear".

 

Otherwise I agree ------- My favorite is ------ Buy inputs when making crop sales


Is that a "Get the farmer while he has the money" promotion.

 

-------------------------------------

 

You discount the value of knowing cost of production too much.  You are lost on both sales and inputs if you don't know cost/bu or have a reasonable idea of it.

In marketing,  I think knowing cost of production is a good indicator of what producers will do.  Price trends around the cost of production will generate more sales than price changes on either extreme.   

0 Kudos
Highlighted
Senior Contributor

Re: Business Strategy Thoughts...Iowa State Fails

Costs of production can be calculated about August 1st. Before that, the corn gods may say F you! Things happen, and you can't put a definite number on investment until its all said and done. 8-1 may be too early, who's to say my combine won't blow up or catch fire this fall? Insurance or not, lost hours are lost revenue.
A good producer knows when he's in the red OR black before he lays pen to paper, but good records make money! That 2 extra dollars on an acre could make a difference over time...
0 Kudos
Highlighted
Esteemed Advisor

Re: Business Strategy Thoughts...Iowa State Fails

sw...I was not saying that knowing your costs is unimportant. We know our projected costs per bu to the penny. Actual costs are not known until harvest, and then we benchmark against the industry and against our budget. Managing cost is just a different discipline than marketing/selling. We drive costs down and try to maximize selling price. Different functions and not related is all. That is the key point, especially in a industry that is fixed costs driven, where your costs and my costs can almost be 200% different in any given year, yet we are selling the same commodity.    (ie 20 bu beans in MO, versus 60 in NE IN equals costs of $21 or $7/bu...everyones price is still the same) If you do the math over time, with a varable cost structure due to yields, using PROJECTED costs as the profs are doing, is gauranteed to produce pathetic returns, just the math of it.

 

There are times to take price risk, and there are times to NOT take price risk, costs have nothing to do with it.

 

For a local real life example, our 5 yr avg corn yield is 180. Our PROJECTED cost (all costs including our salaries and land) was $4.40. My expected corn yield is now around 165. So my new projected cost is $4.80. Which costs do I use? For us the answer is neither. They are unrelated to selling price.  (Avg corn sale is around $6.20 at this point). Obviously, the math gets out of control as yields decline. For beans, if we use our projected 44 versus the 60 avg, cost have spiked from 10.40 up to 14.20. Again, using costs in any way just messes up your mind about selling. 

Highlighted
Esteemed Advisor

Re: Business Strategy Thoughts...Iowa State Fails

Morning Cat...

   As my IU business grad peer says....you manage every line item independently. You buy fertilizer as cheap as you can. You try to sell grain for as much as you can. As he notes, since inputs are extremely positively correlated, by definition you want to do the decisions as far apart in time as possible.

  For example, none of us who sold 2014 corn and beans last August bought a single input at that time. Just now buying the 28% after it has declined about 20%, while the corn has declined about 20%.

  This is even easier for dry fertilizer if you have the soil fertility well managed and in balance. When P&K spiked higher we just didn't apply any. Then when they decline you can make up the forgone application if needed. Obviously you have to know your CEC's and some soils can't be managed that way, but most of the corn belt can.

 

  This is apparently news for Iowa State graduates :-)   An appropriate saying...if the soil is too good (read Iowa)...it will be mismanaged. Or the corrolary, anyone farming rough dirt (read most everywhere else) HAS to be a better manager."   Chuckle Smiley LOL

Probably stirred the pot enough this morning.

 

0 Kudos