With extreme volatility in all aspects of agriculture, margin management will be imperative for successful businesses in this next decade. In discussing margin management, Tom Neher, vice president of agribusiness at AgStar Financial Services, had one of those “gotcha” moments in a recent seminar where we shared the podium for an agricultural producer seminar.
Tom’s point was that positive margin management in a business enterprise over a number of years is equal to wealth accumulation. This concept could also be applied to a household budget, where one’s surplus could be thought of as margin. If properly saved and invested over a number of years, it could be equal to wealth accumulation.
The foundation of margin management is not price maximization. Rather, it requires you to assess cost of production for each enterprise and the whole operation and then determine what price structure allows you to maximize your profit margin. This concept requires that you have a sound understanding of cost and price breakeven amounts. Allow for up to 10 scenarios with probabilities assigned to each, given micro and macro events, with strategies, actions and plans for execution.
The key to Tom’s point is to have a systematic process that capitalizes on positive margins, or profit, and repeat it over a period of years. Moving forward, the cost of land, cash rents, technology, global economics and market factors will make a margin management strategy even more important.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]