MYFB — Ep. 4: Three Strategies to Manage Margin Compression

How does that old saying go? Crop prices take the stairs up but the elevator down.

It could be said that crop input prices do the exact opposite. Price trends of both variable and fixed inputs seem to march to their own drum. Variable input prices are slow to back off highs; fixed costs can take years to catch up to a crop price trend line. When the crop price falls, but input prices stay the same (or even increase) farmers feel the squeeze of margin compression.

There’s an entire series of Mind Your Farm Business — find it here!

As Brent Gloy, visiting professor with Purdue University, explains in this fourth episode of the Mind Your Farm Business series, there are big-picture strategies for dealing with margin compression, but they take serious planning and time.

This is why anticipating thin margins is the first strategy to managing them — re-organizing your entire debt structure can be instrumental in making sure your farm is resilient, but it’s not something you can just make happen overnight. What’s more, Gloy says, that managing fixed costs could come down to negotiating new land rents or agreements, and plucking up the courage to tackle the relationship side of the business can take months.

Lastly, Gloy says that a farm’s equipment needs and wants can sometimes fall out of line with income realities, but here again, leases or purchases may not be that easy to reverse.

The key to managing margin compression is making tough calls sooner rather than later — hear more about that in the audio below.

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Disclaimer: Royal Bank of Canada and its subsidiaries are not responsible for the information provided in this podcast, and this information does not necessarily reflect the views of Royal Bank of Canada or any of its subsidiaries. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its subsidiaries.

One thought on “MYFB — Ep. 4: Three Strategies to Manage Margin Compression

  1. Another great episode.

    I think part of the problem is that, as it was mentioned, many farmers don’t even know their fixed cost per acre/bushel.

    Many farmers use tax depreciation on machinery, which uses an unrealistic accelerated rate. The result is that a piece of machinery that may last for 15 years may be depreciated in 5 years for that purposes. This will dramatically overstate the true fixed cost amount. On the other hand, once that piece of machinery is fully depreciated, the associated fixed cost drops to zero, even though the machine is still being used.

    The situation is confusing and can lead farmers to ignore fixed costs since they are often unrealistic.
    The solution is to use a book depreciation that is based on the true useful life of the machine.
    The FFSC does a good job at explaining how to handle depreciation in their management guidelines (see http://www.ffsc.org/index.php/guidelines/)

    Clement
    More farm management resources:
    https://www.farmbooster.com/Blog/the-ultimate-resource-list-for-farm-managers

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