The first step is to eliminate break even from the discussion, no grain company is in business to break-even. Decide on a profit target and this analysis will help to shape the necessary decisions to achieve the goal. Each region and location is different, but for this example the grain industry net profit target is set at 2.5 % of sales before taxes. A company with $30 million in sales will then have a profit target of $750,000. Keep in mind a 2.5% profit is 10 cents on $4.00 corn.
- Profit Target $750,000
Review the last two years income statements to determine your fixed expenses. Add the total operating expenses together and divide by 2 then adjust for any planned changes in the current cycle. The fixed expenses typically don’t change much year to year unless new space or an additional location is added.
- Operating Expense Estimate $2,250,000
Research the basis charts and spread histories to determine the basis appreciation for each crop handled to assess the margin opportunity for each crop. These numbers will determine the harvest plan. Multiply the basis opportunity times the anticipated harvest bushels. Completing a grain flow plan makes this process more accurate.
- Basis appreciation harvest grain handle $1,800,000
Study the historical direct ship margins and bushels sold for each crop. Multiply the projected margin by the estimated bushels sold for direct ship sales. This step is simplified if the direct ship bushels are set up in the accounting system as a separate location.
- Direct ship margins $700,000
Review the Price Later and Storage fees to determine if adjustments need to be made before harvest. Profitable harvest grain buying policies are critical to achieving the profit target. Once again, a grain flow plan will make this process quick and accurate. Multiply the fees by the anticipated bushels. Grain companies are often surprised by the consistency of the bushels owned via price later contracts. If net grain discounts or shrink is typically a large part of your income please add that revenue.
- Price later/ Storage Fee Revenue $500,000.
Profit Target = (Basis Appreciation + Direct Ship Margins + Price Later Fees) – Operating Expenses
$750,000= ($1,800,000 + $700,000 + $500,000) - $2,250,000
Developing a realistic profit target may require some very profitable discussions on grain buying, logistics, and merchandising opportunities for the 2017 harvest.
Topics: Grain Merchandising