Finance first: How to analyze unprofitable crop acres

Finance first: How to analyze unprofitable crop acres

Land analysis will help as you approach negotiation for next year's farmland leases

I farm about 4,000 acres, and I think some of them may be unprofitable this year. I might need to get rid of them this winter. Should I? How do I determine whether or not I should? — J.B., Illinois

I think quite a few farmers are asking themselves similar questions this fall. My first question for you is: How do you know that the acres are unprofitable or potentially unprofitable? What financial analyses are you running on your fields to determine their profitability?

If you haven't yet done a field-by-field analysis on your cash-rented land, start by creating a separate spreadsheet or tab for each rented field, including all costs. Calculate the estimated profitability for each field.

Land analysis will help as you approach negotiation for next year's farmland leases

Use different revenue estimates by plugging in various yield and price scenarios. A financial consultant can also do this for you. This analysis should show you which of your fields are profitable and which aren't.

If you find that some of your fields are unprofitable, it's time to look at them in the context of your operation's bigger picture. In light of your analysis, consider these questions about the unprofitable ground: How would losing these acres affect our operation's overall efficiency? Of the ground you're currently farming, what percentage do these acres represent?

Related: Finance First: How can grain farms be proactive in a downturn?

How unprofitable are these fields? It can be expensive to lose acres. What's your strategy to get more acres in the future if you need to? Do any of the landlords renting you these acres connect to your other landlords?

Once you've answered these questions, you may decide to review your options on any cash rent leases that are up for negotiation this year. Analyze all of your options, including arrangements such as flex leases.

Make sure that before going into any negotiation, you're clear on the price level where it will be worth it to stay and at what point you would walk away from the lease. You'll feel more comfortable going into the negotiation when you have clarity about this beforehand.

Good luck!

Frye is president and CEO of Water Street Solutions: [email protected].

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