We have some 100 acres of hay and pastureland, 800 acres of corn and 800 acres of soybeans, along with 100 head of beef cows. With no big surge in grain prices, we must find which enterprises make more money and increase their size. My son says we shouldn’t do anything based on current profitability due to prices and costs changing yearly. Who’s right? — J.R., North Dakota
Does McDonald’s know the profit margin of every food item sold, with or without a promotion? Does Walmart give shelf space based on product line profitability? And for each firm, do their costs not constantly change?
Enterprise profitability analysis in multiproduct line Midwest ag is a must for elementary business management. Yes, costs and revenue constantly change, but we have to make basic assumptions for comparative analysis.
In our case, why are we a continuous corn farm in western Illinois? Because given our soil types, rainfall, manure resources and vertical integrations, continuous corn is more profitable than a rotation with beans 80% of the time. If we add wheat to the rotation, continuous corn is more profitable 92% of the time.
We use this example because it runs counter to the traditions of rotation and wouldn’t have been identified without enterprise analysis.
We’ve grown many types of corn from popcorn to white waxy corn, determined mainly by comparative enterprise profitability analysis. Yes, there were some major assumptions necessary in the areas of yield drag and reduced costs versus the price bonus, but the homework increased our profitability.
Where it gets tricky is the gray area where enterprise diversification might trump annual profitability analysis as a sound financial decision. But at least know the dollars you are trading for the amplified risk management.
Jerry and Jason Moss operate Moss Family Farms Inc. Got a question? We’ll post it anonymously if you want. Contact them at [email protected]