I have had the pleasure many times of hearing Danny Klinefelter speak at the Agricultural Bankers Conference. Mr. Klinefelter is a former professor at Texas A & M University and a legendary farm management guru. Mr. Klinefelter often spoke about the 5 Percent Rule in agriculture.
What is the 5 Percent Rule?
“A 5 percent increase in price received, a 5 percent decrease in costs, and a 5 percent increase in yield will often produce more than a 100 percent increase in net returns. The effect is cumulative, multiplicative, and compounding.”
This is a reminder that it is the little changes that add up to big improvements. If someone told you that you need to increase revenue this year by 41 percent, you would probably think they just fell off the turnip truck, but if they asked you if you could increase your price by 5 percent, you would probably think that’s achievable. This same 41 percent increase over three years would produce more than a 100 percent increase in net returns.
Price increases can generally be achieved by making a plan and sticking to it. Set the price you need and make it happen. I encourage people to work with a grain marketer if possible. The biggest problem in marketing your own crop is waiting for another increase. You just know the market has one more increase left, and then it drops. Determine your operations breakeven, add a profit, set your price, and then sell when you get there. A grain marketer will keep you disciplined. Remember, 90 percent of the people at the coffee shop didn’t hit the high either. They just said they did. You’re not competing with your neighbors; you’re running a business.
I’m not an agronomist, so I’m not going to try to tell you how to improve your yield, but speak to someone who is and ask them for some suggestions. Farmers are very prideful and typically don’t like to ask for help, but we need to get over that and seek input from others. You know the farmers in the area whose crops always look good. Ask some questions and find out what they are doing differently. Maybe they are using a new drought-tolerant seed or one that is inclined to grow faster and stronger. Ask your seed salesperson or the co-op what’s new and shows promise.
Cost savings might be recognized from a variety of things:
• More precision chemical application instead of treating the entire field
• Taking advantage of prepaid discounts
• Paying on time to avoid late fees
• Getting updated quotes on property insurance on a routine basis
• Purchase in bulk with other producers
• Refinance higher interest rate loans
• Limit the number of suppliers to get better pricing – ask for a quote and shop around
The 5 Percent Rule is easy to remember, and I often think about it in my profession. Now, think about how this rule would impact your business and its impact if you did this over several years?
Kathy Daily is the Senior Vice President of First Financial Bank’s Farm and Ranch Division. She has been an agricultural lender for more than 25 years.