A cycle resists a bad year when revenue still pays its cost after price and harvest fall as far as they have fallen on your own farm. Before planting, write three distances in percent: how far the price can fall, how far the harvest (bushels an acre) can fall, and how far both can fall in one year. On a 2,400-acre spring wheat farm in north-central Montana (example figures, worked below), the price can fall 20 percent, the harvest 22.2 percent, and both together only 11.2 percent. An ordinary bad year there, with the price 15 percent and the harvest 20 percent under their averages, leaves the farm $60,000 short of its costs.
Write the combined distance first, and next to it the price at which you act.
How far can price and harvest fall before the margin is gone?
The margin is the revenue you expect minus the cost of the cycle. On the Montana farm, $600,000 minus $480,000 leaves $120,000, which is 20 percent of the revenue. Each of the three distances is a room: the share by which something can fall before revenue only just pays the cost, the point called break-even.
The room on price is the margin divided by the revenue, 20 percent. At a price 20 percent lower, $5.00 a bushel instead of $6.25, revenue falls to $480,000 and equals the cost. That price is the break-even price.
The room on harvest is larger, 22.2 percent, because a smaller harvest also costs less to bring in. Of the $480,000 of cost, $60,000 is paid per bushel for custom combining and hauling to the elevator. That part shrinks with the harvest. The other $420,000 is already spent, whatever comes off the field.
The room on both together is the smallest, 11.2 percent. Revenue is price times harvest, so when both fall by the same share, revenue falls by almost twice that share while the $420,000 stays whole. The year that hurts can bring both.
The shock resilience calculator finds all three rooms from your own revenue and cost.
Which costs shrink with a smaller harvest?
You make this call line by line, and your accountant’s split of fixed and variable costs does not answer it. Seed, fertilizer and crop protection are variable in any textbook, yet they are paid before anyone knows the crop failed, and a short harvest gives none of them back. For this calculation they sit with the costs that stay.
The question for each line is whether you pay it per unit that leaves the farm. Go down last cycle’s invoices and put each line on one side.
- Shrinks with the harvest: custom combining paid per bushel, hauling to the elevator, drying and cleaning charged per load, and storage paid per bushel stored.
- Already spent: seed, fertilizer, crop protection, fuel burned before harvest, land rent, machinery depreciation, wages, insurance, interest on the operating loan, and custom combining paid per acre.
Two lines need a decision. Custom combining depends on the contract, not on the work: paid per acre it is already spent, paid per bushel it shrinks. Your own combine is the second. It burns less fuel on a thin crop, but not proportionally less, because it still crosses the whole field. Put the part that scales with the bushel on the shrinking side, leave the rest, and write down how you decided.
Getting the split wrong costs more in one direction. Leave the harvest-linked line blank and the calculator treats every cost as spent. The room on harvest falls back to 20 percent, the same as the price, and the room is understated. Declare all $480,000 as shrinking and the calculator says the harvest could fall to zero and still break even. In that arithmetic, a crop that does not exist costs nothing to bring in. The result is right inside the formula and absurd on the farm.
A crop budget drawn at the expected yield, like the one in what a crop should leave you, counts harvest costs as fixed. That fits the question of what the cycle should earn. Used for this question, it gives price and harvest the same room, so keep the two rooms apart.
How does that room compare with a normal bad year?
A room says little until it sits beside the farm’s typical swing: how far an ordinary year’s price or yield lands from its average, in percent. You get it from the farm’s own yearly figures, as the standard deviation divided by the average, and the calculator does the division from a list of years. The example farm’s eight years of records give 15 percent for price and 20 percent for yield.
The calculator’s resilience index asks how many of those swings fit inside the combined room. If price and yield fall in the same year, each by the same fraction of its own swing, how large can that fraction get before the margin is gone? Here it is 0.64. A price 9.6 percent down and a harvest 12.8 percent down at once use up the $120,000, and each fall is smaller than one swing.
Under one, a year with one ordinary swing in each takes the margin. From one to two, it takes more than one swing in each, which your records may already show. Above two, it takes more than two swings in each.
The index measures distance, not odds. Turning 0.64 of a swing into a chance of loss would need an assumption about how prices and yields are spread, and the calculator makes none. The FAO draws the same line for investment projects: two dimensions should be considered, sensitivity and probability. A switching value, the point at which the result reaches zero, answers only the first.
Beside the index, count. Go through your years and mark those in which price and yield both ended under their averages by at least the combined room, 11.2 percent on the example farm. A count assumes nothing about odds, but eight years is a short list, and a zero may only mean the list is short.
Take the swing from your records, not from memory. A Brazilian study asked 90 maize farmers for their price expectations, and in every case the standard deviation from the questionnaires was lower than the historical one. It covered one crop in one country, and the direction is a reason to open the records. A narrow swing flips the reading. Type 10 percent for price and 12 for yield instead of 15 and 20, and the index rises from 0.64 to 1.02, though nothing on the farm changed.
Eight years is also a short record. Zampieri and colleagues built a published indicator of how steady crop production is. They report that its uncertainty is under 30 percent only with at least 30 years of data. Shorter series and wider yearly swings give larger errors. Eight years gives a rough measure, far better than none.
Will a short crop in my area raise the price I get?
Your own short crop will not. A United States Department of Agriculture report notes that price and yield on a farm need not be related, because the output of one farm does not noticeably affect market prices. The report calls the offset, a low yield arriving with a higher price, a natural hedge.
For corn, outside major producing areas, it says, the natural hedge is much weaker, so low yields and low prices are more likely to come together. It adds that wheat has weaker natural hedges than corn, because wheat production is less geographically concentrated. It also finds that yield variability is higher at the farm level than at the State or national level, so use your own farm’s yields and not the county average.
You can check which case is yours. Line up your years and look at the weakest harvests. If the price was above average in those years, the offset works for you; if the price was low too, it does not. On the example farm, the two weakest harvests, 29 and 31 bushels an acre against an average of 40, came with prices of $5.40 and $5.70 against an average of $6.25. The offset does not work there, so 0.64 stands as it is. Where the offset works, the real index sits above the calculated one.
What goes on the page first, and what does it decide?
Last cycle’s invoices, the price record and the yield record are enough for a first page. The page ends in a decision with two levers. You can widen the room, with a bigger margin from lower cost, higher yield or a better price. Or you can narrow the swing, with a forward contract, crop insurance or staggered planting dates. The levers pull against each other, because every protection is paid from the margin, and the margin is the room.
Under one, decide before planting and put a price on each lever. On the example farm, cutting the cost from $480,000 to $410,000 lifts the index to 1.06. Locking the price on part of the crop costs money too, and the price and hedging scenario calculator puts a number on it. A fragile reading with no change on either lever means the farm carries the risk; write that down as a decision, with a name on it.
Write the trigger from the combined room, not from the room on price. On the example farm, that means acting when the price falls 11.2 percent under the $6.25 expected, at $5.55 a bushel. Waiting for $5.00 assumes the harvest comes in as planned. Write the price, the action and the name of the person who acts.
Check the price behind the revenue too. An expected price 10 percent above your own average has already used about nine points of the 20 percent room on price, because the average sits 9.1 percent under it. The room follows the margin, so one cost increase can turn a roomy cycle tight. Date the page and write what would make you redo it.
Which farm risks come first ranks the farm’s risks; the combined room puts a number on the year two of them arrive together. More on measuring what the farm is exposed to is in sustainability and risk, and farm management shows where a reading like this one fits in running the whole farm.