Small Changes = Big Results

Kathy A. Daily
Aug 12, 2021
Do you know about the 5% Rule?

I’ve 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% Rule in agriculture.

What is the 5% Rule?

“A 5% increase in price received, a 5% decrease in costs and a 5% increase in yield will often produce more than a 100% increase in net returns. The effect is cumulative, multiplicative and compounding.”

Price $3.80 +5% $3.99
Yield 180 +5% 189
Revenue $684 $754
Costs $425 -5% $404
Profit/Loss $259 $350
Difference

$91

In the example above, it results in a 35% increase in revenue, which isn’t 100%, but $91 is still a substantial increase nonetheless. This is a reminder that it’s the little changes that add up to big improvements. If someone told you that you needed to increase revenue this year by 35%, you would probably think they just fell off the turnip truck. However, if they asked you if you could increase your price by 5%, you would probably think that’s achievable. This same 35% increase over a three-year span would produce more than a 100% 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 crops is waiting for another increase. You just know the market has one more increase left, 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% 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.
  • Keep equipment longer.
  • 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% rule is easy to remember. I find myself thinking about it often in my profession. Now think about how this rule would impact your business and the impact it would have if you did this over several years?

 

Kathy Daily is the Managing Director of First Financial Bank’s Farm and Ranch Division.  Mrs. Daily has been an agricultural lender for over 25 years.

Want to chat with Kathy Daily about your operations and plans? Give her a call at: 888-398-4119. Or if you prefer, drop her an email here.

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