Return on Equity

This cannot end well.  This cannot end well for anybody.  While there are clearly a host of forces at work in the world of agriculture today, the decision to remove 30-35% of the corn crop from the food supply will one day soon be acknowledged as a very bad mistake.  At the present time, if there is any benefit going to the consuming public through lower gasoline prices as is alleged by the ethanol supporters, it is being paid for almost exclusively on the backs of poultry, livestock and milk and  egg producers primarily in the United States.  There is just such a woven set of consequences to this that it is hard to pry them all apart.

    Reducing variation requires first an understanding of the source(s) of variation, the likelihood of mitigation strategies to successfully reduce the variation and the cost/benefit trade-off in source mitigation. As we have discussed, the typical farm record systems and the procedures which are considered practical to perform, work against developing the necessary data and anaylysis to gain a clear understanding of the return for variance reduction.

    However, one of the most powerful aspects of variance reduction strategies is that if they are successful, they favorably affect both revenue and cost simultaneously. This results in a double bang for the buck when considering the potential financial outcomes of variance reduction investments.

Agricultural production is kind of a strange bird compared to other business processes. In economic terms, one of the real challenges is something called “asset turnover”. Asset turnover is the time it takes to generate the value of all assets used in the production process through sales of finished products. Asset turnover is a key determinate of Return on Equity along with net income and level of leverage employed (see the Dupont Equation if you are a budding MBA).

If you think about it, crop producers purchase a $400,000 combine which they operate a few weeks a year and then it is a high-priced bird perch for the next 10 or so months. This is the killer of asset turnover in most biological production processes since many of them are not continuous.