ROE

It's time to get intensive. By that I mean we need to focus on existing but overlooked means to extract more value from our production. One way to do that is to focus on our revenue stream and the process which generates it so we become just as celebrated in our knowledge of this as we are for knowing our cost of production. Once that happens, we will have the components which make up profits (revenue and cost) and some really big changes will start to happen. But since almost no production workers have full access to the revenue numbers of the farm, they are continually focused only on cost of production and production metrics. Because of that, we still operate in a fifteen year old notion/and the "irrational exuberance" that believes if production rises and/or costs fall, we will automatically make more profits. The key error in this thinking is that pounds and pigs are not measures of value, they are measures of physical output and weight.

Normally, lenders allow contract producers with a dependable, modern production system to put up only 15-20% of the new cost of the building as inital equity. This is because the cash flow from the unit is dependable and uniform. Because such a small amount of initial equity is required, returns on equity (ROE), the primary measure of financial outcome tend to be very high for the grower.

As mentioned previously, the payment is calculated to reimburse the grower for all costs including principal and interest on the note at a relatively small initial equity. Returns on equity (ROE) can run in the 40-70% range depending on the length of the contract and the terms of the note. Usually, this return does not calculate or factor in the cost reduction in fertilizer which accrues to those who can use the manure nutrients to offset fertilzer needs on a cash crop such as corn. When these returns are included, net of application cost, the total returns to a contract wean to finish or finishing building become some of the best that can be achieved in agriculture.

    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.