ROE

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.