Tools to Make ROI Calculations a Walk in the Park
Updated: Jul 26, 2021
In many cases, the world of precision ag equipment can seem like the wild west, with no clear direction and lots of experimentation, successes, and failures guiding your path. Farmers can make better decisions about integrating precision ag into their current farming operations with a better understanding of the return on investment (ROI) of a precision ag purchase.
John Larkin, Marketing Manager for 360 Yield Center in Morton, IL says that one place to start is to determine how many acres are required to cover the cost of the equipment. After this sort of break-even analysis, a farmer will understand how many years it might take to “pay off” the investment, understanding that all subsequent years are netting profit.
Larkin tells it like this: “If a $5,000 attachment can generate an additional $5 per acre, it will cover its cost in 1,000 acres of use. For a 1,200-acre producer, they’ve covered their cost in the first year and all subsequent years are profit.”
This type of analysis is an important service 360 Yield Center provides. Each precision ag product that 360 Yield Center sells has its own ROI calculator waiting for individual farmer inputs like acres, equipment cost, projected commodity price, and expected yield. These calculators are available at 360ROIcalculators.com.
When considering this type of ROI calculation, remember that a significant change in practice will require its own ROI decision. Larkin advises that analyzing if a shift to strip till or a shift to organic production will work for you is a macro ROI calculation that requires investments in equipment, storage, and labor. In this case, the ROI calculation requires a farmer to investigate each of these factors in an additive calculation. A micro ROI calculation would analyze if a new piece of equipment will work for a specific farmer. Both ROI considerations are very important and should not be overlooked.
Sometimes, the farmer’s confidence in the final ROI might still be low, even after thoughtful consideration of all of these factors.
“To calculate ROI, you need to plug in a number for the added revenue generated by the input or equipment. The revenue number is generally based on yield increase from the new purchase, so you must make assumptions about the yield response. Sometimes there is good data on yield response. Often, there is not. If your confidence in the assumption is low, there is less value in the ROI comparison,” he said.
Using calculations like these helps turn a precision ag investment or a considerable shift in farm management into understandable numbers and reasonable risk factors. Larkin sees this as a big advantage. The emotional aspects of a precision ag purchase are eliminated with thinking like this. After all, no one wants to allow their preferred equipment color or a desire to compete with the neighbors to drive big business decisions.
Larkin says that the emotional component doesn’t have to be ignored, but with a successful ROI calculation, a farmer can better understand the value of her emotional pull to a long-standing brand preference. The preference isn’t ignored, but simply better understood and quantified.
Things like service agreements, inspection services, and customer service activities with a known cost should be added into the cost side of the ROI calculation. Factors like dealer relationships, response time, machine up-time and other less tangible aspects become part of the emotional component of the decision-making process. These factors have different value to each farmer.
Wherever you make your next precision ag purchase, ask your dealer about the ROI of the equipment or management shift. Consider the tangible benefits of the purchase and work to eliminate the emotional factors in your decision. Place higher value on the ROI calculations for which there is confidence and less value when cost and return numbers are just assumptions.
Use these tools to turn your journey through the wild west to simply a walk in the park.