Discounting Your Profits?

Once again we are with Mike, the general manager of our mythical multistation grain cooperative located somewhere in the Western Corn Belt. Today, Mike is discussing the company’s P&L with his accountant and the conversation is not going well. Nevertheless, Mike’s temporary misfortune sheds some much-needed light on how discounts can rob you of profits and productivity, and FEED & GRAIN examines ways to minimize the impact discounts have on your bottom line.

Mike sits fuming in his office, looking at the bottom line of the monthly P&L. He hasn’t looked at the details but his anger is building.

“What happened last month, Alan?” says Mike to Alan, the company accountant. “These corn and soybean numbers are terrible — I can’t imagine what caused the losses. I know the basis weakened and we should show a small loss on our company-owned inventory, and on some forward contracts, but we had already estimated that for the bank. This is much bigger!”

Alan takes a deep breath; “I think you’ll find most of the answers on page three Mike, most of the problem is in discounts.”

“No way,” Mike replies, “not possible”; but slowly he turns the pages one at a time looking at each category. Sure enough, though, there it is. “How could we possibly take that much in discounts?” he ponders aloud.

“I wondered the same thing, Mike, so we looked through our settlements to verify discounts,” Alan notes. “I started with corn because we shipped over 1.5 million bushels last month and a lot of the cars that went to the ethanol plant graded 16% moisture or slightly over.

“The ethanol plant discounts 9¢ per bushel for 16.1-16.5% plus 2% shrink. On $6 corn the shrink alone costs 12¢. We took a 21¢ hit on all those wet bushels. But there’s worse news,” he says sheepishly. “I discovered that a lot of the soybeans shipped out of the Greentown elevator tested just over 13% on moisture and were discounted 1 ½% of contract price.

“Don’t ask me how they managed to test over 13% — that’s a different story,” Alan continues. “We priced those beans in March — the cash price was over $15 so that moisture discount cost us over 20¢ per bushel. To add insult to injury, about 25% of the beans also tested 1 to 1.5% FM, which cost us a bundle in shrink as well.”

The bad news kept on coming for Mike, as Alan recounts his concerns that the locations that were shipping don’t show equivalent inbound moisture discounts from prior months.

By now Mike is furious. He’s worked hard to tighten controls, and even implemented training sessions on proper handling of ground piles. He thought grain quality issues were well under control and has been spending most of his time on finance issues and meeting with bankers, and monitoring companywide risk. Keeping sufficient working capital and credit lines has been a full-time job!

But Mike takes a deep breath — getting mad won’t solve the problem. Instead he calls the operations superintendent into the office.

“Jerry, have I got a deal for you!” he says with a purposeful, wry grin. “I need you to upgrade our program on grain handling and quality.” Mike shows Jerry the “discounts” section of the P&L. “Clearly my efforts haven’t been enough and I’m counting on you to get us back on track.”

Mike knows his business can’t afford to take shrink or discounts as percent of price on grain when corn’s over $6 and soybeans are $12 or higher, and wheat’s over $8. After careful consideration Mike lays out the following items on Jerry’s “to do” list:

Meet with all our employees who grade inbound grain and re-assess their skills and knowledge. If they need training, arrange for a qualified inspector to hold a class for us. Clarify that we expect inbound grain to be graded properly and marked on the tickets. No special deals or “hair-cutting” grades. It isn’t fair to reward farmers who bring us off-grade grain at the expense of other patrons.