ROI Modeling
Why Do That?
Selling grain based on Return on Investment (ROI) is a good idea because it provides a structured, profit focused approach to decision-making in the unpredictable world of agricultural markets. ROI measures the profit (or loss) generated relative to the cost of production, offering a clear benchmark that prioritizes financial stability and efficiency. Here’s why it’s effective, especially in the context of strategies like the "20% Rule":
1. ENSURES PROFITABILITY
How It Works: ROI calculates profit as a percentage of costs (e.g., [(Selling Price - Cost of Production) /Cost of Production] × 100). Selling when ROI exceeds a target (e.g., 20% above COP in the 20% Rule)guarantees a profit margin.
Why It’s Good: Farming involves high input costs (seed, fertilizer, labor). Focusing on ROI ensures you cover these expenses and secure a surplus, rather than selling at market price without regard for costs.
Example: If your cost of production (COP) is $4/bushel, selling at $4.80/bushel (120% COP) yields a 20%ROI ($0.80 profit ÷ $4 cost). This locks in gains regardless of market swings
2. REDUCES RISK
How It Works: By setting an ROI threshold (e.g., 20% in the 20% Rule), you sell early when prices hit that mark, avoiding the risk of holding grain for speculative gains that may never materialize.
Why It’s Good: Grain markets are volatile—prices can drop due to weather, oversupply, or geopolitics.An ROI-based sale transfers risk to buyers sooner, protecting against losses.
Example: If corn hits $4.80/bushel (20% ROI) in November, selling avoids a potential crash to $4.20 byspring, which would shrink ROI to 5% or less.
3. ALIGNS WITH CASH FLOW NEEDS
How It Works: Selling at a target ROI (e.g., 120% COP) generates immediate cash, ensuring funds for bills, debt, or reinvestment.
Why It’s Good: Farming requires liquidity—delaying sales for higher prices can strain finances. ROI based selling prioritizes cash flow over speculative hope, as seen in the 20% Rule’s “Cash is King” step.
Example: Selling 80% of your grain at $4.80/bushel in October covers $4,800 in costs plus bills, leaving20% for speculation without jeopardizing operations.
4. CAPITALIZES ON MARKET VOLATILITY
How It Works: ROI targets let you act quickly when prices spike, securing above-average returns duringfleeting opportunities.
Why It’s Good: Modern markets swing widely—waiting for the “perfect” price risks missing peaks. ROIgives a clear trigger to sell profitably during volatility, balancing safety and upside.
Example: If wheat jumps to $6/bushel (50% ROI over $4 COP) due to a supply shock, selling capturesthat windfall instead of hoping for $6.50, which may never come
5. ENCOURAGES DISCIPLINE
How It Works: ROI provides an objective metric, reducing emotional decisions like holding grain out of greed or fear.
Why It’s Good: Markets don’t care about sentiment (as noted in other rules). An ROI target enforces a plan, preventing “hopeium” (e.g., waiting endlessly for a rally), as emphasized in the 20% Rule’s discipline focus. Example: At $4.80/bushel (20% ROI), you sell per the plan, avoiding the temptation to hold for $5, whichcould backfire if prices drop to $4.50.
6. Balances Speculation and Stability
How It Works: Selling a portion at a set ROI (e.g., 120% COP) locks in profit, freeing up grain for speculation with less pressure.
Why It’s Good: It combines conservative cash generation with calculated risk-taking. The 20% Rule uses this—sell most at 20% ROI, speculate on the rest only with 80% confidence.
Example: Sell 1,000 bushels at $4.80 (20% ROI = $800 profit), then speculate on 200 bushels for a 10%rally ($5 to $5.50), risking less while chasing upside.
7. ADAPTS TO MARKET REALITY
How It Works: ROI targets can adjust based on current prices and costs, keeping goals realistic (Step 1 ofthe 20% Rule).
Why It’s Good: Fixed price targets (e.g., $5/bushel) may be unachievable in low markets or leave moneyon the table in high ones. ROI scales with conditions, ensuring relevance.
Example: In a bear market with $4.50/bushel prices, 120% COP ($4.80) may be tough, so you adjust to110% ($4.40) for a 10% ROI, still profiting.
8. SIMPLIFIES DECISION-MAKING
How It Works: ROI distills complex market data into one number, guiding when to sell or hold.
Why It’s Good: Farmers juggle weather, storage, and global trends—ROI cuts through noise with a clear “yes/no” (e.g., “Is 20% ROI met?”).
Example: If COP is $200/acre and yield is 50 bushels/acre ($4/bushel), selling at $240/acre (20% ROI) is asimple trigger, no overthinking needed.
POTENTIAL DOWNSIDES (AND MITIGATION)
Missed Peaks: Selling at 20% ROI might skip a 50% rally. Mitigation: Pair with speculation (e.g., 20%Rule’s 80% confidence step) to catch bigger gains on a portion.
Cost Variability: COP differs by farm, complicating ROI. Mitigation: Track your specific costs annually foraccuracy.
CONCLUSION
Selling grain based on ROI is a good idea because it prioritizes profit, reduces risk, and aligns with cashflow while leveraging volatility and enforcing discipline. It’s a farmer’s compass in chaotic markets—ensuring you don’t just survive but thrive by locking in gains early and speculating smartly. In the 20%Rule, ROI anchors the strategy, making it a reliable foundation for both stability and opportunity.
AI PROFITABILITY CALCULATIONS
Using the 20% Rule, expect a profit of $90,000-$130,000 (18.5-27% ROI) on 120,000 bushels in a typical year, assuming a mix of safe sales and modest speculation success. Best-case scenarios could hit $192,000 (40% ROI) with aggressive speculation, while worst-case still nets $88,800 (18.5% ROI).
What We Do
Insight Ag Marketing helps remove the uncertainty associated with grain marketing.
We created a system that takes the chaotic market and turns it into predictable results.
This solves the I don’t know what to do and is this a good decision question.