How the Rule of 5% can unlock profits for your farm
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EmailSmall improvements are the key to maintaining positive farm profits.
Despite recent rallies in grain commodities, many projections continue to estimate farm profits at marginal, break-even levels for 2025. Estimates remain cautious about profit expectations due mainly to continued uncertainty and volatility in the markets. The uncertainty is largely driven by concerns in global supply, potential outcomes of foreign trade policy and even local demand. These types of concerns are especially challenging because they are largely beyond the control of any one farm. So, how does a farm navigate the uncertainty surrounding potential profitability? The answer lies in focusing on and improving areas the farm does control.
The 5% rule
Making improvements does not necessarily have to involve large changes. In most cases, many smaller changes or tweaks to your business may have an equal or greater impact compared to a single large change. This perspective can be found in “The Rule of 5%” first developed by Danny Klinefelter from Texas A&M University.
Klinefelter described the concept as, “A 5% increase in price received, a 5% decrease in costs, and a 5% increase in yield will often produce more than a 100% increase in net returns. The effect is cumulative, multiplicative and compounding.”
What does the 5% rule look like?
Using Purdue University’s 2025 Crop Cost and Return Guide, the 5% rule was applied to their estimate for low-productivity soil (Figure 1). As the example outlines, a 5% increase to the 166 bushel per acre corn yield is 8.3 bushels. A 5% increase to the market price of $4.10 per bushel is an additional $0.21 per bushel. A 5% decrease in expenses results in net savings of $29.60 per acre. These changes result in a net increase of $99.36 per acre after the 5% rule is applied. But how can this calculation be put into practice?
Increase of 5% to price received
Depending on the crops you raise, achieving a price gain may appear as a lofty goal in today’s market environment. The key to capturing any market gain is a combination of securing prices and minimizing losses.
Securing prices starts with knowing what you have to sell. Setting bushel objectives helps you to look at each sale individually and the price you want to receive. Further refine your price objectives by considering your delivery method. Grain elevators may not set a minimum quantity to establish a contract. This provides options to market bushels by one or more gravity wagons or by semi-load.
The next step is to consider pricing targets. You want your pricing targets to exceed your costs of production. Understanding your costs of production identifies the break-even price you want pricing targets to be above. Combine price targets with pricing decision tools (basis contract, hedge-to-arrive, forward contract) to help secure those prices when they are available. Marketing strategies are more effective when they rely on more than one pricing tool.
Minimizing losses starts with thinking about when to begin marketing. USDA’s Economic Research Service (ERS) highlights less than 20% of production is marketed under contracts during the growing season. Marketing before grain harvest can often provide opportunities to capture better pricing for sales during or post-harvest. If you need a place to start, an effective strategy can be to market the percentage of production not covered by your revenue crop insurance policy. If you have an 80% coverage level, pre-harvest marketing 20% of your production protects 100% of your crop from price risk.
Another key area for minimizing losses is considering where you are going to deliver your grain. Hauling costs between grain elevator locations is often the first factor. But discounts on grain can be an equally important factor in final cash prices. Does one elevator charge more for damage, moisture and shrink, low test weight, or foreign material? Basis trends are also important. Is the basis at a farther elevator stronger than the basis for a local elevator? The key about where to sell is to understand what the net cash price will be at your final sales destination.
Decrease of 5% in costs
Many costs are involved in field crop production. There are a few ways to specifically reduce fertilizer and crop protection chemical costs. For in-depth cost-saving options for your farm, reach out to your local MSU Extension educator.
Making the most out of what the soil provides is the first way to decrease fertilizer costs. Sampling your fields to know which nutrients are sufficient, deficient or overabundant takes the guesswork out of fertility and justifies the dollars you spend on fertilizer. With this foundation, you can begin to evaluate which nutrients are truly needed.
While soil samples give a good indication of nutrient concentration in the soil, these nutrients are not always plant available. Prioritize pH, which impacts both nutrient availability and a crop’s ability to utilize them. A failure to adjust pH becomes increasingly costly in all aspects of production, and lime is a relatively low-cost input for the return on investment. Use the correct rate and type of lime to meet your field’s needs. Since most nutrient uptake occurs through plant roots, invest in soil health and compaction prevention to allow sufficient root growth and nutrient interception.
Each crop has different fertility needs, so know what your crop truly needs and when it needs it. A good place to start for crop nutrient requirements is the Tri-State Fertilizer Recommendations. Each farm has different variables that make it a unique situation, so some of your fields may not match the recommendations completely. However, if you are applying significantly more fertilizer than recommended, consider why you are overapplying and if it is truly the optimum plan for your farm. Make sure fertilizers at a high risk of environmental loss are applied as close as possible to the crop’s critical use period(s) to optimize the economic impact. Watch the weather when applying these types of fertilizers to keep them in the root zone.
When it comes to crop protection, first start with a good foundation of genetic resistance. Good genetic resistance can mean the difference between a pesticide application or not. When deciding whether to apply a pesticide or not, hold firm to economic thresholds associated with the specific pest. In many instances, pesticides are applied without quantifying crop damage. Have a good scouting regime and use non-biased methods of evaluation. Avoid cheap insurance passes, such as throwing an insecticide in with a fungicide pass, unless the pest is truly present at economic threshold populations. This also reduces potential resistance among pests, and reducing pest resistance will save money in the long-term on crop protection products.
A relatively easy plan which can have large returns is proper sprayer calibration and maintenance. Accurate and timely pesticide applications will improve efficacy and reduce waste and costs. Operate sprayers at appropriate speeds to avoid kicking up dust that can coat crop leaves and reduce pesticide contact. Use the proper rates, adjuvants and application equipment to increase pesticide efficacy. When it comes to crop protection, not all products are created equally. Buying a more expensive product is worthwhile when it provides better control. However, an opportunity to decrease pesticide costs exists in cases where generic pesticides perform similar to the brand name product.
Many of these types of changes may cause some additional inconvenience in early adoption. But over time those inconveniences become a stable, integrated part of your system, leading to consistent cost reductions.
Increase in 5% in yield
Achieving a 5% increase in yield may depend on some factors we cannot control, like the weather. However, there are still some agronomic strings we can pull to potentially generate a yield increase. many options exist to decrease costs, small changes can be combined to create a yield increase. Again, many of these practices may be inconvenient during early adoption, but this inconvenience will decrease as they become integrated into your system.
Setting the crop up for success begins at planting. In fact, planting date is one of the biggest influences on yield, recognizing some years have less than ideal planting conditions. Beyond planting date, pay attention to plant populations, seed drop, and seeding depth. You can remember this through the phrase “plant pop., drop and depth.” Set your equipment to populations that will optimize yield. Soybeans especially have potential for success at lower plant populations, which will reduce seed costs. Check your seed drop regularly as you begin planting to make sure that the number of seeds per acre reflects your target population. Finally, make sure the seeding depth is correct and uniform. Crop uniformity leads to yield uniformity.
Consider using variable rate applications technology to optimize uniformity. While in the case of fertilizer application, the variable rate cost of product is similar to the field average cost of product, the improvement of uniformity can result in a higher field average yield.
In addition to planting at the right time, timing fertilizer and crop protectant product applications for critical crop periods can optimize yields. Leverage on-farm research programs to test out new products with little to no additional cost. Grants and cost-share opportunities may also be available to upgrade equipment or test out regenerative practices. There is value in having stable, good agronomic practices every year, and innovations can help keep your farm competitive in an ever-changing agricultural landscape.
Select high-yielding varieties for your conditions. While management decisions affect yield, genetic factors will also highly influence them. Check variety trial results against your field conditions. Many variety trials occur throughout the state, whether by seed dealers, agribusinesses, commodities or the university. For example, the Michigan Soybean Committee and MSU release soybean variety trial results every year with trial sites across Michigan. Compare the trial site conditions to your own farm and look at the yield results in conditions similar to yours. When trying a new variety, scale up slowly. Spread risk by growing several varieties. Ideally, every variety performs optimally, but realistically, higher yielders will compensate for lower yielders or adverse conditions.
Finally, calibrate your harvester and check for header loss. Harvest losses generally are not large, but if you can pick up a few bushels per acre by adjusting equipment, this may be the difference in achieving a 5% increase in yield. In many ways, increasing yields is dependent on factors out of our hands, like the weather. However, no matter what the season throws at you, agronomic options are available to help you reach more of your yield potential.
An important principle to remember about the 5% rule is that it is more than a simple calculation. In actual practice, you will be unlikely to decrease every line-item cost by 5%. But many of the variable costs for your operation could be reduced. The cumulative effect of those changes could be equal to or even greater compared to the 5% shown in the example. The same is true for changes in yields and prices. The key is identifying what areas of price, cost, and yield you can control and what changes may be possibilities for your farm.
