By: Chris Bruynis, Assistant Professor and Extension Educator
There are a few things that every business person knows about margins. There are typically only two ways to improve them; either increase revenues or reduce costs. Although this is very simple to say, making the management decisions to affect movement on either front is often difficult at best. Included in this article are some ideas that farmers can consider with today’s lower crop prices and projected lower profit margins.
- Complete a financial analysis. Knowing where the business stands financially will be critical in developing a plan to survive this period of low margins. This will provide insight into the how drastic the measures need to be to weather the storm. Good financial capacity will allow farm families to borrow new money, restructure term debt, or even make interest only payments on some loans. This does not mean to imply you shouldn’t look at other options in conjunction with this strategy. Contact your Extension Educator if you want assistance in calculating your current financial position.
- Lower the cost of production. This is paramount! There is significant variation among farmers in the cost of production depending on size and scale of the operation. Items such as cash rent, input costs, operating costs, and equipment depreciation can greatly affect this cost. Strategies to lower input costs can include: setting realistic yield goals and adjusting your inputs accordingly, selecting lower priced inputs providing they preform similarly, and making sure the input generates more that its cost (what might have paid for itself with $6.50 corn may not at $3.75). Knowing the true cost of production will allow farmers to look at their cost structures to make the necessary changes.
- Improve grain marketing skills. Grain marketing strategies vary somewhat depending on on-farm storage, crop insurance participation, and total bushels available for sale. Farms with 20,000 bushels to sell have fewer pricing opportunities compared to 200,000 bushel farms especially since many contracts are made on 5,000 bushel increments. Regardless of the farm constraints, it is critical to set price targets that are realistic and based on the farm’s true cost of production. Also the ability to use available marketing tools such as option contracts, hedge-to-arrive contracts, etc. and understand risk exposure created or protected by each will be important.
- Increase profitable enterprises. Most farmers are creatures of habit and do not easily abandon their crop rotations or shift to new crops. Farmers will need to closely evaluate the possibility of increasing acres of one crop over another in 2016. Farmers may also wish to adopt a different cropping strategy such as double cropping to maintain profitable income levels. Be careful not to exchange short term profitability over long term profitability. However, if the wolves are at the door, you may have to what is necessary.
- Reduce unproductive assets. Growing crops on marginal soils or rented ground with extremely high rental rates may be good candidates for removal from the business portfolio. Farmers need to weigh the loss from farming these properties compared to the fixed costs that will be spread over the remaining acres to determine if this is a good decision. Other ideas could include selling unused and underutilized equipment on the farm. However, be careful to examine the tax liability of the sale of these assets so that it does not consume the income generated from their disposal.
- Add additional revenue streams. Additional revenue streams can come from a few sources, but most commonly this would be the addition of off-farm employment for one or more of the adult family members. This lowers the need for the farm to generate all of the family living expenses and health care costs. Other ideas would be the addition of other agricultural production enterprises or agritourism/agritainment enterprises. Make sure you have studied these options thoroughly to predict the positive cash inflow they may generate.
- Talk to your lender. Believe it or not, your lender really wants to see you succeed and will work with you toward that end. The earlier you communicate with your lender, the more options which will be available to you. Bankruptcy auctions rarely provide the cash flow needed to repay the farm loans and meet the other financial obligation of the farm family.
- Cooperation among neighbors. Years ago, farmers understood that by pooling resources they could generate increased profits. This was evident by the number of supply and marketing cooperatives that once dotted the countryside. Is it time to create farming arrangements that bulk purchase inputs, own equipment, produce greater marketing opportunities, etc to maximize income? What about each farmer specializing in a farming practice such as planting, spraying and harvesting and work together to capitalize on the specialized strength of each other? These strategies have worked in other countries and could be beneficial under the right circumstances.
- Work toward full employment. This is not to suggest that grain farmers are not fully employed. However, there are plenty of examples where farmers have added enterprises to their business portfolio to utilize their and hired labor more fully. Examples include excavating, construction, painting, livestock, machine shop, and custom hire. There is even an example of a farmer that is a big ten basketball referee during the winter when row crop harvest is finished.
- Punt. This is not intended to be funny or flippant, but every farm business owner needs assess when exiting the business may be the best alternative for them. At some point, preserving wealth should become more important than continuing against all odds. This might look very different for someone that is 35 than someone 65 years old. If exiting the farming business is the correct management decision, make sure to visit with your tax accountant to create the proper exit strategy. Remember for the past several years, many farmers have been focused at reducing taxes and thus have created a substantial tax liability for the business.
Period of tight margins have plagued farmers many times throughout history. The last time we saw this in row crop farming was in the early 1980’s. It followed a very profitable period through the late 1970’s similar to what we have just experience in the early 2010’s. Currently, the nation’s farm balance sheet is in much better shape relative to 1980, but that does not relieve the responsibility of operators in making management decisions necessary to keep it there.