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Surviving an economic downturn in the agriculture industry

My last column highlighted the time period of 2007 to 2012 as an aberration of profits for grain producers; noting post and prior time periods exhibit more normal profits. The data I used in my previous article was from the Center for Farm Financial Management’s data system, FINBIN. In order to better understand ways to survive this economic downturn, we need to once again examine FINBIN’s excellent data.   

Many in the agriculture industry do not see a historical return of a 1980s type of scenario. In the recent 2007 to 2012 super cycle, more land was purchased with the use of cash and profits from agriculture and related industries such as energy, minerals and other lucrative rural industries. The profits in recent years averaged $33,000 compared to $67,000 prior to the super six-pack years of 2007 to 2012. The median profits during 2007 to 2012 were approximately $170,000 in 2014 constant dollars. To put this into perspective, the latest two-years’ profits are one-half of what they were in the 2000 to 2006 period, and five times less than the super six-pack years of 2007 to 2012.

Proactive producers have observed this trend and continue to make tough adjustments in their business models. Such adjustments may include:

  • Shedding marginally productive land, both rented and owned.
  • Releasing rented land where landowners are not willing to adjust existing obligations to accommodate more difficult economic times.
  • Limiting capital expenditures, such as equipment, until better economic conditions prevail.
  • Moderating family living withdrawals and dividends to appropriate levels.
  • Exploring potential for diversification such as incorporating beef cattle into a grain operation. 
  • Reducing the human side of farm assets to improve efficiency and productivity.

While difficult, decisions of restraint during the super cycle of profits put producers at an advantage going into this economic downturn. Many of them forward priced with a guaranteed profit instead of waiting for possible higher profits. This looks like a smart strategy from today’s perspective.  My point to lenders and regulators is that even with an industry in an economic down cycle, such as the grain industry, good managers can make swift, incremental adjustments and continue to make a profit.

As the economic downturn continues to unfold, adjustments will be needed not only for producers but for farmland owners, as well.  Adjustments may be interesting in 2016 for landowners and operators alike. Lastly, we must continue to be mindful of one of agriculture’s largest and fastest economic adjusters, the weather. 

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