The “starting five” may sound like a basketball team ready to start the game, but it is actually five adjustments happening in agriculture today. Based on my discussions with producers and lenders, several businesses have identified specific adjustments helpful in today’s economic reset.
With low commodity prices, some producers want to produce their way back to profitability. Several try this method, but even increased production cannot compensate for unsustainable expenses. Astute managers are focused on the cost side of the equation. In fact, according to University of Minnesota’s FINBIN Farm Financial Database, farm businesses in the lower 20 percent of profitability have production yields similar to the top 20 percent.
1. Examining the starting five, negotiations on cash rent and other lease arrangements appear to be the first priority. Again comparing the bottom 20 percent of profitable businesses with the top 20 percent, the more profitable group saves an average of $60 per acre for rented and leased ground. This is a significant difference.
2. A second area of adjustment is in input costs. This includes fertilizer, crop protectants, transportation and drying. Once again, the upper tier of profitable businesses seem to be spending $50 per acre less, on average, than the lower tier.
3. Those in the higher profit classification have also shown a focus on family living expenses. In many cases, businesses and families reduced family withdrawals by $25 to $30 per acre, according to FINBIN data. In fact, those in the top profit segment cut even more. This requires a personal budget and crucial conversations with all family members. Credit cards must be monitored closely along with any costs that become out of line with the budget.
4. Shifting to the revenue side, the year 2016 is a good example of the need to be prepared to seize a profit window when it appears. Data shows that farms in the top 20 percent of profitability are incrementally better at marketing and risk management programs. Specifically, they wait for the margins to be profitable, not for the largest profit margin possible.
5. Finally, the commodity super cycle was favorable for high levels of capital investment and specializing operations. Now inside an economic reset, the top-level producers reduced their capital investments specifically, on machinery and equipment. In addition, they are diversifying their operations. One upper Midwest farmer told me that manure from his livestock operation was his most valuable product in diversification expense management.
This wraps up the “starting five” expense cuts from the road. While this certainly is not a complete list, these practices and cost savings continue to happen on farms in the top 20 percent of profitability today. Similar to the different talents of basketball players, each of these areas has their own strengths and weaknesses, but together they are making a difference!