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Take ownership, strategize and focus on earns and turns.

David Kohl, Contributing Writer, Corn+Soybean Digest

July 2, 2019

2 Min Read
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PashaIgnatov/Getty Images

Agriculture producers often ask, “When are commodity prices going to return to the

robust years experienced during the super cycle?” The quick response to this question is that the super cycle was an unusual, extended period of high commodity prices usually experienced only every 40 years.

The low-margin era could continue to affect the agriculture industry for a period of time. Technology has resulted in supply exceeding demand in many parts of the globe. Layer on new farmland and resources coming into production in South America, Eastern Europe, and Africa, and supply appears to only be growing. Couple these factors with weather changes, which could allow triple cropping in South America to become the norm and double cropping in the upper Midwest a possibility, and the supply-demand equation indicates continued margin compression.

Shifting to the balance sheet, land prices have maintained resilience despite the cash flow crunch. This strength in land values is due to investors buying farmland, existing older producers who own farmland, and an era of low interest rates. Strong farmland values result in higher land rent, which further suppresses margins.

What are the management tactics needed to successfully manage through reduced margin expectations?

First, take ownership of your production, marketing, and finance data. Develop a record keeping system that builds in efficiency for your operation. Monitoring revenue and expenses line by line with a trend analysis is at the top of my list.

Next, strategize and execute a marketing and risk management plan. This important management tactic will be a difference maker in the future. Managing expectations through a mindset of “base hits” versus “home runs” in the marketplace may be the mode of operation going forward.

Finally, management must have a drive toward competitiveness with a focus on earns and turns. Agriculture producers with a high business IQ focus on their earning potential by maintaining their profit margin. These same producers also pay attention to their asset efficiency or capital asset turnover to limit idle assets. Earns (margin) multiplied by turns (capital asset turnover) equals return on assets, a measure of profitability.

The aforementioned elements, combined with a balanced expectation for living expenses or management withdrawals, can be a formula for success in a low-margin era.

About the Author(s)

David Kohl

Contributing Writer, Corn+Soybean Digest

Dr. Dave Kohl is an academic Hall of Famer in the College of Agriculture at Virginia Tech, Blacksburg, Va. Dr. Kohl has keen insight into the agriculture industry gained through extensive travel, research, and involvement in ag businesses. He has traveled over 10 million miles; conducted more than 7,000 presentations; and published more than 2,500 articles in his career. Dr. Kohl’s wisdom and engagement with all levels of the industry provide a unique perspective into future trends.

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