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Think differentOne principle—increasing return on assets—motivated farmer Ron Miller to share equipment with a neighbor in Towanda, Ill. They prorate their combined equipment expenses proportionally by the number of acres each farms. “We sit down twice a year and even things up. A few years ago, a third party went in on the sprayer, lowering those costs further,” he says.
Susan Winsor
September 23, 2014
2 Min Read
In the long run, the key to success in a commodity business is being a low-cost producer. That advice comes from Purdue Distinguished Ag Economics Professor Michael Boehlje. “When you wake up each day, tell yourself, ‘My job today is to lower my costs,’ he says. “The only trouble is that Ukraine woke up seven hours earlier and got a head start on it.”
The following are his pointers for success in turbulent times:
1. Manage operating risk
Keep cash costs and land rents in line with revenues.
Recognize continued leaner profit margins and margin risk.
Take advantage of forward pricing and crop insurance to manage risk.
2. Manage money and capital
Protect your working capital. Extend your terms for items purchased on 10- and 20-year terms. “Now is the time to refinance that land on a 20-year mortgage,” Boehlje says.
Lock in today’s relatively low interest rates on capital expenses.
Deleverage.
3. Emphasize execution
Do fewer things better. Identify areas that lose money.
Use standard operating procedures (SOPs). “Every manufacturing plant uses SOPs, and you are a biologic manufacturer,” Boehlje says.
Optimize data management.
Simplify operations and automate where possible.
Pay attention to details.
4. Increase asset utilization (asset turnover)
Observe 24-hour-per-day operators. Trucking, many factories and the airline industry do this to increase returns on assets. For example, use autosteer.
Lease rather than buy. Short-term operating leases increase asset turnover.
Use joint venture and shared machinery to intensify production.
Think in terms of “earns and turns,” the key financial metrics known by every machinery dealer and hardware store owner. Stated differently, they are operating profit margins on sales and asset turnover.
Outsource or custom farm. “You already outsource your taxes and legal work,” Boehlje says. “Recognize where you capture value by hiring things done.”
5. Increase margins
Control costs. You have to measure before you can manage.
Buy right.
Use best management practices and technology.
Market rather than price.
6. Use time efficiently
Focus on management.
Hire skilled employees.
Use scheduling and workflow planners.
Develop standard operating procedures.
7. Grow volume and sales
Increase productivity.
Generate more volume with less investment.
Joint venture for size and volume to gain market access.
8. Focus on a strategy
Practice operational excellence.
Develop customer intimacy.
Focus on product and process innovation.
9. Create value for your customer
Understand your customer and what you can do to create value for him or her.
Differentiate on service, such as quality, storage and just-in-time delivery.
10. Get smart
Use consultants.
Network with successful farm and non‐farm business managers.
Develop management skills.
11. Think like a CEO
Manage people, money, relationships and strategies.
Think more strategically; farmers are good operationally.
“Do these things now,” Boehlje urges. “I’m worried about profitability, especially in 2016.”
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