Agricultural profits depend on seizing opportunityAgricultural profits depend on seizing opportunity
Since 1995 the top 25 percent of farm managers earned more than 10 percent on their investments.Ag lenders also have to counsel farmers and ranchers on living cost management. Family living costs have risen dramatically over the last four decades. In 1967, family living withdrawals were $4,000 per year. In 1986, costs had increased to $20,000 and by 2011 they were at $80,000.40 percent of farmers and ranchers have no health insurance.
December 2, 2011
The assumption that there is no money to be made in agriculture simply doesn’t mesh with the facts.
“Since 1995 the top 25 percent of farm managers earned more than 10 percent on their investments,” says David Kohl, professor emeritus, Agricultural and Applied Economics, Virginia Tech.
The flip side of that coin, he says, is that the bottom 1 percent of farm mangers earned 1 percent or lost money on their investments.
“The better managers will get better; the rest will fall behind,” Kohl said during the Rural Economics Outlook Conference on the Oklahoma State University campus in Stillwater.
A key to success, he said, is setting goals. “Farmers and ranchers need a business plan. Currently, 80 percent of all Americans have no goals. But the 4 percent who make goals and write them down earn more money.”
Success requires goal setting and also the ability to recognize and understand opportunities and then “pull the trigger,” Kohl said.
He said a key problem with agricultural businesses is that they fail to plan far enough ahead. “They think only to the next quarter.”
He also discussed the relationship between farm production and farm lending, which has changed significantly over the past few decades and perhaps not always for the good.
“America was built on community banks and other rural lenders, such as the Farm Credit System and FSA,” he said. “Rural lenders were often the cornerstone of a community. They need to be talent magnets with internship programs and they need to hire people who will raise them up.”
A trend in ag lending is educating producers, particularly young farmers and ranchers.
He also discussed the ills of “risky lending,” which include leaning too heavily on collateral and too little on cash flow and profitability. Lenders that practice risky lending employ too little “sensitivity testing,” Kohl said. Sensitivity testing includes cash flow, profitability, liquidity, equity and collateral, and concentration analysis.
He said bankers should determine if stored assets are adequately protected by a risk management plan. They also should determine if a business is growing too fast.
“And be aware of producer/lender fraud,” he said. “Oklahoma is currently a hot spot for agriculture and is a target for fraud.”
Successful agricultural lenders, Kohl said, maintain a strong credit culture with sound financial analysis. “They know their customers and their industries. They have a culture of lifelong learning and practice ‘what if’ lending.”
He said marketing savvy and relationship lending are also crucial. “Relationship lending is coming back. Both the board and management team should understand agriculture.”
He said getting a loan with just a “quick credit check” is disappearing.
Kohl said ag regulators also should have staffs that “are quick learners of their industry, customers and lenders. They should encourage strong financials and accrual-adjusted records for producers who are growing, highly leveraged or above $250,000 in sales.”
He said proactive regulators should encourage bank boards and CEOs to have employee training metrics — two to six hours a week. “They should think globally but act locally,” he said.
“We are seeing a tremendous turnover in regulators,” Kohl said.
Cost of Living
He also noted that ag lenders also have to counsel farmers and ranchers on living cost management. Family living costs have risen dramatically over the last four decades, he said. In 1967, family living withdrawals were $4,000 per year. In 1986, costs had increased to $20,000 and by 2011 they were at $80,000, according to data from the Nebraskaland Farm and Ranch Management Education Program.
“Family living withdrawals are like concrete,” Kohl said. “Once set, they are difficult to change. Personal finance management is critical,” he said.
Some of those changes include:
Personal interest and consumer credit card costs increased by 365 percent from 2000 to 2010.
Social Security and income tax increased 192 percent. “Farmers and ranchers are paying more taxes because times have been good,” Kohl said.
Medical and health insurance costs jumped by 180 percent during that same period.
Kohl said 40 percent of farmers and ranchers have no health insurance. “Lenders have to look at that.”
He said liquidity is important to a farm or ranch. “Liquidity means money is available when you need it. It’s available for the next investment.”
Kohl said agriculture always faces issues of hardship — weather, politics, production pests — but opportunities are also available. “Agriculture is the foundation of success in America.”
You May Also Like
Current Conditions for
Enter a zip code to see the weather conditions for a different location.
18 gifts for the farmer on your listNov 27, 2023
5 take-home lessons from soybeans in 2023Dec 01, 2023
Market expectations: What's on the horizon for grain and livestock?Nov 22, 2023