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Business 101 demands accurate farm enterprise budgets

Cotton Harvest
Enterprise budgets, down to field level, provide the framework for farm decisions

The most important tool a farmer can use as he prepares for the 2018 planting season could be a computer loaded with Excel spreadsheet software.

“It’s business 101,” says Dr. Bryon Parman, assistant professor, Mississippi State University, department of agricultural economics. He adds that farmers are good at farming, raising crops, but not as accomplished with the business end of farming, which, he believes, is at least as important as the agronomic aspects.

It’s especially important, he says, with tight margins. “With corn at $3.25 and soybeans less than $10, it’s hard to make a living. It’s all relative. When input costs were a lot lower, $3.50 corn and $8 beans could be profitable.”

He points to several positive factors for Mississippi farmers. Land values have not decreased, as has been the case in other parts of the country. “Mississippi land values are flat,” he says, “a few ups and downs, but that’s just noise. We haven’t seen a downward trend yet.”

Land Rent Rates Lower

Land rental rates, however, have gone down, giving farmers a bit of a break on input costs. “Land rental rates have come down drastically since 2014,” Parman says. “That’s a result of low commodity prices.” Rental rates are much more fluid than land values, he explains.  “Farmers renegotiate rental rates, so costs change with crop prices.”

Good crop yields last year and a good harvest this fall also put farmers into better financial positions, at least for now, Parman says. “Good crop yields have softened the blow of low commodity prices and high operation costs. Land rent opportunities look a lot different with $12 soybeans than they do at $9.”

Low interest rates have also helped. “Interest has been at historical lows, 3 percent or 4 percent,” he says. “But it will not go lower, and has ticked up, just a quarter of a percent at a time, but that can make a difference, especially with high volume, long-term loans.”

So, all that good news could be fleeting, Parman says, making the post-harvest season a crucial period for farmers and their lenders. “Bankers have to find out (in the next few months) who to lend to and who to have a hard conversation with to consider new production plans, perhaps downsizing or switching enterprises. We have had some loan carryovers in Mississippi over the last few years.”

Farmers who have managed well over the past few seasons and have made decent crops should be able to secure financing with little hassle for 2018, Parman says. But those who are carrying old debt may not be as easy to finance. Also, yields and input costs are fluid.

Enterprise Budget Essential

That’s why a farmer’s best investment this off-season could be time spent in front of a computer screen. And the first chore should be developing partial enterprise budgets, without which, Parman says, producers will be hard-pressed to develop efficient crop production plans, will be at a loss to develop an effective marketing strategy, and will find financing a bigger challenge.

Parman says a farm management strategy should include creating those enterprise budgets, developing a marketing strategy, and fostering a long-term partnership with a lender.

“Enterprise budgets should be created down to the field level, not just by crop,” Parman says. Drilling down that far, he adds, may reveal that a producer is better off letting some ground go, rather than holding onto fields that are not profitable and pulling profits away from the rest of the operation.

“A field level enterprise budget analyzes the cost per bushel (or pound) in each field. Crop decisions should be based on those detailed budgets.

“Technology helps,” Parman says. That may include GPS technology (including yield monitors), as well as precision application equipment. It also requires time in the field. “Field level budgets require active management and heavy oversight,” Parman says.

Marketing Strategy

A marketing strategy offers producers an opportunity to take advantage of price fluctuations. He says in the past year farmers have had opportunities to sell $4 corn, $10 beans and 75-cent cotton. “But a marketing strategy must include production costs. What price is necessary to make money?

“That goes back to enterprise budgets,” Parman says. The ideal goal is to pick a price that offers a profit, but he adds that some years, with tight margins, a farmer’s goal may be “to operate another year, just get through it. Things will turn around.

“Some get by with ‘lax’ management when commodity prices are good,” Parman says, “but they should use these budgets all the time. Technical help is available and inexpensive. All you need is a computer and Excel software. Mississippi State puts out crop budgets, so farmers can plug in their own numbers. They should do that for every field.

“No business is successful without a business plan,” he adds, “which should include inventory control, budgets and marketing. If a business does not have that, it will run into issues. And it’s not a matter of if, but when it will turn.

 “That’s why we keep harping on it. And it has never been easier to keep budgets. Excel does the math, and keeps track of the information. Plenty of other companies have budget and inventory programs, as well. And, compared to the cost of equipment, software is a pretty small investment.”

Help with Lenders

Creating and maintaining that information helps with lender negotiations, too. “Coming in with an accurate budget and a marketing plan is a big advantage,” Parman says. He says the banker-farmer relationship should not be adversarial but a “long-term partnership. The bank is a valuable resource, but the banker needs the farmer’s business. If the farmer is successful, the banker is successful.”

He adds that he has empathy for bankers and farmers. “I work with both client groups. And I understand that sometimes the banker’s hands are tied, and he couldn’t make a loan if he wanted to do.”

When a farmer, because of a bad crop year or two or a bad decision, eats into his equity, a lender has to consider one of those hard conversations, which could include counseling producers to downsize, switch crops, or in worst cases, leave farming.

Parman says a commitment to sound business—farm business 101—principles should limit the number of farmers in financial trouble.  Budgets are the fundamental tool that makes it possible. “Budgets have to be detailed and accurate,” Parman says.

“I am passionate about this because it is important.”


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