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Farm with grain bins and irrigation equipment in corn field. Tyler Harris
LONG-TERM CHANGE: Lease agreements are one area where long-term innovation may have potential benefits. Flexible land rental contracts have become more attractive to both renter and landlord.

Farming isn't easy, so make the best possible choices

Tough Decisions: The key to survival is capitalizing on the positive while preparing for challenges.

Business cycles come in many forms and to various farms in different ways, for any number of reasons. Farms face individual challenges depending on the year and their circumstances. When everyone is affected by the same challenge, it makes it hard on farm communities.

This year's COVID-19 experience is one of those years and begs the question: What business decisions and actions can be made to help individual producers be more resilient?

We know that whole supply chains have been disrupted. Just look at the pork and beef chains. The disparity in product supply and demand has created a larger gap between farm gate and retail prices, making life more difficult for both producer and consumer. There are several factors other than government aid that may be helpful to struggling producers.

Hopefully, up to this point in the season, producers have been working at reducing input costs. This is one direct way to help mitigate what now appears to be a lower value market. Unfortunately, this season may prove to be one where the goal of profit maximization is more of a loss minimization effort.

As with all business cycles, there are times when profits may be significant, and other times when they become narrow or nonexistent. The key to staying in business is to capitalize on the positive and be as prepared as possible for challenges.

The answer to lower prices often has been to increase yields, which can be mitigating if the costs are low enough and the yield increases sufficiently high. A less risky approach, at least in the short run, is to bring costs in line with revenue expectations.

Of course, this says nothing about how easy or difficult that process is. Some of the adjustments might be very quick and require little planning, while other will take careful study, effort and time. It is likely that some producers already have made some adjustments.

It takes understanding

Successful long-term direction control takes an understanding and knowledge of the financial performance of the farm business. Strategy development requires understanding. This knowledge does not have to be applied or collected in a complicated fashion, but can simply be the wise, prudent use of both good farming and business practices.

Managing and understanding credit and debt, and their relationship to risk and unexpected events (weather, unstable markets, etc.), provides clarity of purpose and the needed understanding for restraint. It is difficult to maintain business viability, as some may have seen, when overcapitalization in equipment costs them part of their hard-earned equity, such as refinancing and production debt expenses.

Physical asset ownership in the business, specifically land, often provides a financial buffer. However, once this is used to supplement liquidity or pay for overcapitalized short-term assets, it often is hard to recover quickly, and it puts the business in a less desirable position to remain viable.

The innovative spirit of farmers needs to be applied, not only to the biological part of farming, but also to the business operation as well. The successful farm operation is a unique blend of production know-how and business smarts.

One of farming's most common expenses is land rent. Lease agreements are another area where long-term innovation may have potential benefits. In this past decade, the economic environment has made the flexible land rental contract a more attractive way to lease land to both renter and landlord.

This lease is generally based on market value and productivity potential. The current market supports a lower rental rate. Rental rates that go up or down based on crop price and productivity can benefit both landlord and tenant and make land rent negotiations and expectations more realistic.

If used properly, a flexible land lease would offer relief to the producer when price and production are poor (the current situation), and to the landlord when they are high (2010-12 markets). With the introduction and wider use of multiperil crop insurance, the information needed to make these lease agreements is easily accessed, making them more tractable and transparent and easier to understand.

These federally subsidized multiperil insurance products provide a consistent way to establish spring and fall crop prices, as well as historical yield and average expectation by individual land areas.

A helpful and simple question producers may ask themselves when making business choices might be: Does the value of the operation, action or choice I am about to implement result in making the farm's financial outcome better? The general rule is to compare the (total) value of the action's outcome with (all) the cost of its implementation.

It should be expected to provide revenue at least equal to or greater than the costs of its implementation. Suppose a field application of some sort is to be made at $12 per acre. The expectation should be that that operation would return at least $12 per acre more than without it.

In terms of yield, this value is governed by grain value and added yield. At $2 per bushel, it requires at least 6 bushels per acre of yield increase. At $3 per bushel, it only requires an increase of 4 bushels per acre. When grain prices are low, operations and activities must create more productivity, or have a reduced cost, to be viable investments.

It might be prudent to forgo, or postpone to another season, activities that incur costs with a delayed return several seasons in the future. This, of course, depends on many factors and must be very carefully evaluated based on financial impact and other relevant factors. Sometimes it's best to live to fight another day.

Impact on productivity, costs

Changes in business structure, equipment, capital requirements and strategy are fixed or difficult to change quickly, whereas tactics and current-season choices may provide immediate opportunities to make gains in cost control.

Not mentioned here, but worthy to consider in pursuit of increased profit, is to focus more on sound marketing tactics, strategies and opportunities. The more good choices that are made, the more likely the farm will have a positive outcome. Cost-cutting measures done on an acre basis alone may backfire and increase costs by reducing yield significantly, making it important to have a good handle of how any action or operation is expected to affect productivity and costs.

This article started with the mention of personal business cycles and how they are a challenge to staying in business. Certainly, every farm is different, and every farm has opportunities and challenges. This has always been and is likely to always be. But the future belongs to those that don't stay stuck in the past.

The FFA creed comes to mind as perhaps speaking best about what people in agriculture are all about. With the first line declaring, "I believe in the future of agriculture." This is followed by a statement of faith in the actions of previous agriculturalists.

It then shines a light of hope on how we might move forward during difficult trials, "in the promise of better days through better ways, even as the better things we now enjoy have come to us from the struggles of former years."

Stockton is an associate professor and agricultural systems economist in the Department of Agricultural Economics at the University of Nebraska-Lincoln.

TAGS: Marketing
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