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5 Ways to Manage in Tough Times

5 Ways to Manage in Tough Times

In a commodity business, the key to success is low costs.

It's time to dust off an old playbook – the one you used back in the '90s and first half of the 2000s when times were lean on the farm. That's because we're entering a period of low prices and high costs, at least for the short term.

Here's a few management ideas to put back in play for the next several months:

Manage the operating risk in your business. That starts by taking a close look at cash costs and land rents, crop insurance and cost structure. Most farmers work in a commodity business, so in the long run, the absolute key to success is low cost production.

Mike Boehlje, Purdue University, offers his perspective for the year(s) ahead as a new cost-price squeeze hits agriculture.

"It's not complicated, but it's hard to get it done," says Purdue Ag Economist Mike Boehlje. "Your job every morning is to go out and find ways to lower costs. The only complication is, someone in Ukraine is already doing it. It's tomorrow's job and the next day's job too. Just getting a tenth of a cent lower could make all the difference."

"Cash match:" Price products and inputs at the same time. Another oldie but goodie, so pardon us for repeating ourselves. A lot of people don't think about protecting the cost side of the business; they only protect the selling side of the business. It's time to rethink that approach.

"Buy inputs and sell commodities and cash match at the same time," says Boehlje. "Too often we speculate on buying inputs and speculate on selling products. This way you lock in margins. If you buy $10,000 worth of fertilizer you sell $10,000 worth of grain."

Manage money and protect working capital. If you haven't done this yet, you are behind the power curve. If you made some bad moves in the market or left some money on the table, think about how to rebuild your financial position.

That won't be easy in 2015, but you can preserve capital by rethinking every buying decision. This downturn will be tough on equipment dealers, so no doubt, good deals will be dangled in front of you. But, do you really need that new iron? Make sure you don't destroy your working capital trying to get that good deal.

Hold on to cash. It's the first line of defense against financial stress. The value is its risk mitigation, not the return you can get for it. If an opportunity comes along, it gives you the capacity to capture that opportunity. You have to go into this period with better reserves. Without them you need to have a serious conversation with your lender about restructuring your debt. Don't wait until you have a problem.

Emphasize execution. If you want to get more efficient and stretch your dollar, start with SOPs (Standard Operating Procedures). "Low cost producers are the ones who produce in a systematic way," says Boehlje. "That's why integrated pork producers have been as successful as they have, because they train people with SOP structure and they do it the same way every time. They have a very specific list of activities and schedules integrated into each SOP."

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