In years past, the Farm Futures’ Business Summit has focused on maximizing profit. This year, speakers concentrated on warning growers about the challenging times ahead. Perhaps Mike Boehlje, an ag economist with Purdue University, sums it up best.
“You will make a reasonable return on your resources [in the coming years],” Boehlje says. “You just won’t make a phenomenal profit like we’ve seen in the past five years.”
Here are the top seven tips from two of the industry’s best Ag economists – David Kohl (Virginia Tech) and Boehlje – on how to secure a reasonable return.
1-Lock in profit
Boehlje reminds producers the first step to locking in profit is knowing the cost of production. Almost every successful business manager knows his/her cost of production. Yet, for some reason, Boehlje notes farmers are content to market grain without this key piece of knowledge.
On numerous occasions, Boehlje and Kohl reminded farmers not to swing for the fences. That fat, $7 corn pitch won’t show up this year. Instead, lock in a profit when possible, i.e. be content with a series of singles.
Consider this: a 50-cent/bushel profit is pretty darn good moving forward, Boehlje says. If corn averages $5/bushel, that’s a 10% profit.
2-Buy inputs right
Don’t jack up the cost of production by locking in high input costs. Boehlje recommends making liberal use of a bid process when selecting suppliers.
Also, don’t pay too much for land! Kohl and Boehlje both see indications that current land values are not supported by farm incomes. Kohl says the first sign of a land bubble is when land goes to auction and doesn’t sale. He’s already heard reports of this happening in some places.
“Nobody I know, except someone selling real estate, thinks [the farm land market] is going up,” Boehlje adds.
This is a time to stay flexible, especially when it comes to expectations. Boehlje recommends making three budgets: a normal expectation draft, along with a high and low expectations budget.
Along with that worse-case scenario, put together a contingency plan. “Don’t develop a contingency plan in the heat of battle,” Boehlje says. “It will be a bad one.”
4-Accept the reality
Kohl says now is not the time to be overly optimistic. To weather the coming storm, accepting reality is a necessity. That means coming to terms with $4-$5 corn.
Numerous farmers will be seeking advice for the coming years. Boehlje recommends making an action list of best ideas from the various meetings. More importantly, start working on the list back at the farm.
5-Negotiate on debt
Debt management will be extremely important moving forward. Boehlje says too often farmers get hung up on a single facet of debt – the interest rate.
On top of interest rate, farmers should be negotiating repayment and collateral terms. Additionally, consider using two lenders. Baylis, Ill., farmer Jerry Moss uses two lenders to ensure he’s getting the best rate.
6-Intensify cost control measures
Anytime a business begins exceeding expectations in a fairly consistent manner, complacency is a serious risk, Kohl says. With rising global competition, U.S. farmers cannot afford to get complacent.
While Midwestern farmers were selling $7 corn, global competitors were taking notes. Those competitors have started planting more corn, which has increased the crop’s global supply. Problem is, Boehlje says, when corn is $7 a bushel, no one is worried about watching the nickels and dimes. That needs to change in 2014.
“We’ve gotten sloppy over the past five years,” he adds. “We have to be globally cost competitive.”
It’s time to sit down and determine what’s absolutely necessary for growing the 2014 crop.
7-Execute, execute, execute
Each farm should have a set of standard operating procedures. Timely field operations are more important than ever. Being detail oriented and following the plan keeps the equipment rolling. If the equipment is moving, the farm has a better chance of making money, Boehlje notes. This is not the year to miss out on a prime planting day because routine maintenance was neglected.
- Flint is editor of our sister publication Prairie Farmer