16 strategies for farming through thinner margins
Remember when the good times rolled? The times, they are a’changing. Commodity prices have dropped, and crop farmers are looking at reduced profits for 2015. Even livestock growers can expect sale prices to decline once herds build up again. We asked four experts to share best practices that can help you succeed in the downturn.
RAY MASSEY works with farmers as an extension professor and agricultural economist for the University of Missouri in Columbia. Here are his tips.
- Major on the majors. Focus on your major costs. Capture your costs of productions in a pie chart, and include land rents, equipment, fertilizer, seeds and energy. Things like labor and interest rates will make up smaller pieces of the pie. Frequently, when farmers look at cutting costs, you focus on smaller items like reducing interest rates by half a percent. But what if you can cut fertilizer costs by $10,000 by adding-on precision equipment that prevents overlap? What if you rent or share spraying or combining equipment rather than buying new—or what if you hire someone to do it for you? Don’t skimp on little things like labor and maintenance. Look for big things that really make an impact.
- Don’t let people put you in a box. Negotiate! Salesmen usually give you two choices when they offer products and services. Why not suggest other options that suit you better? For example, if a banker wants 50 percent down on a loan, ask if you can get a better deal if you put down 60 percent. If your seed provider offers two product and pricing choices, ask for a third option. This is what decision scientists call “decision framing.”
- Manage risks that you can manage now. Including fertilizer costs. People gamble more when they’re losing money. When you were making money like last year, you made different decisions than when you’re losing money—like you may this year. For example, if you see fertilizer prices softening, you may decide to wait a bit before making a purchase. But fertilizer companies aren’t storing as much as they did in the past—so you’re taking a risk on whether it will be available. Last year when times were good, you weren’t worried about a two-cent price difference, so you locked in prices in December. Waiting until spring may be appropriate now, but don’t let emotions sweep you away—you may put yourself at greater risk.
CHARLES WILKEN is an extension agricultural economist with the Farm Management Association at Kansas State University. He lives in Chanute, Kansas. Here’s how he’s advising his more than 100 farm clients in southeastern Kan.
- Don’t abandon good cropping practices. For example, crop rotation and herbicide programs are vital parts of long-term soil stewardship that lead to better yields and soil preservation. Be realistic in your fertilizer program—aim for attainable yields, not once in a lifetime yields. You might change practices in fields where fertility is just not there, but most fields should remain in your original plan.
- Consider your cost of living. You can’t make rational decisions without a thorough knowledge of what it takes to grow that crop or that herd. Corn growers, for example, usually consider the cost of seed, chemicals and fertilizer, but may forget about crop insurance, machinery and your own labor costs. In Kansas, we currently base the cost of living at $64,000 annually. For crop growers, that includes 2,200 hours of managerial labor a year, which is fulltime employment. The hours go up if you raise dairy or swine.
- Within reason, wait until commodity prices hit your marketing goals. At least try to meet your cost of production. For example, if you sold corn at harvest time last fall, you earned $2.50 a bushel. People around here raise a lot of poultry and need to buy corn year-round. If you waited 60 days after harvest to sell corn locally, you could have made $1 more per bushel. If you hauled it to other markets, you might have made another $1.
- If you sell cattle, put a floor on your selling price. We will probably move to a downward pricing cycle as cattle numbers build. Backgrounders and feeders purchase financial marketing tools such as puts and calls to help cover pricing risk. But most cow-calf growers don’t do much of this. You could benefit from a price floor as prices go down. You might also consider livestock insurance.
MICHAEL BOEHLJE has conducted management workshops for thousands of Corn Belt farmers. We asked him to update and expand on strategies he provided in our January issue. He’s a distinguished professor of agricultural economics at Purdue University in West Lafayette, Ind.
- Plan for continued soft grain prices. It’s possible that we may see a weather event that reduces yields, and with it some price recovery. But recovery will come from a weather event rather than from a significant increase in demand. Economic growth is uncertain in the rest of the world, which will weaken exports. With today’s lower commodity prices, particularly in the grain sector, it’s important to manage risk. Adequate working capital is your first line of defense in times of financial stress.
- Take advantage of land opportunities. Adequate working capital can give you the agility to take advantage of opportunities to rent land that hasn’t been available until now. With lower commodity prices, some renters will have to give up property. In addition, rental and purchased property may be available at reduced prices.
- Consider modernizing your machinery. We’ve seen used equipment prices drop by 20 percent, and we expect continued soft or declining prices. Some dealers are offering one-year-old equipment with one-year warranties. But only consider this if you have adequate working capital.
- Beware of borrowing more. This is the time to keep your debt load from going up. Big capital expenses such as machinery and storage facilities have a major impact on your cash flow and debt service capacity.
- Restructure debt. In recent years, many farmers opted for shorter repayment schedules because you had the income to cover it. One way to reduce financial pressure is to restructure intermediate term loans from three to five years, or to convert your land debt from a 10-year payback to 20 years. Contact your banker before you miss a payment.
- Protect your yield. It’s going to be hard to make up for today’s lower commodity prices through increased yield. But it’s critical to at least protect yield. Improve efficiency through things like timely spraying and harvesting this year, and timely planting next spring.
KEVIN GABBERT is vice president of commercial farmers and agribusiness for FCS Financial in Jefferson City, Mo. Part of the farmer owned Farm Credit System, FCS Financial serves 15,000 members.
- Invest in financial resources. With profit margins tightening, the need for accurate and timely financial reporting becomes more critical. Recently, many producers made significant investments in land and equipment, but investment in resources to manage your finances—such as software, staffing or third-party expertise—has lagged. Lenders are looking for better information.
- Reach out for professional help. Call on a team of experts to provide advice, such as an attorney, an accountant who understands agriculture, a marketing broker and a financial planner. To work optimally, they need to understand your operation and your goals.
- Don’t wait too long to lock in favorable prices. With tighter margins, it will be important to maintain a disciplined marketing strategy. Knowing your break even point is the first step. Markets may rally, but keep in mind that sometimes the window of opportunity closes quickly. Don’t make an emotional decision and wait too long in hopes of higher prices.
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