A Game Plan for 'The Trough'

A Game Plan for 'The Trough'

Hide the checkbook: going forward, it's all about cost management, marketing and liquidity

No one ran shrieking from the room at this week's Top Farmer Conference at Purdue University, but the tone of the presenters had definitely changed from past years. No more sweet talk. No "We're in the money," playing happily in the background.

After several boom years, we now appear to be headed for what economists call 'the trough.' The hangover after the party.

A group of about 80 farmers were fed a steady diet of presentations that sounded a lot like pre-2007 meetings: cash is king…think twice about buying new iron… high cash rent can kill  next year's crop budgets. Get your financial house in order now.

Although agriculture is in good financial health, farm debt is rising.

As you will read in Bryce Knorr's analysis in our July/August issue of Farm Futures, after a wild and extended party, corn is taking 'the cure.' When prices were high, farmers around the world began growing more; now, with another big U.S. crop expected this fall, we could be headed for a bearish carryover number this winter. By this time next year, getting corn prices to nudge back north might be like turning the Titanic – too late, there's the iceberg.

Purdue Ag economist Chris Hurt points out that agriculture's fixed costs make commodity farmers somewhat inflexible compared to other industries; they will keep planting commodity crops, sometimes even when revenue/cost numbers barely make sense.

The hope is that demand catches up to supply, or less efficient global growers drop out as corn prices hit the skids.  As Bryce points out: There is a good correlation between changes in global corn acreage and prices over the past decade.

For the record, this meeting was not all doom and gloom. Most presenters were predicting a soft landing for Ag and very few implied we were headed for a 1980s scenario. As University of Illinois professor Todd Kuethe pointed out, 2014 net farm income is still projected to come in higher than average.

The big question is, how long will this trough last? There's a lot of unknowns ahead: economic growth in developing nations, renewable fuel mandates and other demand-related 'what ifs.' But in general, Hurt says boom times last 5 to 7 years; while the following hangover can last 10 to 15 years.

Start planning
What do you do to plan for this new era? First, think about where the global economy might be headed in the next three years – strong or weak economic growth and demand, for example - and write down strategies you can incorporate into your business to respond to those possible trends.

Of course, so much depends on the weather and other uncertainties. But you can still make plans based on possible outcomes.

The trick is to reinvent your business to manage through the down times, yet be flexible to gear up if future demand turns robust. Keep your powder dry as opportunities arise.

Presenters this week did a darn good job offering up some 'here and now' advice. You can take these to the bank:

Work through key financial ratios for your farm, such as Return on Assets, Return on Equity and Operating Profit Margin. According to farms ranked by Net Farm Income in FINBIN, the 20% least profitable farms averaged -18.1% OPM while the 20% most profitable farms had +20% OPM. Those were 2013 numbers.

• If you haven't yet done so, develop an accrual based income statement for your farm; it will give you a better idea of how your business is really performing. Large farms, highly leveraged farms and farms in transition need this the most. Watch the September issue of Farm Futures for a simple spreadsheet that will help you make this leap.

Lock in interest rates. They're going up - it's just a question of when and how far. "When you're at zero you can't go anywhere but up," says Purdue Extension director Jason Henderson.

• Land costs could be a breaker for some farmers with high cash rent. Be ready to renegotiate or give up land that makes no sense in your 2015 business plan.

Put the farm on a diet. According to University of Illinois data, capital purchases grew from $39 per acre in 2006 to $115 per acre in 2012. Variable costs also need another look. Do you really need all the stacked traits in a seed? Am I really spending on things that directly correlate to profit, or have I allowed some extra expenses to creep into my budget that don't need to be there with $3.50 corn?

• Likewise, put the family living budget on a diet. According to a Farm Business Farm Management survey of around 1,200 Illinois farms, living expenses grew from $72,434 in 2009 to $85,012 in 2012. That's normal considering the big profit years we enjoyed; the trouble is, it's very difficult to turn that ship around. The top third of those farms came in at $135,272 while the low third spent only $57,820 on family living. Those costs compete with other farm business expenses.

• Highly leveraged farms – those with debt-to-asset ratios above 40% - make up 35% of all farm business debt. If you fall into that category, restructure debt to get a lower ratio.

• Good marketers will shine in this low price era. Reduce market risk with a disciplined marketing plan. If you're not very good at it, hire someone. This is not the time to take chances.

Good management principles work any time, boom or bust. There's no reason to panic. Just put on your manager's cap and get to work.

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