High prices have cured high prices in the agricultural industry, and the change in marketplace opportunities has necessitated a change in management style. During a Community National Bank Agricultural Update in Emporia, Kansas, Virginia Tech professor of agricultural economics David Kohl spoke about the future importance of on-farm management in a difficult economic cycle.
“We’re in the seventh year of this agricultural reset,” Kohl said. “I call it an agricultural reset because we are in an environment of low margins and high volatility.”
While producers linger in the memory of the “golden years” of production, Kohl encouraged producers to stop questioning when higher prices could return and instead focus on the nuances of the market in conjunction with their production.
While testing the trade war waters and monitoring Twitter storms might provide a distraction from the realities of managing a farming operation, Kohl said focusing on news and market blips could be a costly management mistake.
“Manage the things you can manage, and manage around the noise,” Kohl said. “One of the important things about managing in this environment is that you will have to be really focused.”
Kohl suggested producers — and any other rural business owners impacted by agricultural markets— should brush up on their “Business IQ” by employing a few key tactics.
Setting aside time to plan sounds ludicrous for busy producers, especially with spring approaching; however, Kohl suggested producers who spend 5 to 7 percent of their time planning production, marketing and risk management decisions can expect an increase in profitability.
Monitoring cash flows and tailoring a system to a specific farm can relieve some of the pressure producers feel during critical financial times, Kohl said.
Time management is critical in any business and farms are no different. While decision making on-farm can become a tangled web of family disputes and financial stresses, Kohl said producers should objectively evaluate which decisions should carry the most economic weight on the operation.
“We’ll spend more time fretting over a hundred-dollar-a-day decision than we will over a hundred-thousand-dollar-a-day decision,” Kohl said. “You’ve got to prioritize.”
Perhaps the most difficult aspect of developing a high “Business IQ” comes in the execution. Big plans and even bigger dreams can become time consuming and disappointing without execution. Time invested in planning is only beneficial alongside careful execution.
“You can have a great plan and strategize but if you don’t execute, nothing will happen,” Kohl said. “We don’t execute game plans because we are afraid of the consequences.”
Monitor Your Business
As farms move away from keeping books on-farm, miscommunication and misinformation can cause producers to over- or underestimate their financial positions. Instead of burning the midnight oil discussing purchase decisions as a family many producers might meet with their bankers or accountants just once a year and the result is an ill-informed business owner, Kohl said.
“You cannot look at your financials just one time per year,” Kohl said. “You can’t go to your accountant in November or December and try not to pay any income tax.”
Kohl encouraged farmers to view their accountants and lenders as strategic partners and to consult them on their financial situation at least once a quarter to change or develop the most strategic game plan.
Why are some businesses more profitable?
During a farm financial reset, profitable farms live by the “little bit better” principle, Kohl said.
“They’re a little bit better in production and holding their costs in line,” Kohl said. “Success depends on those incremental bushels and that extra pound of beef or milk that somebody else is not getting while holding their costs under control.”
The “little bit better” principle also works in terms of percentages. Kohl said producers who achieve a rate of just 5 percent above average have greater opportunities for success.
“You’re 5 percent better than average in many areas of your business — production, marketing and finance,” Kohl said. “Being just incrementally better in a few areas can make a big difference in profitability.”
Kohl said producers commonly miss the mark in two key areas when they are assessing their business: leaving money on the table by missing marketing opportunities and trying to avoid paying income tax.
“Here’s the big one — successful producers know how to market,” Kohl said. “Seventy-five percent of the time, marketing while you are planting is advantageous.”