- Don't become overly financially leveraged
- Build working capital in profitable years
- Seek to increase profits/returns at rate greater than inflation rate
So you do not want to be the biggest farmer on the block? What can and should a small farmer do to sustain profitability as the agricultural industry consolidates with fewer but larger farms and ranches? This was a question asked during a recent webcast by two ag lenders that had a large number of midsize and small producers in their loan portfolios.
First, this farm group must not become overly financially leveraged. Debt-to-asset ratios exceeding 50% are a recipe for financial stress, regardless of enterprise. A young producer in this segment may exceed these debt limits.
Priority one is to build working capital in profitable years to bridge losses in an economic down cycle. A working capital cushion of at least 25% of revenue with a strong sprinkling of cash on the top half of the balance sheet is recommended.
One must be modest in lifestyle, have living withdrawals below $50,000 annually or have off-farm revenue to offset an increased living withdrawal.
A risk-management program locking in positive margins with a revenue, cost and interest rate strategy is very important. Despite being a small or midsize farm business, you must seek to increase profits or returns at a rate greater than the rate of inflation, or risk losing future purchasing power.
Have a full-fledged business plan, like the ones we use for training in our Farm Credit University Ag Biz Planner educational program. Writing down your goals and spending time planning for different scenarios as well can help you make more objective, calculated decisions, rather than “winging it.”
Remember, fine-tuning and incremental growth will be essential, along with keeping open lines of communication with your ag lenders.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at firstname.lastname@example.org.