Road Warrior

Strategies for handling tighter margins in agriculture

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The roller coaster of economics on farm and ranch businesses continues. The highs are higher and the lows are lower. The other day during a webcast with ag lenders in Canada, a young agricultural lender asked, “With tighter margins anticipated in the future, where should producers focus their energy to maintain viability of their operations?”  While there is no one strategy to fit all, the following is some advice that can be applied regardless of the business cycle or business enterprise.

Before you roll your eyes because you have heard this before, good records that “talk” to the business and managers are critical. On the webcast, I told the story of a lender who required audited financial statements from the agricultural business. This requirement is great; however, if the producer does not use these records in the management of the business, these great financials lose their value very quickly.

One question that can be asked to ascertain the level of record use in decision-making is, “Do you know your cost of production?” If you have a blank stare despite the fancy records, you have failed one of the tests of business sustainability in tight times. However, you fail in the positive part of the cycle as well because the worst decisions are made during the best of times when people who own and manage a business become complacent and do not track cost and margins, not only for the whole business, but for each enterprise as well.

Another tool is variance analysis. Develop cash budgets and then compare actual results to projected results. This strategy assists in maintaining control of operational, marketing, and financial practices. Those quick adjustments on-the-fly can be the difference between positive and negative bottom line profitability.

Finally, conducting sensitivity analysis, i.e. different cost, price, and production scenarios, with a marketing and risk management plan can be a management strategy to maintain a business and keep it within the boundaries of sustainability and success.  While this is not an all-inclusive list, it does provide some food for thought on operating and managing your business in a tighter margin environment.

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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