Business skills, not just bushels, will keep you farming The ability to grow a bumper crop doesn't always separate one farmer from another. Plenty of guys have figured out what it takes to get the most bushels from their fields. The real trick is to translate those bushels into dollars in the bank.
It's those business management skills that will cause some farmers to flourish while others look for another job in the next five years, believes Virginia Tech ag economist Dave Kohl. He suggests five areas of business that farmers need to focus on if they want to keep farming.
The first step is simple, but many of even the best farmers miss it, according to Kohl: Know your cost of production.
"It's a big disappointment to me that so many farmers still don't understand this very basic fact about their operations," Kohl says. "They tend to know their cash costs but not their non-cash costs. Without knowing your total costs, including factors like return to management, it's impossible to establish trigger points for marketing your crop."
And that's Kohl's second point. "You need to develop a marketing program that attempts to get you in the top 25% of the market," he says. "With all the marketing information available today, you can track the direction the market is headed and stealth it out right down to your area. You need to know your costs, establish your trigger points and execute the plan."
A sports enthusiast, Kohl views a farmer with a marketing plan similar to a coach with a game plan. "You have to have the process in place and then keep developing a new game plan as situations change," he says. "Good coaches adjust as the game develops and farmers need to tweak their marketing programs as conditions change. Otherwise, go to contract crops and let somebody else do the marketing for you."
Step three: Kohl urges farmers to use government programs and insurance to mitigate risk.
"Be proactive," he says. "Half of some farmers' net farm income is from government subsidies. Take advantage of those opportunities and maximize the amount of cash you can generate by understanding how the program works and using it to your advantage."
Don't get caught in the macro-micro trap, warns Kohl. "Don't make long-term decisions based on current payments. These payments won't continue at these levels."
AMTA (Agricultural Market Transition Act) payments, for example, will be nearly 20% less in 2001, according to USDA. And there's no guarantee that farmers will each receive an extra AMTA payment in 2001 as they have in 1999 and 2000.
Step four is to use technology for site-specific farming to farm more efficiently and for traceability.
"I'm amazed at how the computer and machinery are being interlinked to provide not only low cost, but value-added products, particularly on larger commercial farms. It's a way to differentiate your product from your competitors'," Kohl says. "I was just on a 12,500 acre cotton farm in Australia where the farmer was receiving a 10% premium for his cotton in China because he could trace back every bale to exactly where and how it was grown in the field. If you want to market to the part of the world that has money, you need traceability."
Step five is to keep your debt-to-asset ratio under 30% and maintain 20% working capital, according to Kohl. "That's particularly important if you're a straight grain farmer," he says. "For the next 10 years we're destined for low grain prices. If your debt-asset ratio is 40%, you just aren't going to be able to generate enough cash to service that amount of debt."
Take a hard look at land cost, Kohl cautions. "Land anywhere in the U.S. is overinflated for its agricultural value. Take out government payments and the wealth effect of our economy and land values at a global level will be about 50% of today's value. If you're buying land, make sure that you have enough liquidity or working capital to survive at least a three-to-five year downturn in value. Right now I would be cautious in purchasing land. However, it's a case-by-case situation."
One of three things could change the crop price picture, believes Kohl. "It will take a major weather event, a public policy change or an act of agri-terrorism. Other countries are starting to realize that if they can interrupt our food supply they could throw our economy into a major recession. Agri-terrorism may become a real concern in the future."