In a recent webcast for the Farm Credit University Commercial Ag Lender class, one of the lenders asked me an intriguing question: What do you feel is the single most important management aspect of the agricultural industry that producers should consider for their success over the next three to five years?
In response to Jeremy’s question, given my background as a professor I could not narrow it down to one component. In today's complex global economic and political environment, there is no magic bullet. The following is a response that could be applied to producers regardless of size of operation, age, enterprise, or location.
1. The most important component to start with is the development of a business plan. The business plan in writing requires one to assess physical, management, water, land, labor, information and capital resources. To be successful, one is required to have these necessary components blended together in a system to provide the efficiencies and the competitiveness to not only survive, but to be profitable.
2. The next key is to develop the strategies and then execute and monitor results of those actions. As you monitor, tweak and evolve the business strategy. Develop financial and marketing plans that include extremes in volatility. The best, average and worst-case scenarios with 10-25% variation in prices and costs can be a good start. Some planners have taken scenarios the extreme, using 50% variation to test profits and cash flow.
3. Next, devise a strategy to build a liquidity cushion, if the business is profitable. These liquid assets can be turned to cash in a short period of time if the cycle or the economic margins go south. Cash and liquidity are very critical for leveraged producers that have above a 50% debt-to-asset ratio. This also applies to young producers who have not had an opportunity to build substantial equity on the balance sheet.
4. Finally, a good team of trusted advisors is very critical for success. This includes your lender, suppliers, crop or livestock consultants and even your peers. This group should meet on a regular basis to assess the business’ situation. Strong relationships are essential to make sense of this wild, wild world of global economics.