The U.S. and Canada hold the tale of two agricultural economies. The protein industries — including swine, dairy, beef, poultry and others — are facing severe financial stress. Some say that the dairy industry may follow the swine industry, which has had difficulty for the past two years.
The grain industry is still benefitting from the worldwide commodity super cycle that's in its sixth year. While discussing this topic with a dairyman recently, he suggested some advice and lessons learned that may assist the grain industry in weathering the storm when economic adversity comes its way.
First, a year ago when milk prices were extremely high, many producers were catching up from a negative economic environment two years prior by upgrading equipment or machinery. Others borrowed and expanded their businesses, with the assumption that milk prices were going to maintain their high level.
This dairy producer who is weathering the storm took the opportunity to build some business liquidity while times were good and increased his level of working capital from 15% to 45% of revenue. He also made double payments on loans to get his balance sheet in order to make it more attractive to the lender. Yes, he did pay some income taxes, but his comment was that few people go broke paying taxes.
HE ALSO MADE improvements in building efficiency and refined his skills in risk management, i.e., marketing, hedging and options to establish baselines on prices. While his profit picture is not robust, he is still meeting payments and expenses.
This can be a lesson for grain producers. Act while you have an opportunity to build your financial fortress. As people in the protein industries will tell you, when financial adversity strikes, it occurs abruptly.
What are some of the mistakes profits hide? First, some people will indicate they no longer need a business plan; or to develop, plan and execute a marketing plan because they are already profitable.
On the contrary. When you are profitable is the time to plan and refine your business and marketing models. What aspects of the business will you continue? What will you elect to drop? This is the hard part because some aspects are often linked to the legacy or the heritage of the business' evolution.
The more you make, the more you spend. Farm record systems analysis finds that living withdrawals and spending have far exceeded the rate of inflation in recent years. Many producers make the mistake of not getting back to basics and doing a personal budget during the profitable years.
When a business is profitable and becomes more mature, there is a tendency to become more conservative. Sometimes you must take risks and endure the possible consequence of failure to grow as a business. What are the mistakes that prevent you from doubling profits? Do not get into the trap of using past benchmarks — such as profit numbers — to represent your future goal.
The best decisions are often made during tough times. Sometimes regaining focus, getting back to the basics and plain vanilla business principles can be the recipe for success.
Dave Kohl, PhD., Corn & Soybean Digest trends editor, is professor emeritus at Virginia Tech. He's published four books and over 500 articles on financial and business topics. You can reach him at sullylab@vt.edu.