Managing at the Extremes
During a recent young producer seminar sponsored by the Jackson Purchase Farm Credit Association, we discussed that agricultural businesses must manage much more extremes or variations in cost and revenues than in the past. The group had a lot of fun discussing strategies producers and lenders could employ in managing the wide variations. Producers who position their business with these strategies will capture the profits on the upside and mitigate risk when the ag economy heads south.
The participants developed the following list.
- Some producers mitigate risk by taking out crop insurance. This is critical in natural resource areas that have wide variations in weather patterns or land and water limitations.
- Second, producers should not put all their eggs in one basket. Examine ways to diversify the business not only with agricultural enterprises, but also with those outside the agricultural model. Some producers own trucking businesses, hotels or banks.
- In the good years, get the balance sheet in order. That includes paying down debt, preferably high cost short-term and personal credit card debt. Much debate ensued concerning paying down real estate debt. Yes, it is an option, but focusing on short-term debt provides flexibility over the refinancing hassle of obtaining operating funds.
- Build working capital. In the good years, get working capital percentages up to at least ten percent of expenses and revenues. Working capital gives you flexibility.
- Control the variables in your business; lock in interest rates and implement a marketing program for outputs and inputs. This will help reduce variation in expenses that quickly eats into margins.
- If you have a good year, pay yourself first, and put some money into a retirement fund. This way you can minimize taxes and build a nest egg in retirement that is not solely from the farm.
Wow, corn crops look great except for a few places in Wisconsin. Will we get the growing-degree days in the North?
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Editors' note: Dave Kohl, The Corn and 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.
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