AgDM newsletter article, August 1998

Maintaining profitability in the year ahead

By Elton Tophoj, Pro-Ag Solutions, 515.963.1235

We have had good crop prices and yields the last two years.† Yet, some farmers have experienced financial difficulties.† The current period of low prices is making the situation worse.† The price problem may persist at least until the year 2000.† What will it be like if we have two back-to-back poor grain price years?† The cost of production is in the $2.40-$2.60 range for many producers.† Livestock producers are already feeling the pinch.† My concern is that without some immediate financial planning, more farmers will leave farming over the next few years.

What is the remedy?† For some of you it may involve fewer new pickup trucks, an off farm job, eliminating the use of credit cards, or repaying borrowed capital as soon as possible.† You may also need to wait to replace machinery and other capital assets until commodity prices improve.

Improve profitability

There are two ways to increase profitability--increase income or decrease expense.†† Since farmers are price takers, taking whatever the market will give them, you will have to focus on the expense side of the equation.†

All expenses need to be considered before you spend the money.† Do the hogs (cattle) really need the next injection?† Is your fertilizer program fine tuned, or do you just tell the fertilizer dealer to put on what they think you need?† Can you really afford to own our combine, or is it just a matter of convenience?

Adjust rents

What will cropland cash rents be in 1999?† I will be telling landowners this fall that they can expect lower rates in 1999.† With the expectation of low prices this fall, most farmers will resist paying high cash rents in 1999.† However, cash rents donít adjust downward very easily.† It may be time to consider some type of flexible lease.

When rental rates rise towards the break-even point, rates decrease on top quality land and increase on low quality land.† This is what we have seen in the 1998 Cash Rent Survey.† Rents for better quality land decreased from 1997 to 1998 while the rent on low quality land increased.†

What causes this?† As producers bid up rental rates they are willing to take the risk of paying more for low quality land because of the ability to make it cash flow (fewer inputs), whereas the higher quality land requires more cash inputs (rent dollars, interest, etc.).† Conversely, the lower quality land will yield less.† Farmers are seeking to reduce risk through lower input costs while increasing risk in the form of a yield reduction.

Develop a marketing plan

The above comments on expense is not to say there is nothing you can do about selling price. It is just that you have to make the best of the cards that you are dealt.† It is easy to market grain at a profit when prices are high.† It is another matter when prices are low.† Marketing plans are necessary.† They do not have to be complex.† Even something as simple as pricing a percentage of your grain over several months is better than selling it all at one time when a bank note is due or you have bills to pay.†††

Evaluate the price of technology

Reconsider the price of new technology.† Some of the new technology increases the cost of crop production but may not give a corresponding increase in income.† Also, it does no good to use modern technology to save time if the time saved is not put to productive use.†

Become fully employed

Part of the romance of farming has been the freedom to determine your own work schedule.† Traditionally you have been able to come and go as you please and do what seemed to be the most important task at the time.† The reality is that, although you may have been able to do that in the good old days, the good old days are gone.† The cost of living is too high today to only work part time and make a living.† If you are only employed 3 or 4 months out of the year on the farm, do you need a job the other 8 or 9 months?†

Plan to farm

Do not wait until harvest to decide that you need to adjust your spending.† You can also be sure that your banker is already thinking of your line of credit.† Think about how you can lower your costs for next year.† Expect the best but prepare for the worst.† If you expect to be farming five years from now, you will have to plan for it.† Get the management skills necessary to make it happen.† Get started now.

 

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