by Don Olson, Chief Credit Officer
The moments leading up to the drop are the most important. There’s no getting off the ride now; you’re too invested. As you reach the peak, you do everything to prepare yourself for what’s next. Then it’s all a rush and when the ride comes to an end, you’ve traveled many hills and valleys, but endured.
Whether riding a roller coaster or working in the ag industry – what goes up must come down. The volatility in farming has increased significantly over the past 10 years and is influenced by many factors outside of farmers’ control. Changes in monetary, fiscal, energy, and trade policies, along with technology, regulation, and consumer preferences affect the business of producing agricultural goods for the world.
Just as you would on a roller coaster, you must prepare yourself for the twists and turns of business. Following best practices during the good times provides a farming operation with staying power during the downturns.
Farm Credit has more than a century of experience providing financial services through the ups and downs on the roller coaster of farming. Each operation is unique and the tools that provide staying power vary from one agribusiness to another, but there are commonalities among those that have endured the peaks and valleys a few times.
1. Flexible management
Businesses that adapt to changing times are guided by a flexible management team that seeks knowledge. Whether managers attend educational programs or conferences like Farm Credit College, read about the latest trends and innovations, or work with trusted advisors, staying up to date and vetting major decisions is a key role to success.
2. High quality & timely financial records
Keeping quality records in a dependable system including accurate balance sheets and accrual earnings information will streamline any operation’s financial administration.
3. Strong understanding of fixed costs
When making land and machinery investments, focus on manageable and predictable fixed costs over a multi-year period with manageable debt service costs per acre.
4. Intentional input purchases
While land prices are beginning to reflect the decline of commodity prices, many input suppliers have not followed trend. Take advantage of often rare discounts, call multiple sources to find the best offer, and utilize conservation practices to reduce costs.
5. Negotiated cash rents
Define expectations and transparency with landlords about the terms your operation can endure while making a profit to provide clarity, especially for landlords who inherited the land and may not understand the cyclical nature of agriculture.
6. Acreage stability
Successful operations with a large amount of rental acres often pursue diverse landlords and rental agreements. Limiting concentration risk allows farmers to walk away from unfavorable cash rent situations – rather than operating the farm at a loss – while continuing to manage a similar size operation. Maintaining a stable land base is essential.
7. Strategic marketing
Creating a risk management plan and understanding the agribusiness’ break even isn’t enough without a marketing strategy. Exploit the crop insurance tool to forward market grain when target prices arise.
8. Appropriate working capital
Through the prosperous times of agriculture, operations with staying power accumulate working capital. In challenging cycles they are able to use it to take advantage of opportunities to benefit their operation.
9. Diversified income
The standard of living for farm families through the past 10 years has been relatively high as compared to previous generations. Maintaining this standard is possible today, but may require families to diversify their income with steady, off-farm sources and benefits.
10. Reliable reserves
It’s tempting in the good times to purchase anything that’s up for sale, but operations with staying power avoid overleveraging themselves even then, understanding they’ll need reserves for the inevitable dip.
Many best practices should be implemented during the prosperous times. However, others can be utilized now to ensure your operation’s staying power.
For example, the cost to borrow money has not been volatile over the past few years. The Federal Reserve is widely expected to continue increasing short-term rates. Although we have already seen the impact on the cost of money, interest rates remain low by historical standards. Reviewing your exposure to a rising fixed rate environment and speaking with a reliable lender to lock in a fixed rate on any floating term loans may be a first step to ensuring your operation’s staying power and keep you safely buckled in on the agriculture roller coaster.
Don Olson retired as chief credit officer at Farm Credit Illinois on Jan. 31 after 40 years with Farm Credit. These observations were developed through his experience and represent characteristics of successful first and multi-generation farm families. He was raised on a livestock and grain farm in Vermilion County. He received a bachelor’s degree in agricultural business from the University of Illinois at Urbana-Champaign. Contact [email protected] with comments or questions.