Small to non-existent profit margins are common forecasts for the 2016 grain and dairy farm sectors. Certainly tight margins are not new to farmers. For example, similar margins were a reality in grain farming during the early 1980’s. That period came on the back of a very profitable period in the late 1970’s that was similar to what we experienced recently in the early 2010’s. Recently, Chris Bruynis, Extension Educator in Ross County wrote an article on some strategies for grain farmers to survive tight margins and I will excerpt some of his ideas and strategies from that article. Though written for grain farmers, some of his strategies apply across any number of agricultural enterprises. Chris will be one of the featured speakers at the Ag Outlook and Policy meeting on January 22 at Fisher Auditorium. Registration for that meeting is open until January 15 through the Wayne County Extension office at 330-264-8722.
- Complete a financial analysis. Knowing where the business stands financially will be critical in developing a plan to survive this period of low margins. This will provide insight into how drastic the measures need to be to weather the storm. Good financial capacity will allow farm families to borrow new money, restructure term debt, or even make interest only payments on some loans.
- Lower the cost of production. This is paramount! There is significant variation among farmers in the cost of production depending on size and scale of the operation. Items such as cash rent, input costs, operating costs, and equipment depreciation can greatly affect this cost. Strategies to lower input costs can include: setting realistic yield goals and adjusting your inputs accordingly, selecting lower priced inputs providing they preform similarly, and making sure the input generates more that its cost (what might have paid for itself with $6.50 corn may not at $3.75). Knowing the true cost of production will allow farmers to look at their cost structures to make the necessary changes.
- Improve grain marketing skills. Grain marketing strategies vary somewhat depending on on-farm storage, crop insurance participation, and total bushels available for sale. Farms with 20,000 bushels to sell have fewer pricing opportunities compared to 200,000 bushel farms. It is critical to set price targets that are realistic and based on the farm’s true cost of production. The ability to use available marketing tools such as option contracts, hedge-to-arrive contracts, etc. and understand risk exposure created or protected by each will be important.
- Increase profitable enterprises. Farmers will need to closely evaluate the possibility of increasing acres of one crop over another in 2016. Farmers may also wish to adopt a different cropping strategy such as double cropping to maintain profitable income levels. Be careful not to exchange short term profitability over long term profitability. However, if the wolves are at the door, you may have to what is necessary.
- Reduce unproductive assets. Growing crops on marginal soils or rented ground with extremely high rental rates may be good candidates for removal from the business portfolio. Farmers need to weigh the loss from farming these properties compared to the fixed costs that will be spread over the remaining acres to determine if this is a good decision. Other ideas could include selling unused and underutilized equipment on the farm. However, be careful to examine the tax liability of the sale of these assets so that it does not consume the income generated from their disposal.
- Add additional revenue streams. Additional revenue streams can come from a few sources, but most commonly this would be the addition of off-farm employment for one or more of the adult family members. This lowers the need for the farm to generate all of the family living expenses and health care costs. Other ideas would be the addition of other agricultural production enterprises or agritourism/agritainment enterprises. Make sure you have studied these options thoroughly to predict the positive cash inflow they may generate.
- Talk to your lender. Believe it or not, your lender really wants to see you succeed and will work with you toward that end. The earlier you communicate with your lender, the more options which will be available to you. Bankruptcy auctions rarely provide the cash flow needed to repay the farm loans and meet the other financial obligation of the farm family.
- Cooperation among neighbors. Years ago, farmers understood that by pooling resources they could generate increased profits. This was evident by the number of supply and marketing cooperatives that once dotted the countryside. Is it time to create farming arrangements that bulk purchase inputs, own equipment, produce greater marketing opportunities, etc. to maximize income? What about each farmer specializing in a farming practice such as planting, spraying and harvesting and work together to capitalize on the specialized strength of each other?
- Punt. This is not intended to be funny or flippant, but every farm business owner needs to assess when exiting the business may be the best alternative for them. At some point, preserving wealth should become more important than continuing against all odds. This might look very different for someone that is 35 than someone 65 years old. If exiting the farming business is the correct management decision, make sure to visit with your tax accountant to create the proper exit strategy.