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Areas of Control for Farm Management

Date: 
Author: 
Eric Madsen
Educational Opportunities: 
Articles
Interests: 
Grain, Young, Beginning Farmers
Home > Education & Events > May 2019 > Areas of Control for Farm Management
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Historically, farming has been a high capital, low margin business, where holding working capital and little equity gain is the norm. The current agriculture economy, however, is facing several challenging issues that require some creative navigation. Between trade concerns, tariffs, tight margins, African Swine Fever and wet weather, Midwest producers are facing many obstacles out of their control.
 
It’s easy to compare ourselves to those around us, but it’s important to remember every operation is different. Resources, goals, family relationships, land quality and other factors vary greatly from one farm to the next. You may see your peers or neighbors purchasing new equipment, putting up a new shop or updating a grain facility. However, try not put too much energy or thought into what others are doing. Instead, focus inward to improve areas in your own operation.

Important Indicators. Some fortunate operations seem to be running effectively on all cylinders with little to no debt, a high percentage of owner equity and land that is free and clear. This provides more flexibility and greater opportunity for growth and expansion. Additionally, solid businesses likely have more tolerance for measured risk.
 
On the other hand, an operation with 50% or lower owner equity is more risk-sensitive, leading to fewer options. Achieving and maintaining good financial reporting numbers demonstrates your ability to manage your business, making your lender more inclined to support you in working toward your next goal or initiative.
 
When producers are habitually tight on working capital, have land that is highly financed or a fair amount of equipment financing there isn’t much room for negative returns, resulting in much less refinancing flexibility.
What had been $2.00 to $2.50 corn on the CBOT is now $3.50 to $4.00, and soybeans have adjusted from about $5.00 to now about $9.00 to $9.50 on the CBOT.  I want to emphasize however, that although the numbers may have changed, the overall net return to the farm operator remains relatively unchanged.

The Farm Business Management data — which is compiled every year — is a wealth of information, and helps support this concept. Breakeven numbers, in particular, can vary greatly across operations. The latest data (collected for 2019) is now available on their website. The information and tools they provide allow you to see how your operation compares to others in your area.

Knowing Your Numbers. Lots of industry experts, marketers and lenders frequently discuss the importance of knowing your numbers, which may result in some eye rolling. But it truly is one of the key factors differentiating top producers from the rest. Additionally, tracking your numbers, and updating them frequently, is one aspect you can control no matter what the economy is doing. This foundation is the basis for decisions that will get and keep your operation on track, or continue its’ success. Important metrics related to knowing your numbers include:
  • Commodity breakeven prices,
  • The level of crop insurance that’s right for you,
  • Amortizing loans to fit cash flow and
  • Succession or retirement planning strategies.
We can’t control commodity prices, the weather or political issues, but we can control our attitudes and how we run our business. In order to retain our farm lifestyle, we need to be students of our business for continual improvement. Learning to focus on what we can influence — not dwelling on what’s happening on the other side of the fence — will lead to a culture and business positioned to advance.
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