As the year draws to a close, many of us will sit down with our agricultural lenders to review the year. How did the operation fare in 2018? Did the strategies set forth in the previous year work in practice? How are we going to manage risk in 2019? What can we improve in our business to further our financial goals?
Beginning to think about New Year’s resolutions, I find myself pondering what my family’s business can do better in 2019. Could we be sharper in marketing and advertising to increase our rate of customer acquisitions in our seedstock business? Which investments can we afford to take on, and will the return outweigh the risk? What is in the budget to expand, and where do we need to cut back?
I’ve a goal-driven person, so for me, it’s imperative to sit down with my husband and talk through some of these questions. Having a written game plan in place helps keep us focused and on the same page moving forward. I like to write down tangible action items that we can work on together in the upcoming year to achieve a positive trajectory of growth in our seedstock business.
I recently read an article from David Kohl, Virginia Tech professor emeritus of agricultural finance and small business management. Titled, “Perspectives for producers and lenders,” the article was published in my local bank’s newsletter and offered insights from Kohl’s travels to the American Bankers Association National Agricultural Bankers Conference held in Omaha, Neb., earlier this month.
Of the conference, Kohl said the overall mood amongst the lenders in attendance was of “economic concern,” and the upcoming years could start to sort the winners and losers in production agriculture.
Kohl writes, “Many bankers stated that business IQ and financial acumen are dividing the profitable and not so profitable borrowers. As with the 1980s financial crisis, producers who are innovative, adaptable, and guided by sound business practices are operating sustainable businesses.”
Kohl explains that agricultural trade will continue to be a major concern but it’s difficult to predict as negotiations on agricultural commodities are tied in with steel, aluminum and technology.
“The policies and priorities of U.S. trading partners are inherently integrated into agricultural trade,” says Kohl. “With $1 out of every $5 of net farm income being generated by agriculture exports, the consensus was that U.S. agriculture is only seeing the start of extremes in price, cost, and market volatility based upon domestic and global headlines. Close attention must be focused on emerging nations as they represent up to 60% of U.S. agriculture trade. The implications for producers are that disciplined cost and capital management, and the execution of marketing and financial plans, will no longer be optional.”
As this agricultural cycle continues, Kohl stresses the importance of not burning through all your equity and clearly communicating that intention with your lender, spouse, partners and stakeholders in the business.
Kohl says, “Debt service on operating funds has increased 47% over 2013 levels. Jason Henderson, Purdue University associate dean and director of Extension, indicated that the Federal Reserve would like for prime interest rates to return to normal levels at 6.5-7%.”
What’s more, emerging trends such as process modeling and blockchain technology, which are being driven by Millennials, Generation Z and Generation A consumers, will change how food is produced and will further customize and personalize consumers’ eating experiences.
“The 2020s will be a period of transition for both producers and agricultural lenders,” says Kohl. “In the coming years, I believe that two primary types of agriculture will emerge.
“The first category could be described as consolidated and commodity-based farm operations with a focus on capital and economic efficiencies, operated by multiple partners, family businesses, and complex operations. The second category of producers will be value-added with higher margins and will create a connection with the domestic and global consumer.”
Whichever category your business falls under, Kohl offers some advice to help survive the downturn in this cycle.
He concludes, “Why are some borrowers more profitable than others? It is called the ‘little bit better’ principle. Producers who are a little bit better in many different areas of their business experience cumulative, positive results.
Using the example of crop farming, Kohl says, “Although it may seem insignificant, 9 bushels more per acre, marketing commodities at 10 to 20 cents more per bushel, input cost control, fixed costs of 5 cents less per bushel, and just a little bit quicker capital turnover ratio all make a big difference in the long run.”
So what will you do “a little bit better” on in 2019? Can you reduce your feed costs, improve your risk management strategies, market your cattle more effectively, reduce your debt load, improve your equipment for greater efficiencies or better execute your day-to-day operations?
Now is the time to sit down with your partners, your spouse and your financial advisor to develop a strategy that will separate you into the successful, sustainable category of producers.
The opinions of Amanda Radke are not necessarily those of beefmagazine.com or Farm Progress.