For astute producers who can quickly adjust to the new world of tighter crop margins, 2014 can still be a period for turning profits. Not everyone will make money next year, but you can. Experts recommend keeping the following tips in mind as you develop strategies to prosper and grow next year and beyond.
- Bump up crop insurance guarantees. If you take 75% coverage and corn futures prices are $4.25 when February guarantee levels are determined, you are only protecting revenue equal to $3.40. "Producers need to do the numbers and maybe increase coverage rates," says Mike Boehlje, Purdue University ag economist. With price outlooks hovering close to break-even, this is particularly important.
- Push for flexible leases. While flex land leases start at a lower base, tenants are protected during leaner times, explains Dale Nordquist, University of Minnesota ag economist. "Show your landlord your numbers," he says. However, don’t let go of land without careful calculation. If higher-priced parcels are at least covering direct costs, they can reduce overhead on a total farm basis.
- Shock test worst-case scenarios. "If we have a really big corn crop in 2014, prices could be as low as $3.75 per bushel," says Brian Briggeman, Kansas State University ag economist. This puts a premium on knowing field-by-field break-even prices to help determine what you can pay for inputs, he says.
- Be a shrewd buyer. "Work hard to negotiate inputs," Boehlje says. With lower crop prices, the most important marketing producers can do is not what they sell their products for but what they pay for fertilizer, chemicals and seed, he says, noting that there will be price cuts on some of these
- Invest in operational excellence. "Tighten management and become a world class producer," Boehlje says. It’s not just about tightening up the farm business from a financial perspective. "It’s adopting a best practices focus for each farm task," he says. This includes ensuring the planter is calibrated for optimal seed placement and inputs are applied at the best time. Don’t leave any slack in the system.
- Guard working capital. The key for weathering the downturn is to protect working capital, so don’t use it for capital expenditures, Boehlje says. While the ratio of working capital to gross revenue is the highest since 2003, Nordquist says not to get complacent. Work on risk management.
- Adjust marketing strategies. Don’t use your marketing experience from the last two years, Boehlje says. That won’t work for 2014. Know cost of production on a per-field and per-bushel basis, and when you see a positive margin, lock it in. Have a written marketing plan and follow it, Briggeman adds.
- Steel yourself to low-cost production. Sound obvious? It’s not. Corn production costs differ almost $2 per bushel—from $3.75 to $5.71, according to Minnesota data. "No one thing sticks out for low-cost producers," Nordquist says. "They’re lower-cost on everything and have higher yields."
For more information about how to initiate the succession planning process, visit www.FarmJournalLegacyProject.com.
- December 2013