What better business strategies will you choose to adopt in the new year?
With January around the corner and the 2014 crop season just a few short months away, now is an excellent time to make plans to strengthen your farm business. Our Top Producer columnists offer up different insights and strategies to help make you and your farm more competitive in the ever-evolving world of production agriculture.
The new year is sure to bring many obstacles, as well as opportunities. It’s critical that you position your farm to withstand the obstacles, whatever those might be, and take advantage of opportunities as they occur. —By Sara Schafer
Focus on Margins Over Prices
Chris Barron, Business Matters Columnist
As producers, we’ve been taught to focus on three major areas of our business: cost of production or business management, yield levels and marketing.
While each is important, they are also moving targets. It doesn’t pay to become too obsessed about any one of these. What does pay is knowing and understanding your margin—the difference between your selling price and the cost of production.
When you plan for a margin of X amount instead of a price level, it removes the emotion from your decisions, whether it’s buying inputs or marketing grain. It doesn’t matter if you sell your corn at $4 or $8 if you don’t know the level at which you are making a profit.
Create a spreadsheet or other system so you can always know your margin target. Whatever system you choose, you should be able to adjust any line item and have it automatically reflect the changes in your bottom line. You should recalculate your margins once a week. Remember, your cost of production is not a static number; it moves every minute the market moves.
Everyone is bearish about next year. Now is the perfect time to start crunching your numbers to see where you could reduce costs. There are certain things you still need to spend a lot of money on, but there are probably some things you could do without.
Factor in Global Markets
Jerry Gulke, Market Strategy Columnist
Production ag is no longer limited to the U.S. While input costs are determined locally, selling prices are determined globally.
If the last few years have taught us anything, it’s that high grain prices will turn on production—everywhere. We discovered what the best days in agriculture will do for us, as well as the rest of the world. In the U.S., we still compete with our neighbors, but now competition also lies in Europe, Russia and South America.
Corn production will likely mirror that of wheat. With wheat, we lost our competitive advantage, and now wheat is the world’s crop. Wheat is now harvested nearly every month. I think corn is headed in that direction, too. America is no longer corn’s primary supplier, which makes for an interesting and volatile market.
Now, more than ever before, it’s critical that we understand global markets, especially in production agriculture. The export market works both ways; it’s no longer just a one-way street out of the U.S.
Plan to Increase Income
Paul Neiffer, The Farm CPA Columnist
One of the most common tax-planning mistakes farmers make is focusing too much time and effort on reducing taxable income. Too often they forget to keep a minimum income target in mind.
For example, if farmer John reduces his taxable farm income to zero thinking that is the optimum level of income and he has no other income sources, John loses the value of his standard deduction and personal exemptions. John could easily report $20,000 of farm income and owe no federal income tax and most likely little to no state income tax.
For 2014, farmers should consider using deferred payment contracts to give them the flexibility to increase income when the tax return is prepared. These contracts allow you to deliver and sell your grain in the current year but delay the payment until the following year.
- Mid-November 2013