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.
The tax law normally requires reporting this as income in the year of receipt; however, the farmer can elect to report in the year following the sale. This allows us to bring income into the current year to soak up those extra deductions and exemptions that might otherwise be lost.
A farmer should keep a couple of smaller contracts since this election is on a contract-by-contract basis, and you can’t pick a dollar amount.
Continue Your Ag Education
John Phipps, Perspective Columnist
The last few years underline the need to understand in more depth the economic and cultural forces that shape our markets and business environment. From geography to history to statistics to economics, more educational tools will enable better understanding of why our expectations are confounded and how to adapt.
In economics, for example, farmers typically resort to inaccurate analogies as a substitute for accurate comprehension. The federal government is like a household, we assume, and the same rules for prudent decisions apply. Even a brief effort to understand monetary policy will demonstrate the risks of such mental shortcuts.
Meanwhile, as we become more dependent on foreign markets, we know less than ever about the nations to which we sell. In the end, we depend on others’ expertise and can be easily misled by their agendas.
Farmers should add continuing education outside our "core curricula" to minimize future shocks and increase the possibilities our careful plans have some chance of working. Use online resources, such as massive open online courses (MOOCs) and TED talks, to reinforce the gaps in our worldly knowledge. The payback could be huge.
Tips for Success in 2014
- Don’t lose benefits by eliminating your income. Also, focus on managing a profit margin.
- When marketing, account for global events, the economy and the competition.
- Make an intentional effort to learn about topics that influence what happens in ag.
Jan. 29-31, 2014
Hilton Chicago Hotel
Do you want to hear more from our columnists? Plan to attend the Top Producer Seminar, where you can hear and meet them in person. Participants will have the opportunity to see a live taping of "U.S. Farm Report" with John Phipps, Mark Gold of Top Third Ag Marketing, Brian Basting of Advanced Trading and Bryan Doherty of Stewart Peterson. Additionally, Paul Neiffer and Chris Barron will host sessions about how to maximize Social Security benefits for your farm and maximizing your profits in the new year. Jerry Gulke will help wrap up the seminar by talking about the beginning of a systematic change in agriculture.