3 Keys To Surviving The Current Ag Economy

January 13, 2017 01:55 PM
 
Farm After the Rain

Worried about extended low commodity prices? Pay attention to ag economist David Kohl’s advice on how to manage through volatility.

“Agriculture is a cyclical industry--good times don’t last forever nor do bad times,” says David Kohl, professor emeritus of agricultural finance at Virginia Tech University. “High prices will cure high prices, and low prices will cure low prices.”

This volatile environment will require astute business acumen from farmers, Kohl told the 2017 class of The Executive Program for Agricultural Producers (TEPAP) this week.

David Kohl

Kohl, who will speak in two weeks at the 2017 Top Producer Seminar, says three factors will be critical for farmers to survive and thrive in the current environment.

1. Scenario Planning: Kohl advises farmers to prepare multiple business plans for various situations. “Have a written business plan. It helps us communicate with each other,” he says. Plan for the good, bad and ugly.

Know how your business will adjust to a soar or crash in grain prices, interest rates and other factors that affect your operation.

2. Management Protocols: “Once you start going above $1 million in revenue, the business protocols have got to kick in,” Kohl says. “You have a fork in the road as far as profits are concerned—some are taking the high road, the others are headed to the exit ramp.”

Important protocols to have in writing include standard operating procedures (SOPs), names and contact information of key advisers, a risk-management plan, goals and production costs for each enterprise. “During economic downturns, these management protocols are so important,” Kohl says.

3. Working Capital: Working capital is simply assets minus liabilities. But it’s also defined as the lifeblood of successful farming operations. Those with a strong working-capital position will be able to seize opportunities. “Many producers built up a good working capital reserve,” Kohl says. “But now people are burning through core equity.”

Restock financial reserves by renegotiating cash rents, cutting input costs, reducing family living expenses and diversifying income streams, he advises.

Learn more from David Kohl during his presentation, “Straight Talk, Straight Actions: Agriculture in a Changing Economy” at the 2017 Top Producer Seminar. Register now!

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Comments

 
Spell Check

Zagnut
Eastern, NE
1/16/2017 10:47 AM
 

  I do respect what Dr. Kohl writes. It's nothing new from 20 years ago either. What I would add is we as farmers need to hammer on the machinery manufacturers too. They too ran amok in the good times giving the farmer "what they wanted." However, farmers can't expect to continue to pay unrealistic prices that the manufacturers demand for their equipment. All that are involved in production agriculture need to take a hit in these bad times not just the landlords and farmers. Everyone involved in production ag. Everyone jumped on the back of the farmer during the good times. It was one sector of the economy during that time period that was very healthy and supported the rest of the economy. Those that profited off the farmer need to suck it up too!

 
 
Dee
PARIS, TN
1/16/2017 05:33 PM
 

  hmmm, maybe working capital should be current assets minus current liabilities. Otherwise it might be working capitol as in govt figuring ? Net worth is different than working capital... new businesses who turn the working capital over 3 or 4 times / yr will always be short of cash. Having said that we know a farm business started in the 70's that spun that figure over 10-12 times per year to the horror of the banker. They survive today. Some overweight smokers live to be 100, but it is against the norm of what usually happens.

 
 
Mike Jacobson
North Platte, NE
1/16/2017 11:32 AM
 

  Dr. Kohl is an outstanding speaker and Ag. Economist. He is universally respected for his knowledge and presentation skills by bankers and producers. I do think that there was a slight mistake in what was printed. Working capital is "current" assets minus "current" liabilities. Net Worth is 'total" assets minus "total" liabilities. The key to survival is to first, not allow working capital to go negative. (this happens when operating profits are not sufficient to support family living and term debt payments). The result is "carryover debt" that adds to future years debt service requirements. Ultimately, it erodes net worth to the point of liquidation. When the entire industry is under stress, asset values fall as well. This leads to even more stress. If you are in business, the only person to blame is the person you see in the mirror. You are the one who makes the decisions to be in business and make the investment decisions that are made. The blame game does not work. Take control of what you can control and own the problem.

 
 

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