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.
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!