Avoid putting your farm on the defense in volatile times
Have you enjoyed the ride? Agriculture has been on the upside of a long cycle since the 1980s, explains Sano Shimoda, president and founder of BioScience Securities, Inc.
These days, though, it’s hard to find a bullish take on crop prices for the next few years. With this new reality, producers need to adopt a new mindset.
“The game has changed,” Shimoda points out. “The only people to survive will be the top 5% to 10% of the low-cost producers. It’s time to aggressively adopt a CEO mentality.”
To weather this change in tide, Shimoda says, farmers need to focus on reducing expenses and improving farm productivity. “Low-cost producers with bulletproof balance sheets will be the winners,” he predicts. Also, build up your working capital. “A lot of farmers will get squeezed through working capital. But farmers in good financial standing will be able to deal with it effectively.”
Now is also a time to play to your strengths and know your weaknesses. “CEOs understand they make the big decisions but need to rely on other expertise to help them run their farms better,” Shimoda notes. Consider hiring out crop consulting, marketing or accounting duties if your time is better spent elsewhere. “You need to decide if you should be doing that stuff,” he says.
Critique Every Line Item
Take a close look at these aspects of your farm business plan to see where expenses might be shaved.
Machinery: Most producers have added new pieces of equipment to their operations in the last five years. Newer fleets tend to need less maintenance and fewer upgrades. Shimoda says machinery is the No. 1 area in which farmers plan to reduce costs during tight times. Jerry Gulke, farmer and president of The Gulke Group, suggests that if you have loans on recent purchases, you should talk to your banker about refinancing loans or extending them while you can lock in low interest rates.
Land Rents: Visiting with landlords and also negotiating rents to reasonable levels is one way to manage costs in this environment. “Land rents have doubled in the last several years, along with corn prices,” Gulke says. “Take a corn chart with you and show them where prices are now.” He advises asking for a 15% to 20% rent reduction. “Tell them you’re not trying to get rich off of them, but you are trying to get your expenses down,” he explains.
Living Expenses: Cost of living tends to increase with profits. With a bearish outlook ahead, your income might not sustain the life you’ve been living, Gulke says. “Set your goal for how much you need to cut personal expenditures,” he recommends. “Involve your family, and prioritize your expenses. Then, decide how you, as a group, can reach the goal.”
Owned Land: Farmland values have soared to record levels in the recent past. Yet all of the factors that have increased farmland values have already reversed or will at some point in the future, Shimoda says. “Optimize your farmland portfolio,” he advises. “Consider building liquidity by selling lower-quality land at high prices and waiting for lower prices to buy good-quality farmland.”