Tighter Margins, True, but Ag’s Future Remains Bright

January 30, 2014 12:37 AM
Tighter Margins, True, but Ag’s Future Remains Bright

Use these eight strategies to help you prosper during the rocky road ahead.

Grain and oilseed prices have taken their lumps in recent months, particularly corn, but for producers well positioned with strong working capital, the future is a bright one. "This is a phenomenal growth industry," says Mike Boehlje, ag economist at Purdue University. Times are going to be "more turbulent," however. "Now is the time when many people are starting to get nervous," he says. For financially agile producers who can buy right, the time when everyone else is backing up is precisely when to move forward, Boehlje says.

That doesn’t mean that every day is one of ebullient profits, he acknowledges. "At our farm in Iowa, the elevator today is offering $4.22 per bu. for corn. Our cost of production is $4.68," he says. That places a premium on locking in profits—margins—when the marketplace offers them.

Boehlje offered the following strategies for prospering during the rocky road ahead at Tomorrow’s Top Producer Seminar in Chicago on Jan. 28:

Create value for your customer. Know your customers and their biggest needs, even their headaches, and solve them. "Ask how you can create value for their business," Boehlje says. For one barley producer, the elevator manager said he wasn’t going pay one cent more in additional premiums. However, in having the discussion the producer learned that what really raised elevator production costs was when it when it ran out of grain. By offering to provide just-in-time delivery any time during the year the elevator needed grain—10,000 bu. within 12 hours—the producer receives a 10% premium on all grain he sells to the elevator during the year, not only just-in-time sales. Selling a commodity product makes it challenging to differentiate your product to a grain company that wants volume, "but you can on service and be rewarded for it," Boehlje says.

Be a low-cost producer. Invest in "operational excellence" on all levels of the operation, Boehlje says. It’s not enough just to be the low-cost producer in your local area, state, even comparing yourself with like producers in the U.S. "You need to strive to be the lowest cost producer in the world," he says. Boehlje notes that the fastest growing corn production nation is Ukraine, to the tune of 38 million additional acres in the last seven years—with total acreage of principal crops globally increasing 147 million. "It’s not true" that no more farmland is being created, he says. "You are in a globally competitive market." Because of that, Boehlje encourages producers to begin each day thinking how they can lower production costs one-half cent per bushel per day. In part, this means being on the cutting edge of technology, but be aware of two factors: It can be expensive and you might make a mistake—you might choose a technology that doesn’t work for you, he says.

Increase asset turnover. That means increasing the speed revenue is generated from assets, a common management practice in other industries. "The No. 1 issue in production agriculture is asset turnover," Boehlje says. For instance, he encourages producers to think in terms of 24/7 on major equipment investments or whether it’s better to purchase equipment, lease it, share it or even have land custom farmed. All can reduce machinery costs per bushel. A custom operator might have a higher skill level with equipment than you do, he says. While this isn’t a strategy for everyone, it’s more about the thought process involved in thinking business first, he says. Boehlje notes that in one case, producers in different states reduce ownership costs by jointly owning a combine they use for different crops with different harvest windows.

Margin management. Farming, like any other business, is all about margins, but some producers struggle with the fact that they can’t know their cost of production—where margin management begins—until they know their yields. "We don’t use one margin, we use three," Boehlje says, for expected yields, and costs below and above expectations. It also involves developing contingency plans. For some, making margin management the top priority requires a new way of thinking. "Do you want to run a business or drive a tractor?" Boehlje asks. Another part of margin management is not to think of the price of crops but rather locking in profit margins, increasing return per investment. He also encourages producers to think of growth in a different way—by increasing sales from existing investments before making additional purchases, such as land. "The first job of producers is to manage capital," he says.

Use time efficiently. Boehlje stresses that farming is really a logistics business and having equipment and all inputs at the right field with the right people at the right time with standard operating procedures can lower costs.

Manage operating risk. One key way to cut costs is to be careful in land rent deals, he says. If land rent is $500 per acre that means with 200-bu. yields and $4 corn, land alone is costing $2.50 per bu., which leaves just $1.50 for everything else, including a return to the operator. "If you pay too much for land rent, you can’t make it up in yield," Boehlje says. While cost control is important, Boehlje notes that some costs should be trimmed back, but others, such as soil fertility, should be maintained at levels that allow for highest possible economic yield. Don’t cut back on the volume of what you sell, he cautions.

Get smart. Boehlje stresses the importance of attending seminars and conferences to increase your knowledge level, and the importance of networking with other producers to share ideas and help with problem solving.

Think like a CEO. To prosper in the increasingly competitive industry, producers need to be highly focused on getting the tasks done right, but not necessarily by them. Being a CEO means honing skills of people management, money management, relationships—and this includes everyone from grain elevators to suppliers. Part of being a CEO is to take stock of what you’re good at and not so good at, Boehlje says. For producers who do not have a comparative advantage or don’t necessarily like the process of buying inputs, for example, the answer might be buying groups that have one person who does the negotiating. "And if you don’t like marketing, get someone else to do it for you," he says.


For more information on the Top Producer Seminar or Tomorrow’s Top Producer events, visit www.TopProducerSeminar.com.
Thank you to the 2014 Tomorrow’s Top Producer sponsors:
Bayer CropScience, Case IH, John Deere, Koch Agronomic Services, SFP


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