Top of Mind: Your Three Options

February 6, 2018 11:50 AM
Planted field

Farming is a cyclical business, so it is easy to just hit replay each planning season. You might alter your crop mix a bit or decide to marginally expand or decrease your livestock herd.

But will that be enough to ensure financial success in 2018 and beyond? Is this year the time to develop a new business strategy?

“Given the outlook for tight margins, coupled with fundamental risks facing farmers such as increasing export competition, there is clearly a need to reinvent the industry,” explains Ken Zuckerberg, senior farm inputs analyst, RaboResearch Food & Agribusiness.

When faced with challenging conditions and a low-growth, low-margin and low-return outlook, companies across virtually every industry need to take one of three possible courses of action, according to Zuckerberg and Rabobank colleague Sterling Liddell, senior analyst for global data.

The options: do nothing, do something or do something transformational.

Road To Resiliency. Although the row-crop economy appears to be finding a bottom, a Rabobank analysis suggests U.S. farmers will face tight margins and low returns over the next five years. As a result, Zuckerberg and Liddell recommend farmers plan to transform their business models to ensure long-term resilience. They suggest these four options:

Adopt and Adapt: Look at on-farm technologies and business enterprise management programs that optimize input use and produce the highest yield possible per dollar spent. Only spend money on products and services that add measurable value to your operation.

Horizontal Integration: For financially sound operations, horizontal expansion to achieve great scale efficiencies is a profitable option. Look at increasing both economies of scale (more acres or animals) and economies of scope (expansion into other types of production).

Vertical Integration: Up your marketing game and options by smartly using grain storage and merchandising firms to capture margins that are currently collected by other parties.

Contract Farming Arrangements: Identify ways to diversify your operation that can help ensure profits. Consider contract production arrangements with food-processing companies, livestock operations, solar farms or other entities.

Tried And True. None of these are necessarily new ideas. In fact, you’ve probably tried some of them in the past. But in today’s volatile world, they could be the secret to staying afloat or getting ahead. Be creative and stay focused on your business goals.

As the great Warren Buffett says: “Risk comes from not knowing what you’re doing.”

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