Agricultural economist David Kohl has been peering into his crystal ball long enough to see several economic cycles come and go. While he sees parallels between other recessionary times (1973–1974 and 1980–1981), at no time have commodity prices increased as they have in the past five years.
Kohl, professor emeritus at Virginia Tech, says businesses tend to get bigness on the brain and lose perspective in times of prosperity. He shared the below quotes with attendees at the Bayer CropScience Ag Issues Forum. We pass them along to give you a quick reality check.
You've probably heard the quote: "If you got the dirt, you can't get hurt.” Kohl adds a qualifier in that sometimes it doesn't work. In the 1980s, those who owned overpriced land were often the ones who did get hurt.
Likewise, while a few guys with no marketing plan have been lucky in the past few years, Kohl says they'll likely strike out eight out of 10 years.
Kohl reminds farmers that just because money is cheap doesn't mean you should borrow and expand. He recommends producers adhere to the 60/30/10 rule of growth—use 60% of your profits to increase efficiency, whittle down debt and incrementally expand; use 30% of your profits to build working capital; and the remaining 10% to have fun in life.
- Occasionally, a farmer who has no marketing plan hits a home run.
- If you got the dirt, you can't get hurt. But sometimes it doesn't work.
- 50% of farmers and ranchers think working capital is the balance in the checking account.
- Many businesses go broke attempting to minimize taxes.
- Prices and cost are not too volatile for a business plan.
- Most businesses attempt to grow their way to profitability.
- Funding long-term acquisitions out of cash flow and operating monies is the kiss of financial death.
- 25% of small businesses filing bankruptcy just had their most profitable year.