Why are some farmers more profitable than others? How do some farmers find opportunity in tough times? “Production is important but focusing on the business side of farming has become the dividing line,” says Jim Knuth, senior vice president, Farm Credit Services of America.
The macroeconomic forces at play in the grain markets point to continued low-margin environment for farmers, Knuth says. This means farmers must have a goal of being a high-revenue and low-cost operation.
“Today’s farmers need to spend as much time running their business as they do running their combine or tractor,” he says. “Focus on getting better, not just getting bigger—bigger alone won’t solve issues.”
Focus on financial acumen.
With today’s thin profit margins, a guess at your financial standing won’t cut it. “You cannot look at the financials or business management practices once a year,” says David Kohl, professor emeritus of agricultural finance at Virginia Tech University. “You have to constantly monitor them. What created deviations? Was it something we did positively or negatively from a management decision?”
Manage time wisely.
Farmers should follow the 80:20 rule, encourages Danny Klinefelter, professor emeritus and Extension economist at Texas A&M University. “Around 80% of your results come from 20% of what you do,” he says. “It’s that way on almost everything. Do first things first. So many people never reach their long-term goals because they spend too much of their time doing second things first. Prioritize. Delegate or hire it done; you can’t do it all.”
Be proactive in cutting costs.
Farmers who are surviving and even thriving in the fifth year of a down cycle in grain production are using a few key business strategies, Knuth says. “They have found the sweet spot between maximizing profits versus maximizing yield or minimizing costs,” he says. “To adjust to this low-margin environment, they have sold under-performing or non-performing assets.” Also, they have proactively negotiated cash rent prices and are using or exploring flex leases.
Kohl encourages farmers to look at their business and identify three areas to improve, such as your grain marketing, asset utilization or yields. “Try to be 5% better in about three areas—never more than three—or you lose focus,” he says.
“A 5% increase in price received, a 5% decrease in costs and a 5% increase in yield will often produce more than a 100% increase in net returns,” Klinefelter adds. “The effect is cumulative, multiplicative and compounding.”
Execute a marketing plan.
To be successful in grain or livestock marketing, farmers must make it a priority by dedicating time, Knuth says. “It’s not the last thing to do, the first thing to do.” Knuth encourages farmers to study normal market cycles and do pre-harvest marketing. Also, don’t try to shoot for the highest market price—just a profitable price. “If you try to chase the last dollar, you rarely catch it,” he says. “We tend to see market highs and market lows in the rearview mirror.”
Aim for continual improvement.
The most dangerous phrase in business, Klinefelter says, is: that’s how we’ve always done it. “It is an economic reality that for your business to succeed and continue successfully beyond you, management must learn, adapt and continuously improve at the rate set by the leading edge of the competition and not by your comfort zone,” he says.
Today’s successful and profitable farmers are lifelong learners, Kohl says. He encourages farmers to attend three to five educational opportunities annually. This will help you look beyond your farm and garner new ideas.