Minding Ag's Business
Six Ways to Set Your Business Up for Success
Saying these are good times probably doesn't sit well with some. Like my colleague DTN Ag Policy Editor Chris Clayton detailed on his travels across North Dakota this past week, the drought is having a devastating impact on farmers and ranchers across a wide swath of the northern United States.
That's forcing difficult decisions, like spending more on fuel to harvest hay than the feed value it delivers or selling cow-calf pairs that you know will be much more expensive when there's enough grass to start rebuilding the herd. (You can read the story here: https://www.dtnpf.com/…)
For farmers further east in the Corn Belt, the story is different. In some areas, it's just plain too wet. Storms have been recurrent; hail and wind have tried their best to lay corn flat and pummel the leaves off the soybeans. Too much water can be as taxing as too little. (More on that here: https://www.dtnpf.com/…)
Despite the weather woes, and to some extent because of the weather woes, both spot and futures prices for corn and soybeans remain at the highest levels since 2013. Along with the highest crop insurance guarantees in years -- at $4.58 for corn and $11.87 for soybeans -- and tight supply-and-demand fundamentals, the outlook for farm revenue is strong.
That fact is what inspired a team of DTN/Progressive Farmer reporters and editors to write a special series of stories called "Keep the Good Times Rolling."
When Matthew Wilde, Joel Reichenberger and I began brainstorming this package several months ago, we didn't know what the weather held in store, but we did know that agricultural markets, particularly grain markets, are cyclical. A year or two of profitable prices are often followed by years where it's nearly impossible to avoid red ink. So, we set out to explore ways grain farmers could put this year's revenue to work for them.
I highly recommend spending some time reading each of these stories, and you can find the links below. They're full of valuable insights from farmers, bankers, agronomists and others, and since every farm operation is different, you never know which piece of information will resonate or inspire a new idea. However, I think there are some high-level takeaways that anyone can benefit from:
1) We don't how long this market will last. Despite China's pledges under the phase-one trade deal, I think it's fair to say no one really foresaw them buying 1 billion bushels of corn. Farmers planted more acres this year, leaving soybeans in a historically tight spot. Now, with drought taking its toll, supply constraints are on the table. But will China keep buying at this pace? While the experts we talked to say these prices are likely to stick around for another growing season, the picture is much more uncertain a year out.
2) Stay disciplined. Uncertainty about how long this price environment will last means farmers should be cautious. When corn demand reset at higher levels during the ethanol boom, some farmers threw their marketing plans to the wind. Always chasing the top of the market, many never made it and lost out on a lot of profits as the market fell. Almost every banker, economist and analyst we interviewed stressed the importance of sticking to your marketing plan and selling grain when profitable opportunities present themselves.
3) Higher input costs are coming. Land expenses are one of the largest line items in a farmer's budget each year. Commodity prices started rising last fall, and in most cases were not a factor in rent negotiations. Expect them to play a role this year and start talking to your landowner now to make sure he or she understands the impact to your business. Plan for more expensive fertilizer and chemicals, as these have been hit by both high demand and supply chain disruptions. Input costs rise quicky but fall slowly. Start planning for it now.
4) Think about what you can do to boost yields. Yes, it may be largely out of your hands this season, but what we heard through our reporting is that many farmers either switched or are making the switch to variable rate application for inputs. It'll help lower that input tab and increase efficiency. David Hula, who holds the world record for corn yields, suggests investing in technology that aids even emergence, which he argues is key to yields. Others say they're replenishing micronutrients or considering sustainable farming practices that might earn a carbon credit or two, but really pay off with their ability to boost yield potential.
5) Reduce your debt and build working capital. It may sound cliche, but it's true: Cash is king. When the tide turns on prices, having adequate cash reserves will come in handy. Farmers have largely depleted their reserves during the latest grind of low-income years. Now is the time to rebuild it. Keep expenses in check and put some of those profits into savings. Taking measures to reduce your debt load also improves your break-even prices, so that when corn and soybeans fetch much less at the grain elevator, there's a better chance you'll be able to pencil out a plan that works.
6) Invest wisely. Most of our experts suggested building working capital over buying land or new equipment, but if you do plan on making a large purchase, think carefully about how it'll affect your cash flow for five or 10 years down the road. If it adds efficiency, like grain bins, or helps increase yields, it's a lot easier to justify. Avoid the trap of buying something that's new and shiny just to reduce the tax bill. Sometimes it can be hard to calculate a return on investment for new technology, but make sure it has a purpose and brings something beneficial to the operation.
I'm sure this list is far from comprehensive, and I can't help but wonder, what are you doing on the farm to set your business up for success? Let us know in the comment section, or by sharing your thoughts with me at email@example.com.
You can read more about price outlook in the first article of this series, "Farm Revenue Driven by Chinese Demand, Drought Concerns" here: https://www.dtnpf.com/…
See our second story, "Farmers Willing to Spend Money on Crops if Yield Potential, ROI Are Promising" here: https://www.dtnpf.com/…
The third piece of this series, "Contact Landowner Now to Smooth Way for Rent Negotiations," can be found here: https://www.dtnpf.com/…
The fourth piece in this series, "Maximize Profit With Smart Grain Marketing," can be found here: https://www.dtnpf.com/…
You can read more in the fifth pieces of this series, "Boost Your Bottom Line by Building Cash Reserves, Investing in Income-Producing Assets" here: https://www.dtnpf.com/…
The final story, "How to Get the Best Bang for Your Tech Buck," can be read here: https://www.dtnpf.com/…
To see a Reporter's Notebook video about the series, check out https://www.dtnpf.com/…
Katie Dehlinger can be reached at Katie.firstname.lastname@example.org
Follow her on Twitter @KatieD_DTN
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