We'd Like To Mention

The thing about the boom-and-bust economic cycles in agriculture is that you never want the lows to go too low and, if we're being perfectly honest, the highs too high. Since net farm income peaked at $181.9 billion in 2022, farmers have watched their take-home pay decline. That trend is expected to continue in 2025 with a projected net farm income of $129 billion, according to the Food and Agricultural Policy Research Institute's most recent report issued in September. That's a nearly 29% drop in three years.

"We're coming off some pretty serious highs, and sometimes that comedown can be really painful," explains Brent Gloy, partner at Agricultural Economic Insights LLC (AEI). The ag economist's comment underscores the U.S. farm economy's volatility and the monetary risks farmers and ranchers must constantly manage to stay in business.

He points out the industry's income decline has now settled into "average" revenue levels at which agriculture historically operates. The problem, Gloy adds, is when the cycle turns downward, the higher cost structure that occurs during the boom years is slow to adjust. Financial conditions erode when there is a big gap between costs and prices, creating a margin squeeze.

ADJUSTMENTS AHEAD

That's the situation many find themselves in today. And, while there have been a few bright spots for producers -- beef prices, for example -- the crop sector has underperformed. Low commodity prices mean losses for many on every acre planted. Consequently, farmers are focused this winter on financial planning: analyzing their operation's spreadsheets by studying cash-flow, working capital, debt and income/expenses to identify potential cost reductions and other adjustments for 2025 and beyond.

Complicating those calculations are other risk factors largely out of their control. Weather, of course, is the primary one. Farm policy/trade is another. The Trump administration is proposing tariffs on some of ag's best customers, causing uncertainty about the potential impact on farm exports and prices. Also, the 2018 farm bill has been extended heading into the new year, a farm bill the industry argues doesn't provide the income safety net necessary in today's economic environment.

STRATEGIES TO CONSIDER

With so many wild cards, formulating an action plan will require a deft hand -- and a sharp pencil. Gloy and David Widmar, cofounder of AEI, stress any plan should include analyzing your cost structure. "The challenge a lot of producers have is how do you convert that into actionable decisions?" Widmar points out. Here are a few to consider:

-- Give added attention to three fixed costs: Since 2019, there has been a 25% increase in family living expenses, 25% increase in cash rent and 30% increase in farm machinery.

-- Evaluate which cost structure category to focus on. For example, what costs need to be covered to help you make progress toward a long-term financial goal, such as a future land purchase? Or, what costs do you absolutely have to pay to remain in business?

-- When a cost structure course adjustment is necessary, take immediate steps. Though it may be painful, it'll leave you in a better working capital position and will mean less pressure to take more costs out of the system later.

-- Know your break-even price for each crop so you can make profitable sales when the markets allow.

-- Use any potential ad hoc payments (if you qualify) to make strategic decisions to improve your financial situation. In December, Congress financed $31 billion in disaster and economic aid to farmers. Widmar says to make sure a payment is not just papering over some of the high-cost structure that you're eventually going to have to address.

Every growing season brings its share of risk and reward. What tactics you employ will determine if your margin squeeze turns into a stranglehold.

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-- Email Gregg Hillyer at gregg.hillyer@dtn.com, or follow Gregg on social platform X @GreggHillyer

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