Minding Ag's Business

10 Ways to Skin a Profit

Economists and ag bankers have been making headlines in recent weeks about the need for grain farmers to drastically realign their cost of production for 2016. After talking at length to progressive grain producers from five states last week, I found all were taking that message to heart. But they are mindful that you can only slash so many inputs without affecting yield.

"We knocked $1.5 million off the top in gross revenue in one year, so it will be hard to make it all up by cutting inputs. We'll need to generate more income, not just cut costs," said one operator who has dropped cotton this year, but raises corn, soybeans, peanuts and rice. "We're getting everybody on board by constantly talking about it."

For obvious reasons (see below) my contacts are not identified, but their mindset shows how proactive operators with 5,000 to 20,000 acres each are attempting to avert a cash crisis in late 2015 and early 2016. In fact, some multi-generation operators with large war chests see 2016 as a year for expansion if they can keep operating losses minimal.

Here's a synopsis of 10 strategies my farmer contacts are implementing:

1. Run what-if scenarios. Many, many grain farms with rented land barely broke even last year. Equipment dealers tell DTN a significant number of their customers are not farming this year, others have been given a one-year warning from lenders if 2015 results don't improve. One 19,000-acre Midwest operation projected colossal drops in revenue between 2013 and 2018 if they don't do anything early and USDA's long-term price forecasts are right. Putting a dollar figure on the problem motivates everyone on your team to take the effort seriously, they say.

2. Restructure debt. Most did this last year, but make sure the length of loan matches the life of your collateral. If you've paid cash for farm machinery in recent years, consider putting it on an intermediate term loan, not a 20-year mortgage you'll be paying after the tractor is fully depreciated. Remember, it could take four or five years to repay carryover debt. Lenders forgive one bad year, but a second in a row is problematic.

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3. Avoid excess equipment. Some operators share expensive machines between trusted friends in different regions, such as a cotton picker swapped between the Deep South and the mid South, or combines between Iowa corn harvest and Washington state's wheat harvest. The last time the cotton market crashed, you had to sell cotton pickers for spare parts, growers caution.

4. Generate more income by making full use of your people and machines. Sometimes that means doing more custom work like land leveling, drainage contracting or custom spraying. Or it could mean hiring out your on-farm agronomist to neighbors. Young, technically savvy producers could work part-time as a "Geek Squad" for senior farmers.

5. Fire your worst rental ground. "We know we're going to make the landlady cry, but we can't afford to farm her land anymore," a Midwesterner has already concluded. One farm operation has ranked their 10% lowest yielding farms and intends to drop those leases this fall. The advantage is it will reduce their cost per bu, but it's painful, especially for those good land partners who've been with them many years. To keep everyone happy, they are finding substitute tenants before they break the news. Downsizing does risk excess machinery capacity. However, with so many operations in financial flux, culling the bottom 10% of land could position them to replace high cost farms with better quality or at least geographically closer land by next spring.

"This will also open us up to future opportunities closer to home. It also helps us maximize our expenses and labor. We feel now is the time to be doing this consolidation," they say.

6. Be transparent about costs with landowners. The most effective cash rent reductions have been by sharing what your returns would be at current rental rates, these operators say. Those with variable rate leases automatically adjust under these circumstances, but landowners may not be happy with the situation. "We started the conversation with landlords in 2014, alerting them they wouldn't be receiving as big a bonus in 2014 as in the past," says a Midwest producer who has used variable rate leases since the 1990s. "But it's a struggle for our land partners who have the double whammy of higher property taxes and no increase to pay it."

7. Meet monthly to match your budget against actual expenses. Regular snapshots of your financial position help you correct course before a crash. Some include their top managers, not just family owners to help everyone get invested in the process. Real-time budgeting helped one commercial farm stay on target: "We didn't draw $225,000 out of the operating line we had this year," they said.

8. Gain strength in numbers. It's hard for a solo operator to leverage deals with input suppliers or become the "go-to" supplier for elevators and processors. One Ohio buying club pools 34 farms--representing 150,000 acres--to get real economies of scale on the buying and selling side.

9. Consider "all natural" fertilizer. Spreading can be a hassle, but biosolids, trash from cotton gins and chicken litter offer one 8,500-acre grower a chance to make a 25% to 50% dent in their fertilizer budget. It might not happen overnight, but it's part of a long-term plan.

10. Review your crop insurance. Study coverage farm by farm, crop by crop, to decide if enterprise units' discounts are worth the savings for you. An irrigated operator who has had only one production claim since 1995 buys enterprise units and 50% coverage, to qualify for prevented planting coverage if needed. Just remember if you have highly variable fields, such as 20 bu. wheat averaged with 100 bu. wheat in the same enterprise unit, you may not qualify for a claim.

All these efforts might not cure all ills. " I don't know how we could plant a crop cheaper than we already are," says a producer who ditched a combine , laid off several employees and now hedges commodities earlier than ever for better prices. "Our state Extension service published budgets last fall that showed negative returns, even before a land charge. The disappointing thing is when you've done all this, and it's still not enough."

Follow me on Twitter@MarciaZTaylor

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Comments

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Bonnie Dukowitz
6/16/2015 | 10:54 AM CDT
Is this an article referencing family farming or Big Bus.?? Substitute Tenants? Screw thy neighbor! Thanks a lot.
Todd Young
6/15/2015 | 11:01 AM CDT
I noticed in the last paragraph that one farmer "....now hedges commodities earlier than ever for better prices." It's good to see this since after all once all inputs have been scrutinized the best place to make up profits/ground on your competeting neighbors is in the area of doing a better job of marketing. I have tried to convince my family members to do a better job of marketing (forward price by taking advantage of better/higher prices earlier then protecting those earlier/higher prices w/ hedging) for years now w/ no/little avail. But alas, old habits die hard.
Raymond Simpkins
6/14/2015 | 9:23 AM CDT
I think I read earlier in one of your blogs someone stating that it will be the top 4 percent in terms of land size that will fail in 2016.Some of these guys are leveraged so hard by paying non profitable land prices.Even at $7.00 corn some land sales were out of reach.And, did anyone think the good farm economy would last?? Come on!!! If you did you haven't been farming long.Why are guys reluctant to give up poor ground or any land for that matter?Let someone else lose money on it,before long it will be back on the market.