Farmers deal with uncertainty on a regular basis, from fluctuations in weather to changes in market demand. But lower commodity prices and higher input costs pose a new challenge—staying profitable in a tough business climate.
“We need to focus more on the financial management of the business than we have in recent years,” says Mike Boehlje, Ph.D., professor of agricultural economics at Purdue University. In the kickoff episode of “Management Matters: Focus on Profitability,” Boehlje explains how growers can make the most of the current economic situation and he offers advice to manage your farm’s finances effectively in 2015.
- Lower prices aren’t a temporary phenomenon—the pressure on crops will continue, so growers should protect themselves from further price declines.
- Price variability makes for tough decisions. In these times of uncertainty, farmers need to focus on the financial side as well as the operational side of their business.
- To determine the value of your inputs, always ask if the potential yield enhancement is greater than the cost. If you invest $10 in fungicides, will you get that $10 back through increased yields?
- When cutting expenses, consider their direct impact on your anticipated yield:
- Nutrient applications: Yields are very responsive to N, but we might be able to pull back on our P and K applications because we often have reserves in the soil.
- Machinery and equipment: The newest and the best in farm machinery can improve yields, but consider whether that investment is worthwhile if you already have reliable equipment.
- Discuss rental rates with your landowner:
- Land rent is usually the highest expense per acre, but cash rents are slow to adjust.
- Share the numbers with your landowner to explain how their rent affects the profitability of your operation.
- Talk to your banker:
- Look for a longer payoff when evaluating the terms of a loan. Aim for a 20-year payoff on a new piece of land, rather than ten. Likewise, a three- or five-year payoff is too short for new machinery.
- Anticipate issues and talk to your lender early on. If necessary, explain that you can make a payment this year, but that if prices don’t recover you might have trouble next year—lenders don’t like surprises.
- Think like a Chief Financial Officer (CFO) for top financial strength:
- Consider the financial side in addition to the operational side of a business—whether you have the capacity to pay off your debt, whether you should make investments in new machinery, etc.
- Think broadly about how individual expenses and investments impact the “big picture” of your farm’s finances.
If you have questions on farm profitability or on Dr. Boehlje’s work, visit the Purdue Center for Commercial Agriculture and stay tuned for more episodes of Management Matters.