My Road Warrior speaking opportunities took me to Louisville, KY, to address a group of ag lenders and credit analysts. It was a fun group that was very engaged in the question and answer session. The rapid-fire question session, much like ESPN’s format, was led by my good long-time friend, Kip, who can always “school” me in one-on-one in basketball. I have told him he is not very kind to an old man!
Kip asked me one of those “zinger” questions from the floor:
Many beginning farmers and producers are showing well-documented earnings, but have little real estate, and have owner equity typically below 30% due to such high input costs. A lot of my young customers can show earned net worth over $2 million, but still have less than 30% owner equity. How can they compete with large, established farmers?
First, this is an issue from coast-to-coast for a large number of young producers who are emerging in agriculture; however, this has historically always been an issue. The young producer who is profitable must be very disciplined in the use of those profits. First, they must invest for efficiency, with a “better is better” strategy vs. “bigger is better” in driving down costs to improve the bottom-line margin.
Next, a young producer must allocate profits to build high levels of available working capital to position the business for the next opportunity. The philosophy on working capital or cash in reserve is not about immediate return on investment, but having a tool to use for a financial shock absorber in uncertain times, and a stash available to take advantage of the next opportunity quicker than their established counterparts.
Next, a strong, balanced risk-management program on revenues, input cost and interest rates is not an option but a requirement. This demonstrates to a lender, who is also in the risk management business, that they are proactive in protecting and increasing their profit margin.
Finally, having discipline in this era of extreme economic cycles, with not only volatility, but increased velocity of change, will separate the winners from losers in defining your business, and positioning the business to compete with the old dogs in business.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]