I learned this spring that production agriculture is not the only business that has cycles. In fact, we likely may be more fortunate than most other businesses.
In April, while stranded in the Louisville airport, I met Matthias Grundler, head of procurement, trucks and buses for Daimler, Stuttgart, Germany. Daimler is the 24th largest company on the planet. He indicated one of their biggest challenges is management of cycles. He feels cycles will be shorter and higher impact. I agree.
Another lesson in cycles is a May 23, 2011article in Fortune magazine about Caterpillar. Its business is much more cyclical than farming, and they’ve learned from the bad times and developed plans during the good times to get the company through the tough times.
We can learn a lot from other companies, not just about managing margins, but about strategic, what-if planning.
Corn and soybean farmers have very good margins in 2011 and very likely will have good margins in 2012. We are seeing $200-400/acre margins in 2011 and in looking at some preliminary numbers for 2012, if opportunities are taken and margins captured, margins could range from $150 to $400/acre.
Those margins will not stay, however. So as we discussed in last month’s article, the opportunity now is to bulletproof your balance sheet because it will cycle.
An economic theory that is not often thought about – or is forgotten – in the commodity-production business is that over the long run commodity prices will level out near the average cost of production. Some years price is above, some years price is below the cost of production, but over the long run that theory holds. See the nearby 40-year charts on price vs. cost for corn and soybean production in Iowa.
We have had about four opportunities like this in corn production in the last 40 years, but they never stay.
The key to creating wealth in the commodity production business is first to understand this, and then recognize that your competitive advantage lies in having lower-than-average costs or higher-than-average marketing results, or both.
As I have mentioned before, the four greatest leverage points to bottom-line profitability are marketing results, machinery and labor cost management and agronomic management. The other costs, while important, do not have the variance or the opportunity to affect the bottom line like these leverage points do.
To capitalize on a lesson from other companies, a good strategy now is to develop plans and determine how you will lower your break-even cost of production when you need to rather than scrambling to keep up when you have to.
We have done this on our farm, and it’s a very good exercise. We’ve learned a lot.