As the economic reset rolls through its fourth year, the impact on farm and ranches is becoming clearer. Some producers see this period as one of selected opportunities, while the stress of losses and balance sheet values continue to mount for others Either way, tough decisions are still ahead for most.
From various state and university farm record systems, it is clear that a certain segment of producers are marginally profitable or have at least marginalized losses. Often, this group exhibits good balance in management including production, marketing, finance, and risk management. They also take advantage of short market windows to lock in profits above the breakeven point. When one examines withdrawals for this group, they are modest in both living cost and dividends. Many producers sustaining profitability built working capital reserves during the recent supercycle as a type of “rainy day” fund. Across the country, these individuals are taking advantage of a buyer’s market and using their ability to negotiate price for selected opportunities.
At the other end of the spectrum, farms in the lower one-third of profitability first exhibited negative margins just after the supercycle ended. For most, there was no reserve fund, and too little working capital. Limiting their options, this situation forced producers into multiple refinances. In extreme cases, machinery and equipment are the only equity, and the land is rented or leased. Of course, without core equity in land, partial or total liquidation is probable, which is already the case for some in the segment.
Farms in the average range of profitability, or those in the middle can be called “tweeners.” High amounts of equity in land have made this segment somewhat resilient. If the economic reset continues, 15 to 20 percent of the “tweeners” will exit the industry. Another 15 to 20 percent will partially liquidate other assets. The remaining 30 to 40 percent in this group will make the necessary adjustments to position their business for the next positive cycle.
As with any economic downturn, each business is impacted differently. Some will quickly adjust, tweak, and fine-tune management and business practices.Those without equity or sharp management acumen will most likely get out of the business.This point in the economic reset will become a fork in the road, forcing producers and managers to get proactive and navigate the reset, or cut losses to transition out of the business.
P.S. Many times those getting by on the lower end of profitability think they are ok financially, until it is too late. As Yogi Berra, the famous baseball and life philosopher says, “When there is a fork in the road, take it.” For some, the fork will take them into growth, profits and minimal losses. The other direction can be deceiving until it consumes all the net worth and options are limited.