Finishing its run in 2012, the great commodity super cycle brought excitement and lots of chatter. Discussions in blogs, coffee shops and articles hailing a new normal standard and a different plateau for agriculture are over. In actuality, the intensity and duration of the cycle is really what made it great. The cycle started in 2002 accelerating over a five-year period and culminated in the 2007 to 2012 timeframe. These five years brought prosperity and wealth; mainly to those in the grain and energy sectors. While farm businesses experienced record profits and commodity prices were a global focus, what impact was made on farm families and personal expenditure expectations?
Well, examination of real-life, on-farm data can provide some insight into this question. According to Nebraska Farm Business, Inc., in 2007 just prior to the increase in profits, the average annual family living withdrawal before taxes and Social Security was approximately $52,000. By 2012, the final year of the super cycle, annual family living costs nearly doubled to $100,000.
Analysis from University of Minnesota’s the FINBIN data found that median profits for the 2007 to 2012 period was approximately $170,000 for grain operations. Prior to the super cycle, median profits on grain farms from 2002 to 2006 were $67,000. This represents a 2.5 times increase in profits. Whether you farm in Nebraska, Minnesota or most any other place, this data is revealing. The more businesses make, the more they spend!
The big question, particularly, among lenders is whether or not producers will be able to cut back on personal spending habits. Despite the drop in commodity prices, summary data from Nebraska Farm Business finds for 2013 to 2014, living standards have remained in the high $90,000 range. This trend is not sustainable; especially, as it appears that grain commodity prices are in for a reset. The producers willing to make adjustments are tracking family living withdrawals, scrutinizing expenses and exercising heightened restraint.
While navigating your business through a commodity price reset, it is important to ask where your finances stand. Do you have separate personal living and business expense budgets? Frequently, 25 to 30 percent of family expenses are rolled into business expenses. Are your expenses actually co-mingled? What expenses can be decreased or are unnecessary altogether? These are tough questions; but ones that need to be asked and more importantly, answered honestly.
As the 2016 growing season quickly approaches, carefully examine your business, personal and potentially, co-mingled expenses. A sustainable business requires constant monitoring and often improves through incremental steps. In today’s environment, spending less can feel like a step backwards when it is actually, another incremental step forward towards improvement and success.