An expected correction to the high times in commodity pricing and land values make it imperative for U.S. agricultural producers to look at strategic economics.
First they should identify the strengths and opportunities and the weaknesses and challenges of their operations, said David Kohl, professor emeritus of agriculture and applied economics at Virginia Tech. and a 20-year partner in Northwest Farm Credit Services’ development program.
The global economy, particularly in emerging countries, will have a big impact on strategic planning for 2014 and beyond, he said during a webinar Monday.
Those emerging countries have experienced rapid growth for at least the last 10 years, which has fueled prices for a lot of U.S. commodities. But that pace is definitely moderating, and if the Federal Reserve cuts back on its economic stimulants, it will impact that growth even more, he said.
Kohl outlined some steps producers should be taking for strategic planning, including setting goals and getting their farm, financial and risk-management plans in order.
Producers should be setting short- and long-term farm, business and personal goals that are specific, reachable and measurable. Those goals should come from every partner in the business and be combined and reviewed. They need to be established, written and retained for future assessment of progress.
Working capital will be critical in the era of waning rural wealth that looms. A strategy for working capital is designed to get producers through the bumpy road ahead and also to allow them to take advantages of discounts or good deals, he said.
Keeping cash in the bank or a short-term money market investment won’t earn much money, but it’s better than having to sell land at 60 cents on the dollar, he said.
He advises having enough cash to cover one year’s debt payments and two to three months’ average expenses.
Producers should also consider the concentration of their inventory, cash and accounts receivable. Diversity in that arena will make working cash more accessible. Inventory should be price protected, but contracts might not be honored and producers shouldn’t have all their eggs in one basket with one buyer.
They also need to consider if their accounts receivable – the most vulnerable element in a down cycle – are collectible. They should keep an eye on prepaid expenses and rising accounts payable, which could have the business heading South.
Rising interest rates are another factor if the general economy improves, and producers might consider locking in interest rates ahead of that possibility.
Kohl advises producers to get their own credit scores and reports as well as the scores and reports of their partners each year, correcting false information and taking steps to improve those scores if necessary. They should shoot for a score of at least 700, which reflects a 5 percent chance of delinquency, he said.
Producers should also practice risk management, not just with commodity insurance and marketing contracts, but also with wills, transition planning and life insurance enough to cover their debt.
In addition, successful producers have a professional record system that allows them to identify their break even and negotiating range and allows them to apply money and effort where they’ll get the best bang for their buck, he said.
Another element of success is education and life-long learning, and Kohl advises producers to plan three to five venues annually for seeking information and networking that motivate action.
Yet another element is having a team of advisers, which could include lenders, industry consultants, mentors, customers, and planning specialists.
He recommends having at least an annual meeting; meeting away from the ag operation; having a facilitator, agenda and previous minutes; assigning responsibilities with timelines; and putting the important items high on the agenda in case the team runs out of time or steam.