Today, we shall be looking at how to stay profitable during tough times in agriculture. It is every farmer’s and agriculture investor’s goal to continue making money even during the times that’s the market forces are not looking very good. 2020 has been a perfect example of how unexpected events can flip over even very solid economies. It is therefore essential, for everyone who expects to survive in this field, to prepare for the extremely challenging times.
Most of the farmers you will interact with, fall into the following four categories:
- 10% of them have non-farm income as their major source of income-you will find that most of the farm owners have other high-paying off-farm jobs that enable them to remain profitable even during the tough times.
- 30% of them have a lot of equity- such farmers make a little money in the low price years, but a lot of money in the high price years.
- 30% of them are young and they apply financial strategies to remain profitable – most modern-day farmers finance their farms using debt and leverage. They manage to stay profitable through maximizing yields, as well as making the right marketing decisions.
- 30% are struggling to remain profitable – such farmers are carrying too much debt, and they do not have a solid business approach to the management of their farms.
In reality, the bottom 25% of the farmers who rely on bank loans to remain profitable usually have a hard time making the payments on time whenever hard times come knocking. Investment experts in this field usually coming to aid such farmers to restructure their debt, minimize the debt load, or even get collateral that will help shore up the loan. For such farmers to get help from investment experts, they need to part with a significant amount of money. If they, however, want to remain on track with remaining profitable on a year-round basis, they should see to it that they adopt some good farmer management practices beforehand. Here are some 3 top tips on how they can do this:
Managing all their costs
The very main variables but you will observe from one farm to the next one, are land rent that is paid, as well as the equipment costs. Most of the profitable farms are usually willing to part with a huge lump sum in the form of rent, provided that their land has a high yield potential. The same can be said about the equipment costs. The profitable farmers always seek to maintain the highest level of profitability per acre, thus can spend more or less on equipment, depending on the projected profitability. Some smaller farmers actually stick with their old pieces of equipment, just to ensure that they do not incur annual payments on the equipment. This enables them to keep their costs quite low, without compromising on the productivity of their farms.
Some medium-size farms have come up with ways to share their equipment with their neighbors, in a bid to reduce the costs incurred per acre.
Use all approaches as possible to maximize yields
Some of the very profitable farmers you will find in today’s world, have old equipment, but they have also invested in modern-day technology that brings in a lot of efficiencies. They for instance have planters that help with ideal seed placement, and that maximize the seeding rate per acre. They also ensure that they plant their crops on time. Not forgetting that they work hand in hand with the right seed suppliers, to see to it that they get the perfect seeds for their farms at the right time. These seeds are then planted in the right fields to ensure that they get the best conditions to grow.
Apply the best marketing and decision making approaches
To ensure that you remain profitable even in very tough times, you should be ready to work with a marketing team and make use of a solid marketing plan. You will also find that they are quite conversant with grain merchandising. Some merchandising decisions such as adding 30 cents to 50 cents per bushel on a year in year out basis ensure that they remain above the profitability line.
The general observation is that the farmers who reduce their costs by 5%, increase their production by 5%, and increase the selling price of their products by 5%, have the chance to make an extra $50 to $75 per acre. This is actually the difference between a profitable and loss-making year, for most farmers.
Extra tips to remain profitable in the economically challenging times
Re-evaluate your farming strategies and state of affairs
As is the case with any type of business, every farmer should revaluate their projects from time to time. Doing this helps them adjust accordingly, moreso if their long term projects are starting to show a decline in income. This could be an indication that the products in question could no longer be profitable in that region.
Some common problems that prevent the farm from being fully profitable, including poor drainage and compaction, also need to be looked into. This goes along with the re-examination of the production processes, including the preparation of soil, planting the crops at optimal depth and density, the proper application of farm inputs, as well as the use of the best marketing strategies to guarantee maximum profitability.
Live within your means
During tough times, farmers should seek to minimize their costs, by downscaling their operations, until the coast is clear. As much as it is hard for farmers in sectors such as the fruit and grain production sectors to reduce their input costs since it can negatively impact the quality of the harvest, they should think of ways through which they will not pile up more debt purchasing new equipment.
If you are already facing tough times as a farmer or investor in this field, you should definitely get the more refined version of what it entails to get prepared for the economically challenging times by going through the series below:
That will be all for this article on how to remain profitable during tough times in agriculture. As already highlighted, you can get an in-depth version of the expert advice on this subject by having a look at the 4 part agriculture series recommended above. I have my best to simply pick up a few tips on the broader perspective, but the series will take you through the specific details on what you need to do in order to survive and profit.
I wish you well,
Eric, Investor, and team member at Gold Retired!