This famous line modified from the movie Apollo 13 is very appropriate given the current agricultural economic environment. Grain and row crop producers are experiencing the brunt of the blow while many of the livestock sectors have been experiencing relatively profitable economic conditions. Let’s explore the challenge parallel to Apollo 13. Every problem creates opportunity for innovation. If you recall, duct tape was used as a means of solving the issue on the spacecraft.
Examining the University of Minnesota’s Center for Farm Financial Management (FINBIN) data illustrates the extent of the issue on a historical basis. The grain industry go-go years of 2007 – 2012 may be best described as an economic irregularity set up by the convergence of timely events. The emerging nations’ rapid economic growth, the Federal Reserve lowering interest rates and value of the dollar, encouraging exports, biofuel mandates, and weather were perfect conditions for record profits in the grain sector.
Net farm income during the commodity super cycle
The group of nearly 1,000 grain producers represented in the 2007-2012 FINBIN data summaries finds the median net farm incomewas approximately $170,000 in 2014 dollar values. The peak was 2012, which registered in at nearly $270,000. In the five-year period from 2002 – 2006, median net farm income was approximately $67,000. During the great commodity super cycle, median net farm income was approximately 2.5 times greater than the 2002 – 2006 period.
In 2013 and 2014, median net farm income dropped significantly to approximately $33,000 for grain farms. This is comparative to Clayton Kershaw, major league baseball’s 2014 most valuable player from the Los Angeles Dodgers, throwing a curveball that drops off the table. This net income level is very similar to the 2001 – 2002 period before the start of the great commodity super cycle when median net farm income was $37,000. Data from the most recent two years is not a long-term trend, but is a potential trend that grain producers should notice.
Cutting the fat
What are the innovative “duct tape” solutions given these economic scenarios? First, any producer in a position to have diversified income flows will find navigating the economic white waters a bit easier. Livestock income or other outside sources of income can be a bridge to a sustainable path.
The ability to shed marginal assets will be another strategy utilized by those in command of their business. Marginally productive land, landlords who are not willing to budge on rents, and excess machinery and equipment will be on the chopping block. One must examine the human asset side of the equation also to first determine productivity, and then whether the individual is causing a cash flow drain to the business. In some cases unproductive family members could be the ones who may not make the cut.
Separate business and personal expenses when budgeting and conducting cash flow planning
Moderation of family living costs and non-farm capital expenditures will be a high priority. Analysis of farm record data during the 2007 – 2012 super cycle shows a strong correlation; the more producers made, the more they spent. You must know your burn rate on working capital. How many years of losses would result in depleting the working capital reserves? My observations suggest many producers are burning through their liquid financial assets or working capital much quicker than expected.
Know your financials – keep your eyes on the books
Do not be afraid to request assistance. Another set of eyes on your financials, marketing and risk management plans, and overall operation can be invaluable in establishing a correct course of action. In Apollo 13, the astronaut who was left behind on the ground in Houston was the common sense resource in a very emotional time.
Finally, in any down cycle there will be businesses that quickly adjust and continue to make a profit. These individuals and businesses are calculated risk takers in the go-go cycle and resilient and focused in the down periods. This reset period is an opportunity for refinement of business planning and execution.