In recent years I have visited with hundreds of FCI member-owners. Many of these conversations include discussions comparing today’s ag economy to the 1980s. While there is no doubt similarities exist, the differences are much more pronounced.
What Are The Differences Between Today’s Ag Economy and the 1980s?
- Crop insurance products are available and protect production and revenue risks
- Low interest rates counter the skyrocketed rates in the 80s
- Long-term fixed rate options mitigate interest rate risk
- Export business is fueled by countries across the world, including China’s growing middle class, most notably effecting soybean prices
- A domestic ethanol industry increases demand for US corn
Another vast contrast present today versus the 1980s is volatility. In this age of technology we have access to unlimited avenues of communication with the internet providing on-demand information for farmers to consume, evaluate, and draw conclusions from. While this is largely a good thing, it also creates a tremendous level of volatility. We have seen enormous swings in the commodity markets as a result of the availability of real-time information.
But is this volatility your friend or foe? Your first reaction may be that it is your foe because volatility may cause emotions to run high, and emotion is a critical element of anything to do with money and finances.
For example, let’s say you made a 5,000 bushel sale of corn in the morning before the market opened. You feel content with your sale until 15 minutes later when news from overseas indicates Argentina’s corn crop is in trouble, moving the market up 30 cents.
Whether we want to admit it or not, situations like these leave us frustrated and convinced this 30 cent high is just the start. So we don’t make another sale, waiting for the price to increase, and the market drops back 40 cents by week’s end, leaving us even more irritated.
The most successful operations today see volatility as a friend and realize it provides an opportunity to generate profits. These same agribusinesses have learned the importance of disciplined emotional control to avoid knee jerk reactions where unpredictability exists. They make a sale at the 30 cent high, knowing even if it goes up five more cents, it’s still a good sale. There are other strong financial management skills that help farm businesses stay profitable through both the prosperous and challenging cycles of the ag economy.
What Financial Management Skills Help Farm Businesses Stay Profitable?
- Keeping quality financial records including year-end balance sheets to coincide with the tax year
- Creating income statements (not just tax returns) to assess profitability or lack thereof
- Knowing the cost of production of all enterprises in their operation
- Creating and executing an effective, realistic marketing plan with detailed time frames and/or target dates to make sales
- Investing in appropriate crop insurance coverage to protect the operation’s bottom line
Making calculated decisions throughout the year and reducing the emotion involved in managing your operation limits stress, helps you see volatility as a friend, and increases your farm family’s staying power today and tomorrow.
For past editions of Staying Power from other Farm Credit Illinois experts, visit www.farmcreditIL.com/stayingpower.