Strategies to survive tight margins

Tony Nye - OSU Extension

Happy New Year! Hopefully, by the time you read this week’s article, the Buckeyes won their bowl game against Notre Dame to start the year off right.

After the New Year glow is worn off, how many of you really have a new year’s resolution you will keep and see through? Research already says that if you are going to a fitness center to help you lose weight you will quit going by February, so, how many of you will really make a new year’s resolution you will keep? There are lots of things I should consider, but for now I like food, and I know I am overweight, so that won’t be a resolution for me this year.

As we head into the New Year, taxes and other farm management decisions are on many farmers’ minds. I found an article written by Chris Bruynis, OSU Extension Educator in Ross County, that addresses 10 strategies to survive tight grain margins.

Bruynis notes that there are a few things every business person knows about margins. There are typically only two ways to improve them; either increase revenues or reduce costs. Making the management decisions to affect movement on either front is often difficult at best. Included are some of his ideas that farmers can consider with today’s lower crop prices and projected lower profit margins:

1. Complete a financial analysis. Knowing where the business stands financially will be critical in developing a plan to survive this period of low margins. This will provide insight into the how drastic the measures need to be to weather the storm. Good financial capacity will allow farm families to borrow new money, restructure term debt, or even make interest only payments on some loans.

2. Lower the cost of production. This is paramount! There is significant variation among farmers in the cost of production depending on size and scale of the operation. Items such as cash rent, input costs, operating costs, and equipment depreciation can greatly affect this cost. Knowing the true cost of production will allow farmers to look at their cost structures to make the necessary changes.

3. Improve grain marketing skills. Grain marketing strategies vary somewhat depending on on-farm storage, crop insurance participation, and total bushels available for sale. Regardless of the farm constraints, it is critical to set price targets that are realistic and based on the farm’s true cost of production. Also the ability to use available marketing tools such as option contracts, hedge-to-arrive contracts, etc. and understand risk exposure created or protected by each will be important.

5. Increase profitable enterprises. Most farmers are creatures of habit and do not easily abandon their crop rotations or shift to new crops. Farmers will need to closely evaluate the possibility of increasing acres of one crop over another in 2016. Be careful not to exchange short term profitability over long term profitability.

6. Reduce unproductive assets. Growing crops on marginal soils or rented ground with extremely high rental rates may be good candidates for removal from the business portfolio. Farmers need to weigh the loss from farming these properties compared to the fixed costs that will be spread over the remaining acres to determine if this is a good decision. Other ideas could include selling unused and underutilized equipment on the farm. However, be careful to examine the tax liability of the sale of these assets so that it does not consume the income generated from their disposal.

6. Add additional revenue streams. Additional revenue streams can come from a few sources, but most commonly this would be the addition of off-farm employment for one or more of the adult family members. This lowers the need for the farm to generate all of the family living expenses and health care costs. Other ideas would be the addition of other agricultural production enterprises or agritourism/agritainment enterprises. Make sure you have studied these options thoroughly to predict the positive cash inflow they may generate.

7. Talk to your lender. Believe it or not, your lender really wants to see you succeed and will work with you toward that end. The earlier you communicate with your lender, the more options which will be available to you.

8. Cooperation among neighbors. Years ago, farmers understood that by pooling resources they could generate increased profits. This was evident by the number of supply and marketing cooperatives that once dotted the countryside. Is it time to create farming arrangements that bulk purchase inputs, own equipment, produce greater marketing opportunities, etc. to maximize income?

9. Work toward full employment. This is not to suggest that grain farmers are not fully employed. However, there are plenty of examples where farmers have added enterprises to their business portfolio to utilize their labor and hired labor more fully. Examples include excavating, construction, painting, livestock, machine shop, and custom hire.

10. Punt. This is not intended to be funny or flippant, but every farm business owner needs to assess if exiting the business may be the best alternative for them. At some point, preserving wealth should become more important than continuing against all odds. This might look very different for someone that is 35 than someone 65 years old. If exiting the farming business is the correct management decision, make sure to visit with your tax accountant to create the proper exit strategy. Remember for the past several years, many farmers have been focused at reducing taxes and thus have created a substantial tax liability for the business.

Bruynis concludes that period of tight margins have plagued farmers many times throughout history. The last time we saw this in row crop farming was in the early 1980s. It followed a very profitable period through the late 1970s similar to what we have just experience in the early 2010’s.

Currently, the nation’s farm balance sheet is in much better shape relative to 1980, but that does not relieve the responsibility of operators in making management decisions necessary to keep it there.

Tony Nye is the state coordinator for Small Farm Programs and an OSU Extension educator, agriculture and natural resources, for Clinton County and the Miami Valley EERA.

Tony Nye

OSU Extension