The ag sector’s general economic health may have bottomed out. That being said, a quick and significant improvement doesn’t seem to be around the corner.
It may be a little early to ascertain the outlook for farm operations’ 2017 bottom line, but it does appear that for many, this year could be another “push” financially.
Producers are reporting better-than-expected yields, but they may only make up for lower-than-expected or projected commodity prices. Yields in many areas, while better than expected, may not reach 2016 levels for most crops. Also, most producers didn’t take advantage of the few narrow windows of marketing opportunities earlier in the year, and as a result, there will likely be a lot of unpriced 2017 grain being stored.
‘The old normal’
Many in the agricultural industry have labeled the last four to five years of economic challenges in the grain sector the “new normal.” The reality is with current commodity prices and profit margins we’re probably back in the “old normal.” We’re realizing the super-cycle years of 2006-2012 were the “good old days” set up by a perfect storm of several factors and are proving to have been an aberration.
Prices crash far faster than costs adjust. Prices can adjust immediately to market supply and demand. But costs — especially land and equipment costs —don’t adjust nearly as fast. Input costs take five or six years to adjust after prices collapse, Iowa State University data shows.
Many crop and livestock producers are finding it challenging to adapt promptly enough to prevent erosion of working capital and core equity.
The grain sector can’t count on Mother Nature to bail it out of its commodity-price environment. With today’s improved genetics and fertility management, as well as top-notch farming practices and technology, the likelihood of a crop failure large enough to significantly impact crop prices is diminishing. It’s still certainly possible, but perhaps not something to bet the farm or ranch on. It simply may not be reasonable to plan on $7 corn, $15 beans or $3/cwt feeder calves soon enough to pull an operation out of its problems.
Good managers sweat the small stuff
To handle the challenges, producers need to plan, strategize and execute, managing what they can control and managing around the uncontrollables. It takes a much higher level of commitment and management than it did just a few years ago. But working smarter, not just harder, has the potential to pay large dividends in an operation.
Future bottom-line profits will be largely driven by managing expenses rather than revenue. Producers will need to focus on being efficient, maintaining moderate family living expenses, making asset purchases based on an acceptable return on investment, and generally being more attentive business owners.
Finding ways to build working capital will be many producers’ and their lenders’ goal. As working capital levels diminished in recent years, solutions have become fewer, more difficult and often more problematic for many.
Continuing to push debt down the balance sheet to refinance operating losses or debt service coverage shortages — or worse, refinancing excess family living — will be monitored closely. Pushing debt down the balance sheet can be done only so many times. You can’t borrow your way out of debt, and you can’t spend your way into prosperity. It’s never a problem until it becomes one.
The value of a good lender will again be paramount. A good lender is more than just an order-taker. A good lender has an open, honest and respectful line of communication with his customers, lets customers know the risks of continuing to finance an operation “when storm clouds are building in the west,” and lets customers know the limits of their financing in advance.
It’s a great idea for producers to talk to their bankers early to ensure you’re both on the same page with respect to 2017 financial results and how best to move forward. They should go armed with solid financial and commodity marketing data, and if prudent, options and solutions for possible problems. Procrastination will not be their friend. Time doesn’t fix problems; action fixes problems.
There has never been more risk in agriculture. Ironically, there have possibly never been more opportunities. The bottom third of operations that may be struggling could very well be opportunities for top-third operators.
For 2018, well-managed operations that focus on managing the right costs and knowing their production costs and break-even levels to use as the foundation of a marketing plan will continue to do well. Many of them will concentrate on doing a number of smaller things just 5 percent better, which in aggregate adds up to a profitable bottom line.
Lynn Paulson senior vice president, Director of Agribusiness Development at Bell Bank, Fargo, N.D.