Since 2000, many young people have been lured into agriculture believing the industry to be one of record profits and capital appreciation. Now, economic reality has set in which can test the mettle of even the hardened agricultural veteran. Recently, Farmer Mac and Wisconsin Bankers Association sponsored a seminar in Madison, Wisconsin, for farmers and lenders that focused on pertinent, crucial industry issues. In the seminar, a participant asked, “For new farmers or newly expanded producers, what are good ways to position the business for tough times?”
As background, this seminar consisted of a stellar audience of 140 producers and lenders; over 50% of which were under 40 years of age. This highly motivated group was engaged and eager to learn.
In tough economic times there is sometimes a tendency to ignore or deny reality and hope better times magically reappear. In answer to the posed question, this group was already taking the right steps by simply attending an educational event with a willingness to learn. Reach out and use the resources around you. Interdependency is today’s method of success. Attend meetings and engage with your lender, supplier, and peers. Networking can be extremely useful in developing strategies and actions to navigate tough economic times.
Second, position your business with a good set of records to be used in the overall business strategy as well as day-to-day operations. Plans are only useful if they are put into practice. On a simple spreadsheet, link your past year’s production records and your marketing plan to key financial ratios. This facilitates easier, more detailed discussions with your lender and also provides the information in a format that is easily monitored. Thinking out your production, financial and marketing plans on paper is extremely valuable. It also clearly outlines areas where improvements or adjustments may be needed.
If you have recently expanded or taken on debt, accept that is your current position and make plans from that point. In other words, only change the things you can control. Utilizing variance analysis, which compares projected monthly or quarterly cash flow to actual cash flow, can provide guidance on what steps should be taken next. Remember, real improvement often comes in incremental steps, not just one change. Variance analysis also outlines your business performance so that strategies and adjustments can be made.
If you have multiple enterprises, budget with different product, price and cost scenarios. This is often called enterprise analysis and is helpful in positioning your business for changing economic times. Pay particular attention to withdrawals from the business, as they can make a significant difference in the bottom line. Lenders will also measure your business withdrawals, as well as your willingness to make adjustments for the long-term sustainability of the business.
Finally, find a good mentor with experience in an economic downturn. This can be a neighbor, friend, family member or with today’s technology, a colleague halfway across the globe. A mentor should be someone with whom you can freely discuss ideas and strategies. Often, a good mentor can serve as an emotional compass based on their years of experience.
While the agriculture industry may have seemed more alluring five years ago, my message for young farmers is that good times do not last forever, nor do the bad times! Always be open to learning. Valuable information can come from many places including, seminars, networking, lenders, budget analysis and planning and mentors. Just as life is made up of cycles, so is business. The key is to position your business for continued success no matter the economic cycle.
For more from Dr. Kohl, follow his "Road Warrior" blogs.