Farmers Advised to Hone Financial Skills

3/16/2013 7:00 AM
By Charlene M. Shupp Espenshade Special Sections Editor

LANCASTER, Pa. — Are you a “super producer?” If not, what are the skills you need to become one of those top producers?

During a daylong AgBiz Professionals tele-session at multiple sites across Pennsylvania, farmers worked through several scenarios looking for potential weaknesses in a farm’s financial standing.

They also heard from David Kohl, Virginia Tech professor emeritus, and Mike Hosterman, AgChoice Farm Credit agricultural business consultant, who discussed financial strategies.

“As I think of the business you are in, change is inevitable and profits are harder to come by,” Hosterman said.

“Being conservative, particularly in the good times, is critical,” Kohl said. It is easier to make poor decisions in times of strong profits, he said, but this is an “extremely fragile environment” and farmers need to know what it takes “to keep out of a ditch and minimize the roadkill.”

Kohl also talked about key practices of top producers. Many have advisory teams, which can be highly beneficial to a farm operation. Other elements include being conservative on debt, having profit plans and establishing priorities.

“A lot of people put emphasis on the $100 a day decision,” instead of the larger, more critical choices, Kohl said.

Hosterman said it is important to measure business progress. Three ways is by conducting a SWOT — or strength, weakness, opportunity and threats — analysis, identifying trends in the business and following industry benchmarking.

When conducting a SWOT analysis, the idea is to sort out what is happening in a business. When working with dairy profit teams, one of the things the team will do is conduct a SWOT analysis. But moving forward, Hosterman said, the process should be completed annually.

Trends are a “key part of knowing your business,” according to Hosterman. Trends to follow include income, expenses, cost of production, profits and cash flow.

“They are done to see where you have been and how you are doing,” he said.

Farmers also should compare their trends with industry trends. For newer businesses, it might take a couple of years to develop the trends.

“Know your trends before your lender,” Hosterman said. It demonstrates financial management.

Benchmarking is a way to tell whether business weaknesses continue to “show up,” he said. Farmers can develop short-term plans to correct highlighted issues. Benchmarks should then be compared with the top 10 percent of producers.

“Comparing to the most profitable producers is the best way to go,” Hosterman said. “We are in business to make money.”

Both Kohl and Hosterman said business liquidity and projecting are important. Farms have to expect the unexpected, and most cannot handle an untimely weather event or drop in production.

“Liquidity is overlooked at most farms. It’s a measure of flexibility in our business,” Hosterman said.

He recommended retiring accounts payable first, followed by operating loans and lines of credit to start building a cushion. He said farmers should avoid buying “toys” and limit purchases to those that improve productivity.

Finally, Hosterman said, farmers need to realize that another downturn will come.

Looking at the marketplace, Kohl said the fragility in the grain markets comes from being ruled by weather and emotion. Grain price projections have a wide spread, depending on this year’s crop yield.

Years of strong profitability have left farmers complacent, Kohl said, and he advised to “just be careful and you better have a good risk management plan.”

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