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How to Survive $0 Profit
I met with a business owner the other day who owns one of the three manufacturing plants in the U.S. for a particular product. He shared with me what he told his employees last year: Due to market conditions, one of the three companies was probably going out of business, and he didn’t want that one to be his.
So, what do you do when no one in your industry is making money? Whatever it takes to survive. Whenever profit drops to zero for a sustained period in a particular industry, some of the competitors will, unfortunately, go out of business. The low-cost producers with the least leverage can hold out, and the high-cost producers with the most leverage will cease production. The good news is that the businesses left standing will inherit market share from the businesses that cease. In the long run, the remaining businesses return to profitability with probably even higher profits than before the downturn. Many businesses, like farming, are cyclical, and the roller coaster can be downright nauseating.
Some of my clients will hire a consultant when they think their profits are too low. Typically, a consultant then comes in for a few days and charges $50,000 to offer recommendations and a plan. Usually, my clients’ profit is down about $50,000 that year with no subsequent improvement. Why? Either the business owner was unwilling to change practices or the consultant’s advice was only good hypothetically, rather than practically. So, let’s focus on practicality (and save you the consulting fee). If you happen to be a farmer facing $0 profit, I want to offer you some survival strategies that you may or may not have already considered.
The financial strength of any business is tied to the financial strength of the business owner, and this applies to farmers as much as any other business. As a result, your whole personal financial situation is tied up in your farm financial strategy.
Step one is to print out a 12-month profit-and-loss statement for your farming operation and another one for your personal operation, meaning everything else you spend money on.
Step two is to start looking for savings in every line of your expenses, both business and personal.
When you are struggling with payments, try to refinance at lower interest rates or stretch out the amortizations, either with your current bank or with a new one. Banks don’t want your property back, but they do want the payments to arrive on time, even if that means easing the loan terms.
One important thing to think about is whether or not you have any extra vehicles sitting around, especially ones with debt. The 2018 Tahoe is nice, but the $800 monthly payments aren’t nice when you’re struggling. Your spouse could be driving a paid-off 2008 Chevy Equinox instead. Other nonessential personal items might be fishing boats, motorcycles, or motor homes. These things are fun but a financial burden, and they all have to be insured, stored,
Do you own extra tractors? Tough call. It’s nice to have emergency backups, but again, there’s insurance, storage, and maintenance. You might turn that 1982 John Deere into a little cash and work out an emergency tractor loan agreement with the neighbor. Maximum efficiency, regarding equipment, is to get down to the point where you need everything you own, and everything you own is right for the task and ready for work.
Speaking of equipment, a few farmers have told me recently that they have curtailed capital expenditures, which is an obvious move to make when profits are tight. Beyond equipment, in this new just-in-time supply-chain world, there is no need to sit on excess supplies. I have clients storing $300,000 in parts and supplies they may never use. When times are tough, you need to sell off obsolete items and work that supply inventory down to a minimum.
Adam Rodgers, a farmer in central Missouri, told me how he saves money on fertilizer. “We buy fertilizer wholesale straight off the river [from a dock on the Mississippi about 90 miles away] and haul it back ourselves,” he says. “Then we spread it straight off the truck.” This obviously won’t work for everyone due to lack of proximity to the river, but it’s something to think about if you’re within range – better pricing than the local co-op, no markups for hauling, and no stored fertilizer to potentially go bad.
A farmer in Columbia, Illinois, told me that he is sure that variable-rate fertilizer application is saving him on fertilizer costs. Another farmer in Caseyville, Illinois, told me he saves money by belonging to a nationwide buyer’s co-op. He gets discounts on seed and tractor parts and can even buy grain bins for about half of the retail price.
places to shave expenses
There are probably 20 different types of farming expenses, but let’s hit some of the remaining ones briefly:
- Utility costs. Switch to low-wattage LED light bulbs on motion sensors, and use programmable thermostats for heating and cooling.
- Insurance. Bid out your whole insurance package and think about lowering coverages to the bare minimum. Insurance companies automatically escalate property values over time, sometimes to unnecessary levels.
- Rent. Try to make the case that average cash rents have come down in your region or that your current lack of profitability simply does not allow for the current cash rents.
- Veterinary costs. I can assure you that some vets charge twice as much as others. Therefore, if you have a choice, ask some pricing questions and consider giving a new vet a try.
- Accounting and tax preparation. You can learn to use Quickbooks or another program yourself to save on paying accountants. In addition, some CPAs charge much more than other ones, so feel free to bid out tax services.
- Repairs and maintenance. Consider used parts and online sources, and certainly do winter maintenance to the greatest extent possible to try to avoid planting and harvesting
- Real estate taxes. Make sure the county assessor has the correct number of acres on record, especially the productive vs. unproductive acres.
- Labor costs. Unfortunately, in this record-low unemployment landscape, there’s not much to do, except literally do everything yourself.
When your expenses have all been beaten down to the minimum, you have to address revenue next in order to improve net income. You probably already plant every tillable acre and do what you can to improve soil quality. You probably have already experimented with different seed varieties to get maximum productivity. So, assuming you are doing what you can with crop yields, think about new ways to make money when you’re not planting and harvesting. Here are some additional ideas.
- Utilize your big trucks for local hauling.
- Hire out your excavation equipment for grading, drainage work, or septic systems.
- Use your shop for repairing skid steers, county mowing tractors, or other heavy equipment.
- Use your welding skills and equipment to repair trailers, metal fences, storages containers, or whatever else you think you can tackle.
With frugality and creative problem solving, you, too, can survive $0 profit.