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10 Things To Help You Position Yourself During The Downturn
How do you win in tough times? It’s a question Dr. Michael Boehlje, Agricultural Economics Professor at Purdue University posed last week to dealers and farmers during John Deere’s LEAD – Leading Economic and Agronomic Decisions – conference. The event, which was held in Moline, Illinois, is the first of its kind for John Deere.
“Ag is a growth industry. Farmers need to make sure they are positioned for the downturn to take advantage of that growth,” says Boehlje. “They need to be best in class and absolutely need to be low-cost producers.”
He outlines 10 things farmers can do to respond.
1. Intense Cost Control. “Efficiency and productivity are critical,” he says. “Know your cost per bushel, not per acre. You don’t sell acres; you sell bushels.”
He cautions that farmers need to be careful when trying to control costs, though. “Don’t give up bushels. If you lower your cost per acre by getting cheaper seed, you may give up some bushels.”
Leverage the technology across every pass in the field. “Precise application of inputs is a good way to achieve that,” he notes.
2. Margin Management. “The only way to know what your margins are is to know what your costs are,” says Boehlje. “Then you have to think about how you manage the margins. Will you be able to have a margin that is not negative but positive? It’s going to be tough. It all depends on what costs you are including in your calculations. Margins above variable costs are probably still going to be very positive in this industry.”
Farmers need to protect the margins when it comes to varying input costs that you pay cash for. “Those who pay rent are going to have a bigger challenge,” he adds. “They will be the are the ones that will have the most vulnerability.”
3. Execution. “Analyze everything you do, and do it right the first time,” says Boehlje. “Reduce the chances of errors or mistakes whether it be your own work or your workforce. One way you do that is by having standard operating procedures or SOP. You are not growing crops like your father and grandfather did. You are in a biological manufacturing business.
If you are in a manufacturing business, you have a set of procedures and policies. He says that’s how farmers have to mentally approach their business. “That’s when I hear, ‘Well, no one has to deal with weather like we do,’” he says. “My answer to that is, have you ever had to manage a resort? They use an SOP so if the weather does change, they don’t sit around and say, 'I wonder what we do now.' You have to have it figured out before the storm hits. Always have a contingency plan. Don’t go to the field with one plan. And know when you have to go to plan B or C.”
4. Buying Right. “When I say marketing, almost every farmer will think immediately of what price he or she is getting for a crop,” says Boehlje. “The first and most important marketing decision you make is what you pay for your inputs. If you’re paying $300 per acre to rent ground, do you know what your cost per bushel is you have to cover that? That cost per bushel is over $2.50. There’s not much left after that for anything else. You have to be careful not to let your costs get out of control.”
5. Logistics Management. “It’s all about scheduling – getting it done in a reasonable amount of time. It’s about input flow, product flow, and you can’t let that iron sit around doing nothing for 6 to 7 hours per day when you have this increasingly tighter window to plant and harvest,” he says. “You have to worry how to manage the assets in the business you’re invested in.”
6. Manage Operating Risk. “Most of us have been doing a pretty good job of managing risk,” says Boehlje. “I do worry about how well the marketing side has been managed in some businesses because we seem to be a bit hesitant to do prepricing in this industry. Typically, there are some real advantages long term in terms of prepricing before we even put the crop in the ground.”
But he also says to think about the standard things like liability insurance.
7. Debt/Capital Management. “You need to think about alternative sources of financing,” he says. “Your lender is going to be asking you tough questions this year. For some it’s not going to be as pleasant an experience as it has been in the past.”
For example, consider leasing assets vs. buying. “Leasing, generally, conserves cash. One of the strategies we look at when we are cash pressured is leasing. Typically, the down payment or cash upfront is less with a lease,” he notes.
Also look at lengthening your payment terms. “The money you’ve borrowed, you’ve borrowed for too short a period of time,” says Boehlje. “Three years ago you might have been able to do that. You can’t do that today. Get in front of the power curve and refinance and lock in interest rates. Lenders don’t like surprises. If you have a financial problem, be honest and transparent and let them know.”
8. Simplification/Automation. “Humans make mistakes and sometimes your equipment screws up, too, but it's less frequently than a human. The more complex the decisions are, the more confusion and time you have in figuring out what to do and how to do it. That’s why we’re trying to move to automation as much as we can in almost all industries, and ag is no different. You need to think about how you can simplify and automate to simplify your business,” he says.
9. Data Management. “You need to know how to efficiently collect data. We have made progress, but there are real challenges when it comes to the accuracy of what we have been collecting. Aggregation is a real issue,” he says. “One of the interesting issues is that farmers don’t want to share their data with anyone. It’s a privacy issue. Guess what? You have over your lifetime 40 observations, and by the time those 40 observations give you insight, you retire.”
Think about how you'll benchmark and share information. “Share carefully to capture the insights, and be careful of false signals because farmers get a lot of false signals. How many of you really work the calibration of your yield monitors? Many farmers are not very good at calibrating their machines,” notes Boehlje.
10. Do Fewer Things Better. “We really need to think about what we do well and then get somebody else to help us with the things we don’t. How many of you do your own legal work? How many of you are first-class accountants? Not many of you. Many of you are increasingly turning to an expert to help with marketing decisions. But what about data analytics? If you are good at something, by all means go ahead and do that. If you know you are not good at analyzing data, get help from an expert,” he says.
While no one can predict what the future holds, Boehlje believes we will be in this downturn for another year or two. In the meantime, what farmers can do is find the agility to capture the upside and position themselves for both challenges and opportunities.
“What we find in most industries is that it's in the difficult times when the best have the opportunity to grow and expand the most,” he says. “But don’t spend so much time playing defense that you forget about the offense.”