What is in this article?:
- Financially successful farmers share at least six things in common
- Decisions made in profitable years make the difference
- Current price levels for 2014 harvest delivery are hovering right around producers’ break even prices at average yields.
- A strong capital reserve position can go a long way toward reducing financial stress in an operation.
- Producers who change or update their equipment when it makes economic sense and not necessarily for income tax benefits seem to be the ones who come out ahead.
Decisions made in profitable years make the difference
The successful producers who weathered the 1998-through-2001 period and continue to survive and thrive share at least six similar characteristics:
Successful producers develop a farm financial plan including estimating crop incomes and expenses, acreage plans and analyzing any potential changes in their operation. Generally, depending on the operation alternative acreages and price scenarios are explored. They then use these plans to help guide them in their operations, changing as necessary.
These producers build up capital reserves whenever they can. These reserves allow them to not only survive tough times and protect against financial adversity, but also puts them in a position to take advantage of any situation where cash is king. This could be early season input discounts or asset purchases to name just a few. A rule of thumb is to have 20 percent to 25 percent of revenues as reserves with a goal of 33 percent. A strong capital reserve position can go a long way toward reducing financial stress in an operation.
Successful producers stick to the basics. Tried, true and proven fertility programs along with sound varieties have allowed producers to not only make it through challenging years but they have helped enhance profits during good times. One of the most basic operations in a cropping program is soil testing. In years where prices are high there can be a tendency to over apply fertilizer and not be utilized. In years when profit margins are tighter, there is a tendency to under apply or forego fertility applications. By using and following soil tests, the optimum amount of fertility can be employed for maximum economic yields.
Selecting top varieties for the correct environment can also enhance economic returns. In this age and time, we have to keep on top of all weed, insect, and disease problems, monitor fields on a regular basis. Not only do producers have to apply the right control method, but it has to be done at the right time to be effective. Keeping up to date production and financial records is a must in today’s operations. How can you know where you are going if you don’t know where you have been?
Records can help a producer fine tune the operation. A thorough analysis of records can distinguish between enterprises or profit centers that are making money and those that are not. Successful farmers are constantly evaluating technology for what will work on their farm. It could be new genetics in varieties, precision agriculture applications or changes in equipment such as automatic section control on planters. Farmers are using these improvements in technology to be more efficient and cost effective.
Successful operations have not gotten hung up on who owns the income-producing asset but whether it can increase their profits by using it. An example in Tennessee is the ownership of center pivot irrigation systems. Some of the center pivots that have been installed in the last few years have gone on leased ground where the producers may own only a portion of the system. It can make economic sense for both the landowner and producer to own the system, as long as both see an increase in income.
Producers who change or update their equipment when it makes economic sense and not necessarily for income tax benefits seem to be the ones who come out ahead. The tax benefit derived from the Section 179 Deduction on purchased equipment may reduce taxes in that one year, but if it is purchased with borrowed money the payments can continue for several years. This can put a crimp in a cash flow plan. The equipment purchase to be viable must help the operation become more efficient.
I will close with one last thought – It is not the bad years that get us in trouble, it is the decisions that are made in profitable times.