I am asking producers this question – Were you born after 1975? Producers born after 1975, most likely, did not have an ownership role in their farm operation between 1998 and 2001 and have not experienced very tough times.
Those years were very difficult for producers in Tennessee as the combination of low yields and low prices put many producers out of business. Based on census data, one-fourth of full-time farmers in the eight county area of West Tennessee that I work went out of business during that time. This is not to say that what is expected over the next few years will be like 1998 – 2001, but it should be noted that commodity price levels of the next few years will most likely not be as high as the last three to four years.
Not to be an alarmist, but the next few years I think will be more difficult than the last few. Producers in Tennessee and surrounding states might say the last few years have been difficult enough as we have battled floods and drought and an extended harvest season. However, one major difference is prices stayed at favorable levels at harvest whereas we are looking at a situation that with average production commodity prices could be quite a bit lower at harvest and certainty below breakeven at average yields.
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.