As we enter the '16 crop season there seems to be more questions and uncertainty in the country than answers and guidance. Over the past couple seasons I have been working with several growers on preparing for a downturn in crop prices and managing through these times. Below are several of the strategies we have been working on that have worked so far.
Examine Your Low Producing Acres
We do an excellent job managing our good acres, but seem to put low producing acres on the back burner. Our good producing acres make us money, but your lowest production ground loses you money. While a field can still get you a good overall yield, putting the same fertilizer and inputs into low yielding areas as your top areas costs you money. The key for us has been using the tools we have to manage these areas so we don't put money where it's not needed. 3-5 years of good yield data can help you to determine these areas and apply fertilizer accordingly. VRT fertilizer based on crop removal and variable rate nitrogen can reduce the amount of inputs you put on areas that will just not get you the return on investment you need. The biggest thing for us the past few years has been finding these areas and determining what's the reason for their lower production. Sometimes its something simple like compaction, or fertility and in some cases they are just low producing soil that will never come up to meet the average for the field. Fixing problem spots is probably the most rewarding feeling I've had, and everyone knows what its like to have a good average going then watching it go down when you take off these spots in every field.
Spread Your Risk With Land Leases
Over 80% of agricultural land is rented, and most use the same contract to lock these acres up for a few years. If you ever talk to someone who does snowplowing in winter they typically spread their risk by three types of contracts; 1/3 are by the inch, 1/3 are by the snowfall, and 1/3 are by the season. Whether they have a low snowfall season, a season with several small snowfalls, or a few big snowfalls they are covered. A typical lease agreement in agriculture is so much for every acre a year over a certain amount of years. Try doing three different kinds of leases; a certain amount per year, yield based, and market based. Flex rent contracts are a way to hedge your risk on a certain amount of your land. Determining the land owners who will fit each type of contract is key. Just like marketing, it's all about spreading your risk.
Take the Emotion out of Marketing
If you trade stocks or have investments we all know it's about the long haul. I'll be honest, I've hit a few big trades but I've also taken a few bad investments(including one stock that I still own that's lost over 50% of it's value). The biggest thing I have learned working with grain merchandisers and investment "experts" is that you have to take the emotion out of any market. Markets don't have to do anything, and often will do what we don't expect. I work with growers on establishing their breakeven per acre and per bushel to determine when we should be marketing grain. Some years we don't get the highest price, but we try to focus on average prices above our costs IE. ROI. The biggest breakthrough we had was a few years ago when we started marketing grain every time we got any kind of selling signal. Even if you think the market may go up you should sell some amount of grain if you are thinking about it, we've hit more of the up days in a rally this way. If you work with a merchandiser capable of doing puts and calls take advantage of them, again hedge your risk. Leave the coffee shop talk to someone else, worry about making the most per acre over the long run not who sold one contract for the most.
Evaluate Equipment Costs
A couple years ago I had a grower ask me about whether he should by a draper head or not. When we looked at the return per acre it was impressive, but when we figured out the years and acres it would take to pay for his investment he determined it wasn't worth it at the time. I think we should all be doing this on every piece of equipment you own. Having fresh paint around is always nice, but does it make you money? Figure out your annual repair costs, and potential down time with the equipment you have. If it doesn't gain you enough to get a return on your investment in a few years then it might not be worth making a trade. That goes both ways as well, if a piece of equipment you have doesn't pay for itself already maybe it's something to consider trying to use one piece of equipment to do what you did with two. A couple of the growers I work with had a tractor that did only one job every year that could be taken over by another tractor that wasn't running another job that time of year.
Use a Farm Advisor, not a Salesman
Saving $10/ton on fertilizer on something you use 200#/acre saves you about $1/ac. While seed/chemicals/fertilizer is a large amount of your expenses they make up only about 40% of your overall input costs. Prices and programs can vary by supplier, but usually markets determine the costs your input supplier pay and they almost all buy for the same price. Lower prices typically follow lower service providers, so for a lower price you get little or no service. The key to all of this is working with someone who understands your goals and is willing to incorporate that into what they recommend and do for you. People who try to sell you products only to fix problems are just at your farm gate trying to sell you products, people who listen to your concerns and pay attention to your equipment, problems, and goals are there to work with you to make you better. I always tell my growers if they don't make money they won't buy anything from me and I'll be unemployed. If we are all in it for the long haul and are invested in each other, we should both be making money.
That's it, that's what I help my growers focus on in good years and help them prepare for the bad years. It's all about working with the right people, spreading your risk, making business decisions without emotion, and looking at the decisions you make with your bottom line in mind. It's not about who has the best equipment, or sold for the highest price; it's about preparing your operation to continue for the next generation and going to bed with no worries or regrets.
