Walk into any farm meeting in the U.S. right now and you’ll likely hear two unequivocally different conversations. The U.S. agricultural economy is exhibiting a split economic personality.
Grain, row crops and, to some degree, specialty crop enterprises are in the midst of a 13-year global competitive downturn. Meanwhile, livestock and some value-added or diversified businesses are sitting in a sweet spot for both profits and cash flow.
Ground zero for farm bankruptcies is emerging in areas like the Midsouth along the Mississippi River and north into the sugarbeet regions of North Dakota and western Minnesota. Bankruptcy is a lagging economic indicator, frequently occurring several years after the initial financial stress.
Early warning signs are often observed in overdue lines of credit, a run-up in accounts payable and increasing credit card debt. In later stages of financial distress, multiple refinances may occur, using land or other assets as collateral to generate funds to pay overdue bills or replenish working capital reserves.
At a recent producer meeting in Arkansas, the room was packed for a banker-sponsored event. In the hallways and before the program’s start, the conversation kept coming back to financial stress, particularly among those involved in rice, cotton and soybeans.
One farmer’s recipe for success
One producer pushed back on the doom and gloom. In response to the difficult ag economy, he had adjusted his business model to generate a profit. A little probing revealed his “secret sauce.”
In recent years, the producer shifted more of his farming enterprises from rice and cotton to corn. But that transition only happened after he ran the numbers through various financial spreadsheet scenarios analyzing production yields, prices and input costs. His farming methods allowed for reductions in input costs, as well as multiyear fertilizer benefits from changes in agronomic practices, which ultimately benefited the operation.
Next, he layered in enhanced risk management practices that aligned with his tolerance for production, financial exposure and ability to absorb shocks. From there, he implemented a marketing program designed not for home runs, but for consistent profit base hits throughout the year.
On the capital asset side, he closely scrutinized his machinery and equipment usage and made the tough call to liquidate underutilized items. He used the proceeds to reduce debt and maintain financial liquidity through working capital management, which provided greater flexibility in his marketing and risk management programs.
He was also candid about the role of government payments, acknowledging they were a meaningful factor in keeping him on the positive side of the ledger in terms of profitability. Renegotiating written leases with landlords and trimming the household budget were equally important ingredients in his recipe for success.
Perhaps the most telling detail was this: His children chose to start at less-expensive community colleges before transferring to higher-cost institutions, reducing the financial burden on the family. It was a whole-family approach to a whole-farm challenge.
The path forward
The split economy described earlier is not just about commodities. It is also separating operations that are built on discipline from those that are built on favorable conditions.
The encouraging news is that the path forward does not require a dramatic turnaround in commodity prices or a sudden shift in global competition. It requires the willingness to assess your operation, make uncomfortable decisions and execute a disciplined plan across every corner of the business and household. This Arkansas farmer did exactly that, and his family did, too.
The fundamentals of a sound farm business have not changed. In a tough cycle, they just matter more. And sometimes, the most important decisions happen not in the field or the bank office, but around the kitchen table.