Dave Kohl, well-respected economist and Virginia tech professor emeritus, often tells audiences that farms are lost during the good times.
"The biggest mistakes are often made in good years when we take our foot off the gas," he says.
That’s not this year. For those putting both feet on the gas this year, Kohl offers insights to help steer the farm through these tough times.
In this episode of Ag Marketing IQ In Depth, Kohl details four financial pillars to help farms adjust to this low in the ag cycle that’s complicated by policy and price volatility. Some might call it chaotic times in agriculture. And Kohl is one of those.
"Volatility impacts us financially and emotionally," Kohl notes, urging farmers to focus on what they can control while adapting to external uncertainties like weather, global politics and market fluctuations. For managing the controllables, Kohl suggests farmers focus on four financial pillars: production efficiency, cost management, marketing and risk management, and capital efficiency.
Benchmark performance
The first pillar, production efficiency, involves benchmarking performance against peers and investing in assets that yield incremental improvements.
"Top producers focus on better production while maintaining cost control," Kohl says. They also leverage technology and innovation to stay competitive.
Zero in on finances
Cost management, the second pillar, requires a meticulous review of financial statements. Kohl advises farmers to focus on major expenses like crop inputs, feed (for those with livestock), labor and cash rent.
"Go line by line and ask, ‘Can I adjust this?’ Small changes compound over time," he says. Focus on trimming in those areas that don’t impact long-term value. Understand both the price and the value, Kohl says.
Stress test your plan
The third pillar, marketing and risk management, is essential for mitigating financial and personal risks. Kohl sees organized budgets as essential and sensitivity testing as key.
"Marketing is a moving target," he says. He encourages farmers to collaborate with trusted advisors while maintaining accountability. "You must execute, monitor, and adjust throughout the year."
Adopt the bird poop principle
Finally, capital efficiency focuses on optimizing resources and avoiding unnecessary expenditures. Kohl believes in the "bird poop principle," which is his advice for identifying underutilized assets. Whether it’s a piece of equipment or a person, anything standing still long enough to gather bird poop is losing value.
"Sometimes we have too many family members drawing from the business, increasing overhead costs," he says. He also recommended seeking external perspectives from lenders or peers to identify blind spots.
Ultimately, Kohl says, taking a close look at the operation during this tough period position farmers to capitalize on future opportunities. By critically evaluating the business and making incremental improvements, farmers can thrive despite volatility.
"These principles are good rules to live by in any year," he says.
To hear more from Kohl, watch Ag Marketing IQ In Depth.