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Dr. David M. Kohl

By: Dr. David M. Kohl

Economic decisions are not always logical. Some say that 80 percent of financial and economic decisions are based on emotion and behavior where common sense and logic are thrown out the window. Let’s examine some of the destructive psychological behaviors that exist in the agriculture industry and explore a game plan to overcome them.

The recent great commodity super cycle allowed some of the more common destructive behaviors to creep into decision-making. One of the more common ones has been greed.A producer panelist last year at a lending school was a classic example. The producer indicated that he had followed a University marketing and risk management program, only to leave potentially a half million dollars of revenue on the table, and, to boot, his wife agreed with him. Yes, in recent years, easy money and greedy behavior have been rewarded. However, in the long run knowing one’s cost of production, and having a balanced risk management program is the recipe for financial sustainability. Sometimes having a simple advisory team to provide input can be a valuable tool to counter the greed.

Another aspect of greed has been the pedal to the metal approach in business growth. Some call it the undisciplined pursuit of more. Remember, growth is the number one reason why businesses fail. Often producers will become very greedy and plow all their profits into growth to hit the proverbial home run without holding a little of the working capital or cash back as a business and financial shock absorber. This is particularly noticeable amongst younger producers who have only experienced good economic times and low interest rates. A little bit of financial scenario planning with lower prices, yields, or higher interest rates can keep the business compass on a reasonable pathway to success.

Another worrisome behavior observed and documented has been a sense of complacency. Recently, producers were surveyed anonymously by clicker technology at a conference. When asked how measurements are used in their decision-making, nearly 30 percent were obsessive about measures and their use in planning and decision-making. It was startling that over half of the producers measure many aspects of the business, but do not use them to improve farm and decision-making performance. It was even more concerning that nearly 20 percent track just enough to get by for taxes and crop yields. This type of management attitude is so yesteryear! A pure production manager who only strives for the highest yields and manages to minimize taxes could find their strategy to be very dangerous, particularly in the economic white waters that appear to be emerging on the horizon.

Utilizing farm records for production, management, and finance, linking to decision-making will be critical as individuals monitor business performance. Recently a producer had a great quote: What’s the cost of not doing something? In today’s world, taking a lackadaisical attitude toward records and financial information can quickly bury you given the high cost of investment in inputs. Complacency kills in the business world.

Another destructive behavior being discussed is high family living withdrawals and nonfarm capital expenditures, sometimes called killer toys. While everyone must enjoy the fruits of success, exuberance and excessive consumption have been a large cash flow drain on many businesses. These withdrawals are analogous to concrete. Once concrete sets up, it is very difficult to change. Realistic expectations concerning living withdrawals and enjoying the fruits of your labor will be a behavior that is important for success. Developing personal living budgets and keeping nonfarm capital expenditures ranging from lake homes to exotic vacations contained within one’s means will be critical.

Finally, the reality of three handle corn and possibly single digit beans is on the horizon. It is natural for many to ignore and avoid examining their financial bottom line with hopes for better times. A key to circumvent this avoidance behavior is to have regularly scheduled meetings with your lender to map out options and scenarios. Open lines of communication with suppliers, spouses, and business partners can often offer proactive perspectives before boxing yourself in a corner with no alternatives.

Human behavior results in economic market cycles and is a reality of life in this world of instant communication where the cycles will be more abrupt. Surrounding yourself with the right people and a plan that includes a process of execution and implementation can keep your business on the pathway to success.

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