By Dr. Kohl
In today’s bifurcated agricultural economy, breaking even in grain and row crops should be considered a win, while livestock producers need profit plans to maximize their winning streak.
The agricultural economy presents both challenges and opportunities. Currently, grain and row crops are in a multiple-year downturn, while livestock and the more diversified value-added businesses are at the positive end of the profit spectrum. Weather, geopolitics, regional warfare along with changes in tariff and trade policy, undisciplined fiscal policy and the mounting federal debt create a roller-coaster strategy in decision-making on the farm.
Given this current state and possible economic future, what are some of the perspectives on profit and overall financial wins?
Grain and Row Crop Producers: Breaking Even is Winning
Those in the grain, row crop and other economically stressed businesses that manage to break even financially in 2025 and possibly in 2026 should consider breaking even a win.
I caution producers across all enterprises to be wary of the mindset that assumes the government will take care of their economic ills. Government checks could be non-reoccurring income, particularly as the government attempts to close the deficits with across-the-board cuts.
Your win will come when you take the time to assess your operation’s position without these ad-hoc payments. This may include developing a set of budgets with different scenarios on spreadsheets to allow financial sensitivity testing of production, price, cost and breakeven scenarios. Next, consider marketing and risk management strategies to provide support or allow one to breakeven or garner a possible profit.
Protect Your Backup Reserves
Within this analysis, close attention to working capital (current assets minus current liabilities) trends or your backup reserves must be considered.
At the current level of losses, what is the timeline for burning through reserves? If positive profits, what is your strategy to replenish the reserves?
Remember, if you refinance utilizing land as collateral to replenish working capital, how will this influence loan and debt service levels over the life of the loan?
A harsh dose of reality is that producers that used this strategy in the 2014 to 2020 downturn still have those payments on the books, creating double jeopardy. But, this time it comes with double the rate of interest!
Livestock Producers: Execute Your Profit Plan
Those in the livestock industry, particularly beef, are on a winning streak for the most part. In these situations, the win comes from planning and executing a profit plan.
Here’s how to allocate your profits strategically:
- Efficiency improvements: 60 percent - Focus on strategies to become efficient while still being effective before you grow your business
- Working capital reserves: 30 percent - Build your backup reserves for future downturns
- Discretionary use: 10 percent - Utilize at your discretion
As a word of caution, you will most likely be required to pay income taxes, so sound income tax management is necessary. Finally, those at the top end of the cycle must suppress the urge to top the market and let emotions overwhelm financial objectivity.
Take Ownership of Your Numbers
Expect lenders to require more financial information and documentation. A win is to utilize this information in better managing your business. The key is to take ownership of the numbers and monitor them at least quarterly, so necessary tweaks can be made.
There’s an old saying “you can’t out earn disorganization or the need to handle your finances wisely” that is attributed to finance expert Dave Ramsey. Ignoring your finances is one of the quickest ways to fail in farming.
Many farm operations are not going bankrupt and are asset and equity rich but cash flow poor. The key to putting winning on your side is to plan, execute and monitor outcomes as business cycles can quickly change.
Your Three-Point Winning Strategy
A winning strategy to place the odds in your favor:
- Stay informed of economic trends
- Manage the controllables in your operation
- Adapt around the uncontrollables in the market
Sometimes, adaptive strategies like fostering collaboration and counsel through advisory groups can be the best remedy for a chaotic economic environment.
Dr. David Kohl energizes agricultural lenders, producers, and business professionals with his keen insight into the agricultural industry through extensive travel, research, and networking around the globe. He is a Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech, Blacksburg, VA. Dr. Kohl has traveled over 10 million miles in his career and conducted over 7,000 workshops and seminars for a variety of agricultural audiences. Additionally, Dr. Kohl’s personal involvement with agriculture provides a unique perspective into the future trends of the agricultural industry and economy.
