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How to manage expectations in ag’s low-margin era

Take ownership, strategize and focus on earns and turns.

Agriculture producers often ask, “When are commodity prices going to return to the

robust years experienced during the super cycle?” The quick response to this question is that the super cycle was an unusual, extended period of high commodity prices usually experienced only every 40 years.

The low-margin era could continue to affect the agriculture industry for a period of time. Technology has resulted in supply exceeding demand in many parts of the globe. Layer on new farmland and resources coming into production in South America, Eastern Europe, and Africa, and supply appears to only be growing. Couple these factors with weather changes, which could allow triple cropping in South America to become the norm and double cropping in the upper Midwest a possibility, and the supply-demand equation indicates continued margin compression.

Shifting to the balance sheet, land prices have maintained resilience despite the cash flow crunch. This strength in land values is due to investors buying farmland, existing older producers who own farmland, and an era of low interest rates. Strong farmland values result in higher land rent, which further suppresses margins.

What are the management tactics needed to successfully manage through reduced margin expectations?

First, take ownership of your production, marketing, and finance data. Develop a record keeping system that builds in efficiency for your operation. Monitoring revenue and expenses line by line with a trend analysis is at the top of my list.

Next, strategize and execute a marketing and risk management plan. This important management tactic will be a difference maker in the future. Managing expectations through a mindset of “base hits” versus “home runs” in the marketplace may be the mode of operation going forward.

Finally, management must have a drive toward competitiveness with a focus on earns and turns. Agriculture producers with a high business IQ focus on their earning potential by maintaining their profit margin. These same producers also pay attention to their asset efficiency or capital asset turnover to limit idle assets. Earns (margin) multiplied by turns (capital asset turnover) equals return on assets, a measure of profitability.

The aforementioned elements, combined with a balanced expectation for living expenses or management withdrawals, can be a formula for success in a low-margin era.

TAGS: Management
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