7 strategies for success in today’s environment

When commodity prices rise, land and input costs often follow. But when commodity prices fall, as market cycles predict they always will, land and input costs don’t always come down as far or as fast. This can create a profitability squeeze. At Crop Connect in Winnipeg earlier this year, Brent Gloy, an economist with Agricultural Economic Insights, provided several strategic steps to work through this situation.

1. Set profit and cash-flow targets

One of the first things to do is to set realistic profit and cash-flow targets, Gloy argues. “Establishing these targets helps you think through different crop rotations as well as price levels needed to achieve your financial goals,” he says. He also encourages candid and open discussion about targets and goals with spouses and partners.

2. Determine what has to go well

Everyone has a limited amount of time, so direct your attention to the things that matter the most, Gloy says. Start by asking yourself a few questions: What drives yield on your operation? What cost categories got away on you over the past few years? What budget categories deserve the most attention? Look over the financials to determine which factors are most important to meeting the profit and cash-flow targets set in Step 1. Basically, look for those levers that have the biggest impact on your bottom line and pull them.

3. Seize marketing opportunities

“Don’t be lulled to sleep by low or slow-moving prices,” Gloy says. Use price fluctuations throughout the year to your advantage. Discuss a plan with your partners and make sure everyone understands each other’s comfort level with different outcomes. For example, is a price that covers variable costs good enough if the market outlook suggests a price that covers variable and fixed costs is not likely in the near term? Or does the operation take advantage of on-farm storage and hold on? How does the plan meet cash-flow needs?

4. Start working on fixed-cost structure

Fixed costs such as land and machinery represent 50 to 60 per cent of the total costs on many grain farms. “As grain prices come down, farmers need to have fixed costs under control,” Gloy says. Spreading costs over more bushels is one solution but requires higher yields without an equal increase in costs of production. Find ways to reduce machinery or land costs per bushel or per acre. “This is not easy, but start thinking about how different alternatives might lower your fixed costs,” he says. Could you share equipment with a neighbour? Does your crop rotation increase machinery costs? Can custom work reduce machinery costs per acre?

5. Revisit your time management

What jobs contribute the most to farm profitability? Gloy suggest you allocate more time to those that have the largest impact. “If two jobs need to be done at once, which one should you do and which could be assigned to someone else – perhaps even a custom operator?” Gloy asks. He recommends you create a “stop doing” list for work-related jobs or activities that increase time stress but don’t add much to profitability.

6. Understand how currency impacts the business

The Canadian dollar’s position relative to the U.S. dollar and currencies in other major markets and competing countries can influence the local commodity prices, Canadian export competitiveness and the cost of inputs. A low Canadian dollar can make Canadian exports more attractive, but it can also increase the cost of machinery and other
inputs imported from the U.S. and elsewhere. Currency values can fluctuate widely and can change quickly. Keep an eye on these changes and understand how they impact your profitability, Gloy says.

7. Evaluate opportunities carefully

Opportunities will come along to buy or rent land, take on a good new employee or invest off the farm. Not all opportunities are good and not all are bad. Gloy asks, “Do you have a systematic approach to evaluate different opportunities?” To prepare to act on good opportunities, he recommends you identify the top three investment priorities that align with the farm’s strategic plan and set a target price that meets your financial goals. Another valuable exercise is to set a systematic approach for crop-input decisions. “Take time in the off season to work through in-crop scenarios, prepping yourself to take action when particular scenarios unfold,” Gloy says. “It helps to talk through ideas with people who will provide honest feedback.”

Find out more about Brent Gloy’s company at ageconomists.com.