July 13, 2017

Northwest FCS News

An old economic adage says that when businesses in the bottom one-third of any industry are making money, watch out because leaner economic times are on the way. The recent commodity super cycle is a testament to this saying and shows that, indeed, high prices cure high prices.

Let’s examine some of the characteristics of the bottom one-third of farm businesses, some of which will be forced out of business over the next few years.

  • First and foremost, managers of businesses in this lower 33 percent tend to manage reactively. That is, they seem to believe that a weather or macroeconomic event elsewhere in the world will return the sunnier side of agricultural economics. And certainly, they are not making proactive adjustments to minimize losses.
  • In many cases, a stronger balance sheet, specifically in land equity, creates a false sense of security for this lower segment, which can lead into the denial mode. Yes, equity is good. Yet while the negative margins continue to grow, these managers do not realize their businesses are slipping beyond repair, regardless of how much equity is on the balance sheet.
  • Another familiar trend among this lower one-third of businesses is a resistance to change. The management attitude of “we’ve always done it this way” is a familiar business theme. In some instances, this discourages the younger generation from pursuing innovation and sharing new ideas. Therefore, the business gets stuck in a rut – most often, an unprofitable rut.
  • Strong economic cycles such as the recent commodity super cycle attract young people back to the farm business, and profits support those additions. Now, in an extended downturn, profits and cash flow cannot support a viable operation. Thus, a trend of exits from the industry will continue.
  • In good economic times, “we plant fence row to fence row,” as former U.S. Secretary of Agriculture Earl Butz said during his time with the Nixon Administration. Today, a worldwide surplus coupled with struggling businesses is eliminating marginal land from production. There is a saying that poor-to-fair resources can make a good manager average or below average quickly.

In summary, success in this cycle comes down to the business side of the equation. Finance and marketing, along with production and business systems are going to be the deal makers and breakers. Of course, this is not a complete list of troublesome management practices; but gleaned from my coast-to-coast travels, hopefully this list provides perspective on some adjustments that may help improve business viability and profitability.