One valuable part of my sessions and travels is the number of great questions I encounter every day. Almost without exception, these questions provoke thought, which I enjoy passing along. Recently, a producer asked me, “Is there a size or type of business that is experiencing the most financial difficulty?” While every operation is unique, there certainly are several top candidates to consider.  

Bigger vs. Better

There is an old saying that bigger is not always better. Covering 12 states and multiple-enterprise businesses, FINBIN data from University of Minnesota’s Center for Farm Financial Management confirms this old adage. To start, let’s examine farms generating over $2 million in revenue. The top 20 percent of these larger farms realized over $500,000 in profits in 2015. In the same revenue category, the lower 20 percent of farms lost over $300,000 in the same year. Clearly, there is a significant difference in management between these two groups of farms, but what were some of the prevailing characteristics of the bottom 20 percent?  

First, many won the “cash rent lottery.” In other words, many of the businesses in the lower 20 percent negotiated high, long-term land rents assuming commodity prices would remain strong. The losses simply continue to mount for those unable to renegotiate or unwilling to give up the ground. 

Next, several businesses expanded during the peak of the market. Some purchased livestock for feedlots and breeding herd expansion. Others made large investments to expand their business’ capacity to accommodate more land. Of course, markets declined and now, losses continue to compound.  

Similar to expansion, businesses engaged in aggressive growth are most likely in financial distress. With all profits and attention focused on growth, many of these businesses neglected to reserve ample financial liquidity. While many of these businesses are not financially leveraged like farms in the 1980s crisis, operating money can be the financial Achilles’ heel for many growth-oriented farms and ranches.  

Another group of producers experiencing financial difficulty is the young farmers and ranchers. This group did not have enough time during the positive part of the economic cycle to build the equity and working capital reserves needed to navigate an economic reset. Additionally, without much experience with an economic reset, the learning curve may be somewhat steeper for this group.   

One characteristic in particular that necessitates careful attention is complacency. Some managers have become incredibly complacent in management, depending upon land equity for financial stability instead of proactive, corrective strategies. Often these businesses seek refinancing of operating loans to longer-term debt to overcome management deficiencies. When land values are on the rise, this practice may go largely unnoticed. However, when land values decline, lacking management skills are painfully obvious. 

In today’s economic environment there are certainly other types of businesses to add to the list, but in general, the well-managed, modest-sized businesses seem to be in the best position financially. Those businesses that exhibit conservative spending habits and good investment in productive assets appear to be weathering this economic cycle well. In fact, regardless of size or type, those businesses in the top percentile are successful because of their top, proactive and engaged managers.