July 2017
The Business of Farming

What Does the Weather Look Like This Week?

Planning and preparation are critical to maintaining sustainability in an unpredictable agricultural environment.

Have you looked at the weather forecast this week? Weather is usually the first thing folks in agriculture talk about when they see another producer. The second question to follow the weather discussion is inevitably tied to current prices. If you hang around folks in agriculture for very long, you will begin noticing these two issues pop up on a regular basis. There is a very good reason why this is the case … namely because producers have little control over these two major aspects of sustainability in agriculture.

Everybody’s definition of sustainability is different. Some demand a certain level of net profitability, while others look for a certain return on investment. Many others are just looking to pay cash expenses.

My definition of sustainability is making enough money to continue doing what you are doing. No matter your personal definition of sustainability, there is a point where any producer will have to stop farming if they do not either begin to make (more) money or if they continue to lose money. This point is often tied to some type of weather phenomena or to commodity market prices. Sometimes it is both.

We had this very example last year. Alabama cattle producers found themselves in the crunch of low commodity prices (leading to a budget that made it look very hard for the average cattle producer to break even) and a drought that decimated pastures and hayfields. Producers in some of the worst drought-stricken parts of the state were forced to either buy expensive feed – adding to an already negative return on their cattle – or liquidate part of or the entire herd. This led to some scrambling by producers as they sought information and options for handling this difficult situation.

What can producers do to help prepare for these types of situations? We cannot control the weather and, for the most part, we cannot control prices. Producers can control planning and preparation. Weather and prices are no different from other unexpected difficulties (such as divorce, sickness, etc.) that will inevitably affect many farms. The key to surviving (remember my definition of sustainability) is being prepared for as many scenarios as possible. All producers should know where they want to go with their operation, where they are with their operation and how to get out of their operation.

This type of planning is usually not at the forefront of many ag producers’ minds. In fact, many of us enjoy agriculture because it allows us to get away from computers, pencils and cubicles, and get our hands dirty. Most of us, if we are honest with ourselves, are also a little intimidated by the idea of business planning, evaluation and exit strategies. However, business planning is not necessarily complicated and is absolutely required to ensure we survive all of the little bumps in the road we will encounter as agricultural producers.

The first step is to have a business plan. There are many types of formats producers can use to make a business plan. There are numerous websites with good, cost-free example templates or you can make your own. The key is to be thorough in your planning. Write down your business structure. Many agricultural producers fall under either a sole proprietorship or partnership by default simply because they did not decide ahead of time to form some other type of business entity. Your business planning should include investigating the legal and fiscal ramifications of sole proprietorships and partnerships, and the legal and fiscal opportunities you can take advantage of through other business structures.

Write down what you plan to produce and be specific – for example, "I am going to produce 650 pounds of feeder calves per brood cow per year"; not: "I’m gonna raise calves to sell." Write down where and to whom you plan to market your product. Write down short-term attainable goals. Where do you want to be in six months, one year or five years? Write down contingency plans for difficulties such as drought, flood, hurricane, prices and other factors. Finally, make a budget. There are numerous budgets available from reputable sites to help you determine whether you have the opportunity to make money in your chosen commodity.

The next step is to evaluate where you are. Business evaluation starts with good financial and production records. Again, they don’t have to be fancy but they do need to be thorough. Create a balance sheet every year. It tells you how much you have and how much you owe. A balance sheet gives a good idea of where you are currently. Producers should consider a more detailed analysis every year. The Alabama Cooperative Extension System Farm and Agribusiness Management team offers producers an excellent opportunity to take advantage of a free farm analysis program with the FinPack program. It is confidential, free and gives a very detailed picture of whether you actually grew your wealth over the past year or if you just have a hobby.

The last thing producers ever consider is an exit strategy. However, we will all exit our business at some point. Some will retire, some will transition to the next generation, some will realize their profit point and sell out … and some will be forced to liquidate to pay debts. No matter what your situation, you will need an exit strategy. This can include a strategy to re-enter your specific commodity as some cattlemen in the earlier example chose to do.

The ACES Farm and Agribusiness Management team can assist you in business planning, business analysis and developing an exit strategy for your business. Contact your regional Extension agent for more information.

 

Ken Kelley is a regional farm and agribusiness management agent for Alabama Cooperative Extension System.