This is not the year to be average. Not when a sharp decline in U.S. crop revenue and “sticky” input prices are contributing to the projected decrease in farm income. According to the USDA, feed, food and oil crop cash receipts are expected to drop more than $12.5 billion in 2015, a decline of 37 percent from 2014. Meanwhile, crop production expenses, though forecasted to be slightly lower in 2015, have remained relatively high.
So what is the average farmer to do? Well, not be an average farmer.
David Kohl, professor emeritus of agriculture economics at Virginia Tech University, says no farmer is going to find it nearly as easy to make money the next five years as they did the last 10. “In grains, the easy money has been made,” Kohl says.
The average farmer believes getting bigger is the best way to boost profitability in production agriculture. Kohl disagrees. “You need to get efficient before you get bigger. Better is better before bigger is better,” he says. “That’s what outstanding businesses do.”
If there was ever a time to focus on the small things that can set your farm business apart, it is now, says Danny Klinefelter, Texas A&M University ag economist. Over the 25 years that Klinefelter ran The Executive Program for Agricultural Producers (TEPAP), he observed certain characteristics that apply to the most successful farms. They include setting continuous management improvement at a rate that is in step with the leading edge of your competition; not a rate set by your current comfort zone.
“The main difference between the top 10 percent and the rest of the top 25 percent is their timing, in terms of when to enter, expand, cut back or exit; whether it’s an investment, a marketing decision or a business activity,” Klinefelter says. “The future will always belong to those who see the possibilities before they become obvious to the typical producer.”
Look for outside advisors—in areas such as tax, farm management, agronomy, accounting—who can help you see the “cracks in the floorboards” and find small efficiencies, such as reductions in labor cost per unit, per acre or per head. Review your approach to asset purchases. Do you have more equipment than you need?
Now also is the time to ask your accountant or financial specialist about activity-based managerial accounting, which can help find both the cost of and returns to specific attributes, practices, locations and enterprises of the farm business. With margins being compressed, the farmers who win in 2016 are those who know their strengths and weaknesses, which are reflected in very specific costs and returns.