Tuesday, September 1, 2009

Managing in Tough Times Begins in Good Times

At Ag Progress Days, I had a discussion with a colleague about the state of the dairy industry. Most readers know that many (or maybe all) dairy farmers are operating at losses right now because of very low milk prices. It really is a horrible situation for farm businesses and families in Pennsylvania and beyond. I can't take anything away from that at all! Careers and family well-being are absolutely on the line! A sad situation, as many in ag or other industries have faced over the past several months.

In the dairy industry, this historic low comes on the heels of a period of high milk prices. My colleague and I argued that it was during that period that dairy owners should have been preparing for now. (Although I use the dairy industry as an example, the principles apply to all businesses.) Being flush with cash, as many were, allows the owner to do some critical things for success in a commodity business.

1. Save your money - There's nothing like cash reserves to help an owner get through unprofitable periods. Although it might not have been advised at the time, some investments would have netted big gains over the past few months. Major stock indexes, for example, are up around 50% since spring.

2. Pay down debt - This isn't quite as good as having cash reserves, but the farmer may be in a position to tap into farm equity in the form of loans. While it may seem contradictory to pay down debt so that you have access to more if needed, that option may not have been available had past debt not been paid down.

3. Invest in cost-cutting production technologies - In all businesses, but particularly in commodities, profitability follows efficient production. If you can't control your price, you have to control your production costs. If you can lower that through technology, then invest after a very careful analysis.

4. Go out on top - For most folks, it's never easy to exit a business or industry that they love; one that's in their blood. But all should have a long-term plan that includes eventual exit. The best time to exit is when there aren't liquidity concerns, when solvency isn't an issue, and when profitability is positive and high. For most in the dairy world, that doesn't describe the current environment. Exiting at the bottom leaves little or no cash left over to start the next phase of one's career.

We in Extension have resources and expertise to bring to bear on owners and managers during these rough times. Despite our best efforts, and the efforts of many legislators, industry players (including lenders), and others, some have exited and others will exit during this period. For few will it be on their own terms. Those still standing after this downturn really need to take time to establish a plan that incorporates one or more of the strategies highlighted above, or others that will position the operation for the next downturn. Getting help then, from Extension, a consultant, or other source, will be more beneficial than anything we or others can provide at this time. Much of Extension exists because these businesses exist. We need them to be healthy and growing.

How have you (or farms that you're working with) weathered the storm? How did you prepare for this? What do you think Extension could do now and in better times to help?


Elaine said...

I'm working with a group of Extension professionals across the country who are developing a new online course called, "Investing for Farm Families." The course is for farm families interested in learning about investing. The course will be up and running soon...I will let you know when it is open for enrollment. It is offered through eXtension.

Jeffrey said...

Thanks, Elaine! Would love to help promote that!