Putting the Odds in Your Favor as Agriculture Faces a Gut Check - by Dr. David Kohl
By Dr. David Kohl
The fall and winter seasons of 2025 and 2026 will be a gut check for some segments of the agriculture industry. This is particularly among grain and row crop producers. In reality, if COVID had not occurred, the industry would be experiencing a downturn that began in 2013 and has now extended over a dozen years. Specialized operations dependent upon export markets and domestic ethanol are subject to a supply and demand imbalance that does not appear to be abating.
The BRICS nations (Brazil, Russia, India, China and South Africa), representing over half of the global population, have strategically reduced their dependence on North American and European commodities. They have infrastructure in place and a new currency to circumvent trade in dollar denominations. The rise of the Global South now includes parts of Africa, which some analysts indicate could rival Brazil and Argentina within a decade.
With this in mind, how can a producer conduct a reality check and readjust the game plan to place the odds in their favor? Recently, I facilitated a gathering with a group of lenders and we developed a list of characteristics for producers to improve their odds in this intensively competitive economic environment.
REM (Respond, Execute, Monitor) Gameplan
First out of the gate was a strong financial and business mindset. However, REM is becoming imperative. That is, the producer must be very responsive in developing a written plan. More importantly, they need to execute the plan. Third, they need to conduct constant monitoring and adjust the plan as economic conditions change. Actions must be deliberate with objectivity rather than emotional decision making.
Next, diversification of revenue sources appears to be gaining momentum. The lenders indicated that producers with three to six sources of revenue, both from farm and ranch operations and from outside sources, were the most resilient. They noted that these revenue streams aligned with the resources, talents, and opportunities in the marketplace. This is becoming more evident with beginning farmers and ranchers, who often indicate that exposure to activities outside the farm and ranch provides the ability to seek new ideas and explore alternative markets.
Character Counts
Character counts in agriculture and rural communities. The lenders indicated that business and personal character, including "walking the talk" or the ability to fix a problem and being held accountable, is priority number one. Character is often tested in the down economic cycle but is really challenged in favorable economic times, such as those the beef industry is currently experiencing. It is easy for the ego to drive decision making without the basics and fundamentals of sound decision making.
Organization with Accurate, Timely Records
There is an old saying that you cannot earn your way out of financial disorganization because a high income will not solve the root problem of poor financial habits. Today's young and beginning farmers and ranchers are doing an excellent job of record keeping, and this is a very positive attribute that I am observing. This is particularly true for those with rented and leased assets and little land equity.
My business partner in the creamery often stated that a record system designed to show the business cash position and backup of financial liquidity at any given time is not an option but a requirement in today's volatile economic environment. Along the same line of thinking, family living budgets require similar monitoring so that lifestyle adjustments can be made as well.
Accrual Adjusted Statements Are Essential
If you are not doing the next practice and are managing your business off a Schedule F tax statement, a true assessment of your business cannot be made. Accrual adjusted income statements are not just for the lender. Making the six adjustments in inventories, accounts receivable, prepaid expenses, accounts payable, accrued expenses, and other current assets and liabilities can detect issues often two years in the future. These statements, linked with marketing and risk management practices, are often observed among successful businesses.
Detailed Contingency Planning
Detailed contingency planning in writing, with actions and dates, is a commitment that critical thinking has been applied to the future of the business. Sometimes this is demonstrated with scenario planning on the cash flow projections and backups of financial reserves in working capital. Actions and dates provide mile markers so that programs can be assessed.
Strong Risk Management
All the lenders indicated that a strong risk management plan mitigating the downside risk is necessary to minimize major losses. Today's margins, even in the best of economic times, are razor thin, often taking up to a decade to overcome a disaster.
Communication Is Key
Finally, one lender who was a veteran of the 1980s and a bank CEO indicated that communication is key. Communication between the borrowers and lenders, and between spouses and partners with full transparency, was critical. The key was respectful communication, with all parties attempting to keep emotions in check while working through difficult situations.
Looking Ahead
In this fall and winter renewal season, both the borrower and lender will need a proactive game plan. The aforementioned strategies and actions can be valuable in facing the realities of the times and moving your business to the next level while managing cycles and economic extremes.