In the long run, the key to success in a commodity business is being a low-cost producer.
That advice comes from Purdue Distinguished Ag Economics Professor Michael Boehlje. “When you wake up each day, tell yourself, ‘My job today is to lower my costs,’ he says. The following are his pointers for success in turbulent times:
1. Manage operating risk
- Keep cash costs and land rents in line with revenues
- Recognize continued leaner profit margins and margin risk
- Take advantage of forward pricing and crop insurance to manage risk
2. Manage money and capital
- Protect your working capital.
- Lock in today’s relatively low interest rates on capital expenses
- Deleverage
3. Emphasize execution
- Do fewer things better. Identify areas that lose money.
- Use standard operating procedures (SOPs). “Every manufacturing plant uses SOPs, and you are a biologic manufacturer,” Boehlje says.
- Optimize data management
- Simplify operations and automate where possible
- Pay attention to details
4. Increase asset utilization (asset turnover)
- Lease rather than buy. Short-term operating leases increase asset turnover.
- Use joint venture and shared machinery to intensify production
- Think in terms of “earns and turns,” the key financial metrics known by every machinery dealer and hardware store owner. Stated differently, they are operating profit margins on sales and asset turnover.
- Outsource or custom farm. “You already outsource your taxes and legal work,” Boehlje says. “Recognize where you capture value by hiring things done.”
5. Increase margins
- Control costs. You have to measure before you can manage.
- Buy right
- Use best management practices and technology
- Market rather than price
6. Use time efficiently
- Focus on management
- Hire skilled employees
- Use scheduling and workflow planners
- Develop standard operating procedures
7. Grow volume and sales
- Increase productivity
- Generate more volume with less investment
- Joint venture for size and volume to gain market access
8. Focus on a strategy
- Practice operational excellence
- Develop customer intimacy
- Focus on product and process innovation
9. Create value for your customer
- Understand your customer and what you can do to create value for him or her
- Differentiate on service, such as quality, storage and just-in-time delivery
10. Get smart
- Use consultants
- Network with successful farm and non-farm business managers
- Develop management skills
11. Think like a CEO
- Manage people, money, relationships and strategies
- Think more strategically; farmers are good operationally
Tips on this web site are meant only to be informational, and are deemed reliable at time of publication, but are not warranted. Factual information should always be rechecked in light of applicable legislative and regulatory changes. Some articles/tips are meant to be entertaining, and not the opinion of Bath State Bank or its directors.
Fun Fact
Q: What does snow on Christmas night mean for next year's crops?
A: Snow on Christmas night, good hop crop next year!