April 7, 2023

DrKohl_color The Ag Globe Trotter

Dr. Dave M. Kohl

Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.

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The other day, an agricultural lender asked an interesting question on a webinar, “What is the best way for a first-generation farmer or rancher to get started in this economy, and what is the best commodity to start with?” First, success will not necessarily be about the type of enterprise or the “next big thing.” It will be grounded in the basics and fundamentals outlined in this article. 

The first step is to develop a written business plan. The key is to put it on paper, as this process requires one to think through the future direction of the business. Within the business plan, aim to have clarity in your goals and objectives within the context of your vision and core values. Short-term goals are one year or less, while long-term goals are three to five years and beyond. Written goals provide focus in a world of multiple distractions. 

I cannot stress enough the importance of financial statements and particularly cash flow budgets. This will be about 80% of your business plan. You must think through production, marketing, prices, costs, timing of operations, capital needs, and debt repayment. In today's world, it is important to financially stress test key variables. A 10% decline in prices, a 10% increase in expenses, and 3%, 4% and 5% increases in variable interest rates could be a first step in establishing the financial guardrails of possible outcomes. 

Next, the personal family living budget is just as important as the farm budget. In developing a budget, estimate your expenses on a monthly basis and add 25% for those unexpected occurrences.  

Finally, you should be able to answer the following questions. 

  • What is your cost of production and break-even point? 
  • Do you have the proper insurance to cover your major risks? This includes, but is not limited to, crop, livestock, property, life, and disability insurance.  
  • Do you have a team of advisors that meets occasionally to discuss your operations and provide guidance and counsel? 
  • Are you ready for a marathon, rather than a sprint? Sometimes a successful business takes three to five years to break even, requiring sacrifice to achieve your destination. 

By the way, the question that prompted this article was asked by a lender participating in our 300th webinar since the pandemic started. You never know how a change in the marketplace can and will affect your business and how it will be received. My team and I look forward to interacting with you on our next webinar!  

 

 

 

 

 

 

Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension and other popular publications.

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