Position your farm for long-term success

HOUSTON — Being a successful farmer requires sorting out risks and developing strategies to manage them.

Purdue ag economists James Mintert, Michael Langemeier and Brady Brewer shared ways for farmers to manage risks at the recent 2024 Commodity Classic.

“Whether it’s buying large machinery or managing labor, any decision a farmer makes as they sort through risk and develop strategies falls into one of five buckets — output price, yield, costs, assets and people,” explained Brewer, associate professor at Purdue.

“I like to describe these as the five strategic levers a farmer can pull.”

Five managerial levers a farmer can pull

• Output price. Manage price you get for what you produce.

• Yield. Manage how much output you produce.

• Costs. Manage how much it costs you to produce.

• Assets. Manage your balance sheet/what tools you use to produce.

• People. Manage the people that help you with the four levers above.

“As part of that, we emphasized the importance of assessing pricing plans, gauging performance differentials, and developing long-term marketing strategies,” Brewer said.

“We talked about how diversified farms are better at reducing risk but may sacrifice certain efficiencies. We also surveyed the audience on the strength of their balance sheets and found that most farmers believe their current balance sheet is in a strong position.”

A valuable strategic risk exercise is for farmers to consider how their balance sheets can be a buffer during a prolonged downturn in commodity prices, he said.

“Time will tell what the future holds for 2024, but farmers will need liquidity not only to weather the storm but also respond quickly to new opportunities,” he said.

The economists defined resilience as a farm’s ability to anticipate, absorb, accommodate or recover from the effects of shocks or stresses promptly.

Shocks to the ag market can come from many sources, including government policy changes, geopolitical conflicts, disease, changes in consumer preferences, shifting weather patterns and technological uncertainties.

Langemeier, a Purdue professor, discussed the importance of farmers’ absorption capacity and agility:

• Definition: Agility is a farm’s ability to quickly identify and capture business opportunities.

• Definition: Absorption capacity is a farm’s ability to withstand shocks from strategic risks.

“Does your farm have the ability to quickly identify and capture business opportunities as they arise?” Langemeier asked.

“Are you in position to rent that additional 160 acres that may be coming up for rent in the next year? Are you in position to buy that 160 acres that may be coming up for sale in the near future?

“You want to talk about strategic risk both from just being able to weather the storm but also responding quickly to opportunities.”

View a recording of the conversation at https://tinyurl.com/5n8d7zv5.