By Don Nitchie, U of M Extension Educator, Agricultural Business Management
The decline in median Minnesota Net Farm Incomes for 2013 from 2012 was 78% according to the Center for Farm Financial Management at the University of Minnesota. By enterprise, crop production enterprises decreased most significantly where earnings were 80% lower than in 2012. This was due to much lower inventory values of stored grain and costs that have steadily increased over the last several years. Livestock enterprises also declined significantly.
Crop prices that remained at record levels for several years while costs of production were lower but steadily increasing made for several years of record profits in crop production. Some experts would argue that a period such as we have just gone through can lead to some managers becoming too casual about managing profit margins and preparing for changing times. So, are there profits to be made when the average farm's breakeven costs are at the average market price available today?
MOVING FORWARD-TESTING FUTURE SCENARIOS; Testing the "average" 2013 farm in the Southwest Minnesota Farm Business Management Association (SWMFBMA), it appears there are significant opportunities to improve profit margins, even now. Using the income, cost and asset valuation shocks the authors applied to the average SWMFBMA farm, the financial ability to absorb these shocks is strong for the near term. Liquidity and solvency would remain in very strong positions although profitability would obviously suffer. The caution would be that for the near term on crop farms, operating expenses and term debt payments would demand an increased portion of revenues. Working capital would have to be drawn down to pay these obligations in some cases.
The last page of a new section of the annual report entitled; "The Impact of Projected Profitability and Financial Shocks" contains the results of shocks on the average 2013 farm. The last column titled "2013 Improved Margin Management" demonstrates real opportunity-what we call "good news" back home. Those calculations show that by just improving gross income by +5% (yield and/or selling prices) combined with lowering costs by -5%, together just about doubles the 2014 profitability for the average 2013 association farm. This does not imply that it is the smart choice to cut costs 5% across the board. Be strategic in your choice of which costs to take a hard look at. Those costs that you suspect have not always be returning $1 in return for the last extra $1 of expenditures-should be the first to be reduced. You may need to look hard at 4-5 or more cost items to come up with a 5% overall cost reduction. You may come up with even more. This information can be found in the full report at http://www.cffm.umn.edu/ under the "publication" tab.