What goes down . . .
. . . will come up

tips on how to survive agriculture's down cycles

All businesses — even successful ones — are subject to down cycles. In good years, these businesses thrive. In tough years, they struggle.

In agriculture, it seems that down years are inevitable. Whatever the cause — depressed prices, weak yields, bad weather, reduced demand — we tend to accept the fact that occasional bad years come with the turf, so to speak.

Still, when you step back and look at the big picture, it helps to remember that what goes down in agriculture . . . generally also comes back up. It happens all the time.

The situation today

We need to look no further than today's Northeast agricultural markets to see that life can indeed be challenging for many business owners. Take, for example, the dairy sector. Just one year ago, dairy farmers enjoyed $16 per hundredweight (cwt.) milk prices. Today, they are struggling to deal with an early fall price of $11 cwt. Fortunately, 2003 looks to be a better year. . . . What goes down, comes back up.

Another example is the cranberry industry. Cranberry growers have enjoyed a long stretch of favorable prices, some as high as $85 a barrel. However, roughly two years ago, that figure plummeted to $11. This was a tough pill for growers to swallow when matched against their production expenses of about $30 a barrel. Fortunately, at this writing, prices are taking a slow but positive turn with prices creeping up toward $25 in early October. . . . What goes down comes back up. (Click for details).

These are just two examples of business sectors in the Northeast, which must from time to time weather the storm, both literally and figuratively.

Fortunately, business owners can take steps to help ensure their survival through the difficult times. In this issue of F.P. magazine, we asked Farm Credit's Bill Kappus, Jon Jaffe, Norm Coe and Dale Foley to offer advice that can help business owners survive agriculture's down cycles.

Each of these four agricultural finance experts has spent more than 20 years working with farmers and other ag business owners in good times - and bad. Collectively, they suggest four basic steps that can help most businesses survive the roller-coaster ride of down years and up years:

1. Stay positive.
2. Monitor expenses (and cut where possible).
3. Investigate supplemental income sources.
4. Work with your Farm Credit teams of financial experts.

Above all else: Stay positive and focused

The biggest challenge that farmers can face is the erosion in forward thinking business strategies.

"You can't get down," says Bill Kappus, senior vice president for Farm Credit of Western New York in Batavia, N.Y. "You've been through tough times before. So don't panic. "Instead, stay positive and stay focused. Avoid gloom-and-doom conversations, and gravitate toward positive people instead. Stop spending your valuable time complaining about conditions that you can't do anything about, like the weather," Bill says. "Focus on those conditions that you can control - and improve."

Jon Jaffe, vice president and assistant branch manager for First Pioneer Farm Credit's Middleboro, Mass. office, agrees. "I ask our cranberry growers to focus on solving their financial problems. When growers put so much energy into assigning blame for low prices, they lose precious time and energy needed to improve their situation.

"I often encourage customers to consider that understanding the root of the problem in their industry is important, but assigning blame won't change the facts. They need to focus their energy on developing new business practices that will allow them to survive, such as cutting expenses or finding alternate income sources."

Staying focused paid off for one family

Bill Kappus tells a story about how the Call family, owners of My-T-Acres in Batavia, N.Y., focused on the future of their business to overcome weather challenges. My-T-Acres is a large vegetable operation, ranked an impressive number 18 on the American Vegetable Grower magazine's Top 100 Growers list.

According to Bill, "The Calls' yields suffered over the last 10 years from dry weather that severely affected their vegetable crops.

"So they stepped back from the situation to analyze their problem and their long-term plan. The family decided that lack of water was the number one factor that could adversely affect their yield variability."

Bill says, "The Calls decided that their long-term strategy was to reduce their risk of drought and gain control over the amount of precipitation they received. Over a five-year period, they focused on developing a center pivot irrigation system for their prime, high potential income crops, such as peas, beets, potatoes, snap beans, onions, cabbages and carrots. The system was their number one capital investment for that five-year period, and it paid off because today the Calls have some control over a very tough challenger - the weather."

Assessing expenses

When the economy heads south and you are searching for ways to turn a profit, look first at your balance sheet to assess the current condition. Then look at your cash flow budget to determine if you can get the next crop planted and if — and how much — you need to borrow. These two reports tell you and your Farm Credit loan officer a great deal about your business and your prospects.

The next step is to look at yourself. What are you willing to do to help correct the situation?

"You have the most control over your expenses," says Bill Kappus. "Rely on your production and financial records, now more than ever. Know your break-even cost of production to determine what level of crop insurance to buy and what price to lock in for forward contract expenses, such as feed, fuel and fertilizer."

"In addition, Farm Credit benchmark reports will help you compare your expenses to others in your industry. If your expenses are too high, see where you can cut."

Dale Foley, senior loan officer with Farm Credit of Western New York in the Geneva, N.Y. office, agrees. "Every industry has two or three key expenses that can represent more than 50 percent of their costs. For example, in the apple industry, labor expenses, such as full-time and part-time labor, workers' compensation insurance, etc., can represent 50 percent of the cost to produce an apple. The cost of sprays, such as pesticides, insecticides and fungicides, is the second highest expense for apple growers.

"When farmers focus on building efficiencies with their top two or three costs in relation to an industry benchmark, they get to the heart of their business expenses. Some apple growers, for example, have joined together to form buying groups in order to take advantage of their collective buying power and reduce their cost of spray."

Norm Coe, business consultant for First Pioneer Farm Credit in Claverack, N.Y., adds, "When comparing your expenses to a benchmark, remember that you don't need to beat or match the average. Reducing your expenses by half the difference between your current expense and the benchmark's average expense will help your bottom line. For example if you spend $150,000 for labor and a similar size operation spends $100,000 for labor, then if you reduce your labor expense by half the difference, you have actually 'found' an additional $25,000."

New income opportunities

Once expenses are under control, farmers look at new income opportunities to take the strain off their cash flow. For example:

• A spouse may be able to obtain off-farm employment. The additional income brings in cash and reduces cash outflow. Benefits, such as health insurance, can take a lot of pressure off the farm and help the family at the same time.
• One western New York dairy farmer whose farm is on a busy highway decided to grow five acres of sweet corn and try his hand at opening a small stand by the highway every weekend. Over this past summer, he generated thousands of dollars in additional income.
• Highly creative agricultural entrepreneurs have developed seasonal cash-generating side businesses, such as corn mazes, haunted hayrides, ice cream and gift shops, wineries, Christmas tree stands, u-pick operations, snack bars and restaurants.

Of course, many enterprising business operators successfully cut expenses and also develop new sources of income

Stay in contact with Farm Credit

Of course, one of the best ways to work your way through difficult times is to secure the advice of experts who are experienced in agricultural finance. The experts include Farm Credit loan officers and other Farm Credit ag business specialists.

Western New York's Bill Kappus provided some examples of the type of support you can obtain from Farm Credit in tough times.

"You can't predict a drought," Bill says, "but you can use business strategies to mitigate risk, such as the Call family's long-term plan to add center-pivot irrigation in their high income crop fields."

Bill points out that reduced earnings and weak cash flows can lead to poor decisions. A Farm Credit loan officer might tell you that the first step to reduce risk during stressful times is to keep long-term goals in mind.

Bill adds, "You don't want to base your long-term decisions, such as selling land or important assets, on today's drought conditions or checkbook shortfall. Rather, you want to carefully weigh the consequences of decisions on the viability of your business over the next five or ten years. Before making an important change remember that you have a lot of resources available to you, such as Farm Credit loan officers, financial record-keeping pros and business consultants.

"Don't be too proud to come to us for advice. As a farmer, you need to use all the good farm consultants you can find. It never hurts to be exposed to new and innovative ideas."

Getting started

To get started, schedule an appointment with your loan officer. Explain the condition of your business and your business plans, and he or she will go to work to select the appropriate tools to help you. These might include strategic plans; risk management strategies; what-if scenarios; financial plans; in-depth financial, business and production analysis; action plans; business trends; and so on.

Or perhaps your loan officer can just listen to you and offer constructive feedback. Sometimes all it takes to improve your outlook is the chance to talk to someone with an objective viewpoint and a fresh look at your challenges. One simple suggestion may help turn things around.

For example, one suggestion may be as simple as having Farm Credit lend you an operating line of credit to get over the current slump in prices. Another may be using a fixed interest rate (rather than a variable rate) to reduce your risk of interest rate volatility. Or, in some situations, the best choice may be helping you work through a plan to close part or all of your business.

Key questions

Farmers know firsthand that farming is a good way of life. But just having a good way of life isn't enough. You need money, too. So if your money situation is in doubt and you are uneasy about going forward in your business, ask the following questions:

• Do I like what I am doing?
• How does it affect my family?
• Am I making enough money?
• Will current earnings support my retirement? My children's education?
• What is the possibility of my business becoming viable again with average prices and average weather conditions?
• Do I want to continue to farm?

"Do I want to continue to farm" is not a negative question. Most of you will answer it with a resounding, "Yes." But you'll be a whole lot happier with the answer if you genuinely love farming, your family enjoys farm life and you're making enough money to cover all your needs and at least some of your wants.

According to Bill Kappus, "You never want to lose all your assets for the sake of your business. Don't gamble with your future. For some customers, that may mean liquidating their businesses, which does not have to be a bad thing to do. Some customers have actually thanked me for helping them close the books on their business because they got out when they still had assets and money."

Norm Coe adds, "An orderly liquidation or partial liquidation can take as much planning as staying in business. A Farm Credit business consultant can step you through the process as painlessly as possible."

The bottom line

Dale Foley concludes, "Down cycles in your industry are also a good time to reevaluate your goals and long-term plans. Make your decisions based on sound records and business principles, not emotion. Stay positive and remember to have confidence in your ability to stay in it for the long haul."

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