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In the weekly edition of The Ag Globe Trotter, Dr. Dave Kohl writes about an interesting question that was recently posed on a webinar.
The participant asked Kohl what segment of agriculture or specific commodities are most successful in today’s agricultural marketplace? His quick response was that success is not determined solely by the commodity, but the successful management of the business within a certain industry segment.
A commodity outlook or where the product is in the economic cycle is important. However, it is more important how one manages the economics, particularly in times of price and cost inflation. Ultimately, profit margin management is key.
As a longtime analyst and observer of financial databases, there is always a top third, median, and bottom third of producers when comparing business performance in terms of profitability. Granted, when an industry or commodity is at the top of the cycle, even the bottom third of producers will move toward breakeven and, in some cases, generate a profit. At the peak of the cycle, the median and top third of producers will garnish substantial profits, enabling them to grow or expand their asset base. Others in the top third of profitability will utilize the profits to build working capital or an equity buffer for the down part of the cycle.
When an industry or commodity is in the down cycle, the top third and median third of producers will resort to optimizing profits or minimizing losses. This is usually accomplished by prudent analysis and an examination of the numbers. In some cases, they will quickly shed unproductive assets. Others will contract or scale down the business to find the “sweet spot” for success.
Regardless of the cycle, chasing the hot market money makers or the next big thing can often occupy so much time that one fails to focus on the fundamentals that ultimately lead to profitability.
P.S. A point to consider:
At the top of the cycle, even the bottom third of managers will often make money. This usually is a leading indicator that the industry is headed for economic issues. There is an old saying that high prices will cure high prices. This often results in producers overpaying for inputs and assets, which drives up breakeven points and eventually kills the profit spectrum.
SOURCE: NORTHWEST FARM CREDIT SERVICES
