Over the past few years, many producers have gotten accustomed to high commodity prices. However, with prices now on the decline and costs remaining high, farmers face a more challenging financial situation.

In the fourth episode of “Management Matters: Focus on Profitability,” David Kohl, agricultural finance author and professor emeritus at Virginia Tech University, explains that this downturn in the commodity supercycle calls for farmers to prioritize their financial management. He shares tips on how farmers can keep profits up in a tough economic climate, and he explains top characteristics of the most profitable farmers.

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Steps to take in January 2015:

• Set 1-year and 5-year goals as a basis for developing a business plan. If there are multiple partners, have them develop their goals separately to see whether they agree.
• Find your cost of production because a one- or two-percent difference in that cost can have a major impact on your bottom line.
• Create a road map for the year, with a balance sheet, a projected cash flow and dates set every quarter to check in on your progress and decide on any necessary changes.

Key takeaways:

• Keep clear, current financial records to negotiate rents, determine profit margins and, ultimately, avoid losses.
• Be proactive in building side-by-side relationships with agricultural lenders and advisors.
• Learn from the common characteristics of resilient farmers who always make a profit. They:
  • Know their cost of production.
  • Take a profit rather than always trying to hit a home run.
  • Create and, most importantly, execute a strategic marketing plan.
  • Are modest in family living withdrawals from the business.
  • Have a team of advisors who offer advice and challenge their ideas.

Want to learn more? Stay tuned for the next episode of “Management Matters,” and read Kohl’s articles on financial farm management in Corn & Soybean Digest.

Read our previous posts for additional insights into farm profitability:

• “How to Stay Profitable in Uncertain Times” with Mike Boehlje
• “Keys to Effective Succession Planning” with Kevin Spafford
• “Evaluating Your Choices in the 2014 Farm Bill” with Nick Paulson