What Erodes Profit?

In agriculture, fluctuating commodity prices, input costs and unstable fixed costs, such as depreciation or investment costs, are well known challenges. How you monitor and manage the swings in prices and costs can be crucial to your business.

Following are several things you need to watch for and do to ensure you stay profitable.
When gross margins weaken because of declining commodity prices or increasing input costs, the situation needs your attention. It is essential that you determine your per unit costs of production, so you know what prices are needed to achieve a profit, or at the least, to minimize your losses. Knowing your costs can also protect your margins when you develop your marketing plan.
Putting aside cash in profit years to put into capital purchases and put off purchases until margins improve are both smart decisions. Beware of over capitalization or making capital purchases that aren’t needed, like buying or trading machinery every year, running over-sized or more expensive machinery than you need, or expensive land purchases. All can erode your profit.
A bad debt structure, where too much debt is due too quickly, can lead to cash flow issues and squeeze your profits. If your operating loan limits aren’t high enough to make term payments and cover operating costs, it may result in significantly higher interest costs associated with trade credit, or perhaps using credit cards to prop up cash shortages. Some type of refinancing may be required to consolidate some debt to a more manageable level.
The size of your operation is important. If it’s too small, draws for fixed costs may outstrip any profit, and without some type of non-farm income, you may eventually be forced out of business.
Having a risk management strategy is essential if you want to grow or maintain your profits. Top managers have contingency plans for most situations. They use risk management tools and programs such as crop insurance and AgriStability, and they lock in interest rates on their loans. It is also wise to have a written marketing plan and use professional services to provide marketing and management advice.
These are challenging times. Decreasing commodity prices, increasing land costs and unstable input cost margins are making it harder to sustain profits. Given these pressures, it is becoming more and more important to closely manage your business operation.

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