| OU 316 | January 14, 1997 |
"Forecasting is not a respectable human activity and not worthwhile beyond the
shortest of periods. Strategic planning is necessary precisely because we
cannot forecast."
Peter Drucker
Given the above quote, let me begin this paper by saying this is not a forecast. It is a discussion of situations that may impact farm input prices, credit and ultimately cost of production in 1997. I feel most farmers must learn to expand their skills in marketing, finance and human resource management to be successful in the modern age of information. It is no longer adequate to be a "good producer". Remember, the people working in the business make or break the business, thus, good leadership/management is the most important success factor.
"Production without good leadership/management will always result in
unacceptable performance!"
Stephen Covey
Where will the cost increases be?
Fertilizer prices increased the least of all the major inputs in the 20 years before 1995. But, with relatively large acreage in the last three years, fertilizer prices shot up in 1995 and 1996 with some increases over 10%. Look out for 1997, many crop farmers had the best year ever with record high prices for some products. Expect acreage to be up more in 1997 and farmers to use higher rates of fertilizer. This will again put upward pressure on fertilizer prices. In addition petroleum supplies are short and prices up, which increases the cost of fertilizer. Therefore, look for early increases in fertilizer prices as much as 10% due to expected demand and petroleum cost. Strategy: You may want to make early arrangements for your fertilizer supplies, including the price.
Pesticide prices have steadily increased due to expensive research and development. However, some will be less expensive due to elimination of patent protection. Due to the demand from increased acreage and higher petroleum cost look for slightly higher prices in 1996 with some specialty products moving up 10% or more.
Farm machinery prices have increased steadily since 1987. Farm machinery sales have rebounded in the last two years as farmers are buying new and better technology. Most farmers think they need to change cultural practices to stay efficient. Sales of tillage, spraying and cultivating equipment are driving the market. Also, many farmers are in a good cash position this year and will buy machinery for tax purposes. This increased demand along with higher labor, steel and financial costs means higher prices for farm machinery in 1997. Look for increases between 5 to 10%. Strategy: Carefully evaluate machinery purchases, many bad asset purchase decisions have been made in the name of income tax management. An asset purchase is a revenue decision. Only buy machinery when it increases net revenue and generates cash to pay for itself.
Energy prices were up dramatically at the end of 1996. If we have a severe winter, expect prices to be up 8 to 10% in 1997. Of course, energy prices affect the cost of many other products including fertilizer and pesticides. The increase will be spurred by increased demand from developing countries and the trend toward more "gas hog" vehicles in the U.S. Things could change if Iraq comes back into the market.
Interest Rates
Good news--interest rates have been fairly stable, due to the FEDS concern about the possibility of inflation. Some economists expect the FEDS will raise interest rates in the first half of 1997, but no more than 0.5%. Rates have increased slightly in recent weeks. Look for slightly higher rates when you go for your operating loan. Also, farmers are again borrowing more and with increased acreage in 1997 loan demand should be up putting upward pressure on rates.
Warning Signs
Farm borrowing is on the rise again. Many farm businesses have started to replace capital resources, such as machinery, in the last 2 or 3 years. This, along with adequate credit availability, somewhat more liberal lending policies and favorable interest rates, has put farmers back into the borrowing mode. But remember, we still have about 20% of farm businesses carrying debt levels that put them in high risk financial situations. Financial records and analysis must continue to be a top priority function for the businessman looking to borrow money this year.
For many South Carolina farmers, 1996 was a good year. The key to success in getting through the bad times is how well you manage the good times. Be very careful with large capital purchase decisions. In the emerging business environment, the emphasis will be on controlling assets rather than owning assets. Farmers that had a good year should look toward improving their cash(liquidity) position. Business risk has increased for the farm business due to less government programs, volatile prices and large capital requirements. Farmers that go into the year with good liquidity can better withstand the risk. Sharpen that financial pencil. Strategy: Look for investments that build security for the future. This may mean diversifying your portfolio outside of agriculture. Make sure any machinery investment is a profitable one.
Look for a 4 to 6% increase in operating cost this year. This, along with increased acreage, will mean increased use of borrowed operating debt. The best strategy for controlling cost is a cash flow budget projected monthly and monitored with actual cost as you move through the year. DO IT! Liquidity(cash) is usually the major financial problem facing farmers. Use the 1996 operating profits to improve liquidity going into 1997. Don't spend it all on machinery and other fixed asset purchases.
Continue to watch your debt load and look for good opportunities in the
market. Improve your knowledge and skills in finance and marketing because:
"The significant problems we face today cannot be solved at the same level of
thinking we were at when we created them!"
Albert Einstein
