Fundamentals of Strategic and Tactical Business Planning
Farmers, as other business managers, differ with regard to their long run profitability, growth patterns, and their responses to changes in the business environment within which they operate. Some farmers are challenged in a positive way by the changes that are taking place in agriculture, and are actively seeking the best way to thrive and achieve business and personal goals in the changing environment. Others become very frustrated trying to keep up with the changes that are going on around them, and struggle to find direction and a path for success.
While there are many factors that lead us to involvement in agriculture, certainly economic returns over the long run are an important consideration of viable sized farming operations. In order to “set the stage” for a discussion of business planning, it is important to consider factors that may, or may not, impact the long run profitability of individual farms or businesses. First, is long run farm profitability driven by overall long run commodity price levels? To the surprise of many, the answer is an emphatic “No”. In order to clarify, we need to make distinction between returns to farming operation, and returns to ownership of the base resources (land in particular). It is a simple fact that higher long run commodity prices or government payments are quickly bid into rental rates, land values, and other base resource values. Long run returns to “farming” are largely unaffected. This implication is often confused, and masked for long periods of time by traditional accounting methods, and IRS reporting requirements. Traditionally reported profits are a mix of returns to land, labor, management, and other farming assets. Short term “net farm incomes” are significantly impacted by commodity prices and government payments.
What about short run price risk management strategies of individual farmers? Can some managers gain an advantage, and improve long run profits, by being better marketers? Again, the answer comes as a surprise to many. The consensus of research suggests that it is very difficult, if not impossible, to enhance profitability to any significant degree by consistently “beating the market”. Price risk management tools can, however, be used to reduce the impact of price variability on the farms financial position. Do not confuse price risk management strategies with long term profit enhancement. As a matter of fact, the two work against each other in many regards.