A SHARP pencil could be the most important tool farmers use for 2001. Faced with uncertainty about groundwater supplies, the absolute certainty of increased energy costs and the unpredictability of commodity prices, farmers and ranchers confront tough decisions as they make plans for next year's enterprise mix.

Texas A&M Extension agricultural economist Blake Bennett, Dallas, recommends farmers develop three budgets for each enterprise as they plan for 2001: best case, worst case and most likely scenarios.

"They should develop a plan for each of those budgets and be flexible enough to adjust production or marketing in-season to meet changing crop and price outlooks," Bennett says.

Potential groundwater reserves should be a first concern, he says. "What are the chances of farmers having adequate moisture to do things the way they normally do them? The answer will affect production and management decisions."

Bennett says farmers who question water availability might consider less water-intensive enterprises or re-configure irrigation systems to supply water at different times during the season.

Energy costs also weigh heavily on farmers as they plan for 2001. "Evaluate energy use," Bennett suggests. "See if there are ways to reduce trips across the field or limit irrigation. Energy costs will cut deeply into the small profit available for many farmers."

Reducing tillage operations offers one possibility, he says. "But evaluate tillage and determine if yield advantages will be lost if the system changes."

New technology, such as herbicide resistant and insect tolerant plants, offers growers an opportunity to eliminate or reduce chemical expenses.

"But higher seed costs and technology fees add to production expenses," Bennett says. "Put a pencil to the difference and determine what makes sense for each enterprise and each field."

Recent research indicates lowering seeding rates with some transgenic cotton varieties may not only decrease costs but also improve yield and profit potential. Bennett says that's the kind of information farmers should develop as they prepare for 2001.

He says diversification will help farmers spread production and price risks. "Even in areas with limited crop options, farmers may choose to plant a winter forage and graze cattle to improve profit potential," he says.

He also recommends farmers determine what level and what kind of insurance they'll need: production or crop revenue coverage, or some of both.

"And look at the futures market, including options, to move price risks onto other parties."

Bennett says farmers now have frequent opportunities to learn more about marketing opportunities.

"The Master Marketing Program provides an excellent means of learning how the futures market can help reduce risk," he says. "And a spin-off from that program has been marketing clubs."

Bennett leads several marketing clubs and says they offer farmers an informal opportunity to track market trends and to share ideas with other producers.

"I like for my meetings to be like coffee-shop conversation," he says. "I want to help create an environment for learning."

Bennett also works with the Texas A&M FARM (Financial and Risk Management) Assistance program and recommends it to farmers and ranchers who want to use their own historical data to improve decision-making.

"We like to evaluate at least 10 years of the farm's history of income and production," he says, "and then use that information to make specific changes. A farmer will have the numbers he needs to show his banker."

He says the key to the program is that it uses an individual farmer's records instead of an average of similar farmers to develop projections.

"We use the information to show individuals how to organize and use information to make decisions."

He says farmers coming out of the 2000-crop year appear to be a bit "gun shy. They are not as optimistic as they once were because of several years of low prices and unusual drought. They've become more cautious."

"But a bit of pessimism may be healthy. They still have to make plans to live off their land and they need to weigh decisions carefully."

Bennett says farmers walk a thin line between caution and creativity. "They have to be creative to find new ways to diversify operations," he says. "But they still have to evaluate each option, develop a business plan and see if it works on paper."

He said opportunities exist. "A group of cattlemen in West Virginia pooled their resources, determined what kinds of cattle most buyers wanted, and agreed to provide the same breed, color, and weight. They also agreed to use the same medication and specific production parameters that appealed to buyers.

"They were able to provide larger lots and set up a tele-auction to market their cattle. They got a premium for their cattle because of how they selected and sold them. They also bought materials in bulk and contracted for a veterinarian to do artificial insemination for a reduced fee.

"They're still raising cattle; they're just producing and marketing a little differently to meet market demands."

Bennett says, depending an a farmer's resources, he may look at pick-your-own vegetable, Christmas tree or flower operations; roadside stands or agri-tourism to increase profit potential.

"Agri-tourism is a new opportunity to bring city dwellers into farm country to get back to a simpler time," he says.

Any new enterprise demands a thorough analysis of labor, capital and time requirements, Bennett says.

And with any change in the farm operation, a sharp pencil should be the first tool a farmer touches.