What is in this article?:
- Volatility creates opportunity for agriculture.
- The extremes get you in trouble.
- Develop a sound risk management program including marketing, hedging and crop insurance.
DR. DAVID KOHL, professor emeritus, agriculture and applied economics at Virginia Tech, chats with Oklahoma State University graduate student Stephanie Schumacher following his keynote address at the recent Rural Economics Outlook conference in Stillwater, Okla.
Points to ponder
Kohl offered a list of questions farmers should answer before they decide to expand or buy more land.
- Have you been profitable in the last three years?
- Will the land/ expansion result in greater than 50 percent equity?
- Do you have working capital to revenue of 33 percent or more after expansion?
- Will overall profitability after expansion exceed interest rates?
- Will overall profitability after expansion result in return exceeding inflation?
- Will overall profitability after expansion result in return exceeding weighted cost of capital?
Kohl said if a producer could answer yes to four of the six questions, buying the land would probably be a good idea. If yes answers get only two checks, don’t buy it, he said.
Water will become an increasingly important issue. “We will fight wars over water.”
Whatever the next decades hold, Kohl advised farmers and ranchers to be prepared. “Build strong working capital and cash reserves,” he said. “Develop a sound risk management program including marketing, hedging and crop insurance. Watch financial leverage.”
He recommended maintaining sound financial records and following a systems approach to management.
Farmers should “prepare for a five-year down cycle,” Kohl said.