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Let's Keep First Things First

Editor's Note: This report was prepared by Greg Wolf of Kennedy and Coe LLC, a major Midwest accounting and consulting firm as a special report for FarmFutures.com.

Unprecedented turbulence in the markets seems to trump everything else right now, but as the production year unfolds, it is important to not neglect a fundamental business perspective toward long-term success.

The following are three areas to keep an eye on this spring and summer. They are too important to keep until next winter!

An eye towards risk

2008 is only three months completed and we've had nearly enough news to nearly wear out the "uncharted territory•bCrLf metaphor. Commodity markets, international currency valuations, a growing credit market panic and more all have taken us into territory we've not seen before.

Lurking beneath news headlines in each of these areas are substantial risk issues. In the credit market crisis, for example, which began with dropping real estate prices and cascaded into the near-collapse and absorption of one of the biggest investment banks on Wall Street, much of the havoc has largely resulted from misunderstood, mispriced, and likely misrepresented risk.

It will be some time, and no one knows how long, before risks and returns move back into a more rational balance in the mortgage-backed security markets.

In production agriculture, we know a lot about risk - especially production and price risk. But other risk areas are looming larger all the time in our volatile economy. The more uncharted our circumstances are, the less reliable our methods of identifying and managing risk.

In the recent commodity run, the ability of grain sellers to contract into the futures markets has become problematic due to substantial margin calls - less a market risk issue, and more of an unforeseen financial risk. What if oil climbs toward $150 or $200 a barrel? And what would be the implication of shocks to commodity demand, unthinkable today, through a changing political mood toward the ethanol mandate, or a dramatically rising dollar against world currencies?

None of this argues for an alarmist outlook regarding risk, but simply an objective assessment and awareness, as much as possible, of risk exposure.

An eye toward strategy

The current agriculture economy, for many farm families, is undoubtedly a historical boom time. USDA forecasts that 2008 net farm income will be at $92.3 billion, over 50% higher than the 10-year average, and 2008 farm household income at a record high $89,434.

For those experiencing prosperity in 2008, and for that matter those who are not - it is timely to consider the context in the business' lifecycle. Current circumstances can provide a ripe opportunity to plan and act more strategically.  

For example, how does this current business experience fit longer-term historical trends and future goals? Is your operation moving more toward specialization, diversification, or a value-added venture? Is the business focus more on seeking additional investment opportunities or strengthening the balance sheet? Who are the people involved today, and are there succession issues to plan for, either in ownership, management, or personally? How are these strategic questions influenced by current conditions?

An eye toward the personal

Beyond all the production and financial metrics of business success, there is another - neither as quantifiable or tangible - that is even more important. That is, where are we at with personal satisfaction? Are we happy with where we are and what we're doing? Are our family members - spouses, children, and grandchildren happy? What about employees? Are relationships strengthening and growing in fulfillment? Is there another place or another priority that would fit us better now or at some anticipated point in the future?

Not everything that counts can be counted, and any time is a good time to be asking these kinds of questions. Our commodity bull run, even after a recent setback, is an exhilarating and unprecedented experience. It may or may not represent a new normal in production agriculture for the foreseeable future. But regardless of whether your farm profitability hits several record highs or reverts to historical norms, it doesn't alter the need to be building not just a better business, but a better life.