Soil Testing Home Farm

Soil Testing Season

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This is the time of year when soil probes all over the prairie are taking samples of the soil that provided the crop in the current year and will provide another crop next year. It’s an annual “check-in” to see what’s left.

It was the same about a year ago. We check what nutrient levels remain after harvest, consider what crop will perform best in each field next year, and begin to apply appropriate nutrients (following the 4R’s of Fertility: Right Source, Right, Rate, Right Time, and Right Place) in fall and/or in spring. The crop get’s sown, produce get’s harvested, and we check the soil again. Based on what we started with, what we added, and what the crop used to through the growing season, we compare to what is left in the soil to evaluate how efficient our fertility program was.

If it wasn’t as efficient as it could have been, we examine the effects on our production (moisture, heat, disease, insects, etc.) and we examine our own role in the process by questioning if the seed tool did a good enough job; how about the sprayer? Often time we use weather as the justification to acquire bigger, newer equipment to “get the job done faster.”

What if the entire industry, not just the progressive managers but the entire industry, used that same methodology in analyzing profit and cash flow? It might look something like this:

This is the time of year when spreadsheets all over the prairie are being used to tally up the performance of the business over the last growing season. We start with the working capital we had after last harvest, consider what crop will perform best based on your crop rotation and market outlook, and begin to project input costs and yield & price for each crop. We enter expected operating and overhead costs into a projection, and convert those projections to “actuals” as the year progresses. Once harvest is complete, we evaluate working capital again.

If profitability and cash flow was insufficient to meet expectations, we examine if operating costs stayed within budget or not (and why), we examine if overhead costs were projected correctly or if we let both operating and overhead “get away” this year. What did we not foresee? What did we properly plan for? Did we market appropriately?

The practice of soil testing compliments crop and fertility planning. These are crucial steps to take to create the most efficient plan. Remember, you need to produce at the lowest cost per unit possible. Period. Hard Stop.

The practice of checking financial performance is similar to keeping score. It would be awfully tough to know what adjustments need to be made during the game (growing season) without knowing the score along the way.

To Plan for Prosperity

It’s been said by agronomists that soil testing is “seeing what’s in the bank account” and they carry on in supporting that analogy by stating that no one would write a cheque without knowing what the bank balance is first. Sadly, there any many people who do both: write cheques without knowing what’s in the bank and plant crops without knowing what’s in soil. One won’t break you, the other could.

Knowledge is power. Knowledge comes from management. Management requires measurement. Test your soil (financial performance), because if you don’t measure it, you can’t manage it.

 

**Side note: the photo is from my farming days, and provides a glimpse into the soil I used to farm. I found it interesting to so clearly see the A, B, and C horizons in a single core. **

Know the Signs

Know the Signs

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When you see a cow that is limping, you check her out to see what the ailment is. A prudent cowperson can quickly recognize foot-rot and will tend to the cow to make her well again.

When you see yellowing bottom leaves and/or thin, spindly plants in the canola crop, you know it is lacking nitrogen. If you see the signs in time, you can top dress nitrogen fertilizer onto your crop and see a positive benefit.

When we see a tire is low, we fill it.
When we see windows are dirty, we clean them.
When we find the level of fuel in storage is low, we order more fuel.
When cash flow is abundant, we spend it in ways we wouldn’t usually spend it.
Yet, when working capital is depleted, when cash flow is tight, or when profitability is dicey, we typically soldier on…doing what we’ve always done.

This makes no sense. The last two sentences above make no sense at all.

When the bank account is empty and the line of credit is nearly full, do you:
a) Apply for more credit, at your primary lender or elsewhere?
b) Evaluate your cash outflow to date and reexamine your plans for the rest of the year?

When working capital as slipped down so low it would barely cover the crop inputs loan, do you:
a) Analyze what caused the current situation?
b) Seek action to rectify your working capital position?
c) Both a) and b) ?

The case for “knowing the signs” is made by acknowledging the impact of each risk that is identified.

In the crop, the yellowing of canola leaves won’t spur any action if the risk to yield potential is not understood.  If the risk is understood, then an informed decision can be made to act or not act. If there is no effort put in to understanding the risk, then the decision to act or not act falls somewhere between apathy and laziness. Being ignorant to the specifics of the risk and its implications is no longer an excuse now that we have access to all of humankind’s knowledge in our pocket…

If you’re unaware of what are the signs of nitrogen deficiency in canola, if you’re unaware of what are the risks of foot-rot in your cattle herd, you are best to seek advice from an expert.

To Plan for Prosperity

The risks of maintaining insufficient working capital, and the risks from shortfalls in cash flow, are obvious to those of us who specialize in the financial side of business. We know the signs. We know what it takes to fix it. We know what should happen to ensure the situation isn’t repeated.

 

Systems

Systems

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Last week, we discussed the importance of adding value to your business. It hinges on knowledge that allows you to see where your business is creating value or eroding value. Without the knowledge to see where value is positive or negative, we risk making decisions that are emotional or even irrational, but always uninformed.

The key to adding value in your business comes from knowledge about the goings on in your business.

Lately, one of the more common challenges I’ve heard from clients is the challenge of accurately reconciling inventory. Yield monitors are an acceptable guess, but certainly they cannot be taken as gospel (I cannot rationalize how a machine running at high speed can provide an accurate measure of yield without stopping to calculate the mass of the grain…but I digress). Many operations have scales on the grain carts, and while this technology is much more reliable, it is useless if the information is not being recorded.  We wonder why the old adage rings true, “You never get as many bushels out of a bin as you’ve put in.” And we haven’t yet touched on inputs (seed, chemical, fertilizer) nor how you manage returns and the subsequent credits…

You never get as many bushels out of a bin as you’ve put in.

With all the technology available to accurately reconcile inventory, the reason it remains a challenge is that the system of recording and managing information is broken…if it exists at all!

Here is a small sample of the systems you need in your business:

  • Managing/tracking cash and working capital;
  • Managing/tracking inventory (production, inputs, parts, fuel, etc.)
  • Managing/tracking staff (hours, vacation, sick days, etc.)
  • Managing/tracking equipment (operating efficiency, service, repairs, etc.)
  • Controlling Unit Cost of Production
  • Creating Profit.

To Plan for Prosperity

You wouldn’t jump into your combine without confidence that all systems are in place and working properly; in fact, the manufacturers now have systems and sensors in place for almost everything making it so you can’t operate if something “isn’t right.”

There are far too many variables in your business and leaving any of them unmanaged puts your profit and cash flow at risk. With little in the way of guarantees that profit and cash flow will sufficiently meet expectations each year, isn’t it worth investing in the right systems to garner full control of your enterprise?

Adding Value

Adding Value

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To actually add value to your business you must have profit from operations. Every dollar of retained earnings that is left in your business increases the value of your business. Simple concept.

In agriculture, when someone says “adding value” we typically hear “value-added” which means something like processing, milling, refining, etc, etc, etc. Basically we infer that it is anything one or two steps up the value chain that isn’t the actual farming.

At this point, many ears close and minds drift off…

What I’m referring to today is what adds value in your business. It matters not whether your business is production, processing, or any product/service that supports your business, there are aspects where value is insufficient and it is hurting your bottom line.

What Doesn’t Add Value

  • Anything that does not provide an ROI (Return on Investment) above 1:1.
  • Anything that doesn’t provide a measurable and quantifiable improvement to efficiency (which can be translated to ROI.)
  • Anything that uses more cash that it provides.

Examples would be a brand new pickup truck, renting land that (at best) will only break-even, chasing yield to the detriment of gross margin.

What Does Add Value

  • Cash flow and expense management
  • Driving down Unit Cost of Production
  • Empowering your people

Examples would be building and preserving working capital (especially cash), understanding total farm costs relative to production, building a team of competent people who can replace you.

Defining Value

Maybe this is the place to start? How do you define value in your business? What do you see as providing value? For far too many farms, value is centered around land appreciation (a passive boost to equity) and new equipment (a major draw on cash.) Interesting how these two focus points are conflicting in how they affect a business’ financial position…

Does value comes from biggest yield, biggest equipment, biggest acreage base? Or does it come from profit, efficiency, and control?  I might be swimming against the current here, but my vote is the latter…

To Plan for Prosperity

Knowledge is key. Without knowledge, determining value becomes emotional, a guess, or a hunch… To understand value in your business requires an awareness, a level of knowledge, that does not come from gut feel. Your systems for managing the operation and all the financial decisions that go along with it are what will provide the knowledge to help you determine where you are adding value, where you can create value, and where you’re letting value be eroded away…

IMG_0162

It’s Never a Problem Until It’s a Problem

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The first time I heard the phrase “it’s never a problem until it’s a problem” was from Elaine Froese. She is a sought after speaker with farm families on the topics of succession and family dynamics. I recall chuckling at the statement because it is equal parts truth and ambiguity.

Elaine uses this phrase to describe issues among family members, those issues we let smolder without drawing attention to the fire in waiting, those situations that irk us but don’t get discussed because we don’t want to create conflict. The statement applies across the board.

Over my career as a business advisor, commercial lender, and bank branch manager, I’ve seen hundreds and hundreds of financial statements, and one thing is consistent: it’s never a problem until it’s a problem.

Between 2007 and 2013, generally speaking, cash flow was not a problem on western Canadian farms: yields were strong, commodity prices were robust, profits were made. Yet anyone who didn’t consider that those boom times wouldn’t last forever likely didn’t prepare for the effects of the cycle turning downward. Those are the businesses who were most likely to make long term decisions based on short term results. Now there is pressure on cash flow from issues such as excess moisture, or as in the case of 2017, drought. As such, cash flow, which wasn’t a problem in the past is now a problem for many.

“The future will always belong to those who see the possibilities before they become obvious to the typical producer.”

Danny Klinefelter

Danny Klinefelter is the recently retired ag economics professor at Texas A&M University, and the founder of TEPAP. His words, if heeded and practiced, will head off most problems before they become problems!

To Plan for Prosperity

Being a visionary isn’t exclusively tied to seeing the future, it also applies to pragmatically looking at the present. Connecting the dots between the present and an objective (meaning realistic and not overly-optimistic) outlook for the future will help us all identify problems before they become problems. Then comes the hard part: taking action.

top producer

Are You a Top Producer?

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Esteemed economist, Dr. David Kohl, is a fervent advocate of improving business decision making. In one of his recent speaking engagements, Dr. Kohl suggested that top producers can answer Yes to at least six of the following questions.

Top Producer Kohls questions

With only 10 questions on the slate, a positive response to only 6 of them would make you a top producer.
You’ll note that nowhere in those 10 questions will you find anything about actual production…

To Plan for Prosperity

If you are unable to answer YES to at least 6 of Dr. Kohl’s questions, then I suggest you do an internal audit on yourself and your business to determine why. If you are unsure about where to start in doing such an audit, or how to make the changes necessary to be able to answer Yes to 6 of 10 questions, then pick up the phone – I can help.

If six-out-of-ten makes you a top producer, imagine how strong your business would be if you hit 10/10…

Per Acre Equipment Investment

Per Acre Equipment Calculation

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In the June 8, 2017 edition of the Western Producer, columnist Kevin Hursh penned Per acre equipment calculation can be revealing. As is typical, Hursh hits the nail on the head with this piece by suggesting farms should know their equipment investment per acre. His column goes on to describe how new equipment has seen significant increases in SRP (suggester retail price) over the last few years, contributing greatly to the elevating of the “per acre equipment calculation.”

First, let’s figure out where you are at. Add up the current value of all your equipment, owned and leased. If that total is $2.5million, and if your farm is 5,000 acres, your equipment investment per acre is $500. If we compare that to a 2,500 acre farm with $1million invested in equipment (therefore $400/ac), who is better off?

Measure it against earnings

Last year, I had a client tell me about a meeting with his lender. This particular client is small acreage, relatively speaking (under 1,000ac in crop) and yet was quite well equipped for his acres. He carried minimal debt, and despite some cash flow challenges over the previous two years, his working capital was still very strong. He was seeking a high-clearance sprayer so that he could ensure timely fungicide applications for his lentils, and other high value crops. The feedback he received from his lender was that his “equipment investment per acre was to high.” On the basis of that single calculation, it most certainly was. What the lender failed to evaluate was the entire farm profitability. Because of the small acre base, my client was able to produce a rotation of high-management high value crops. His net profit per acre was almost double a typical grain farm. His ability to justify a high equipment investment per acre was evident. Needless to say, he acquired his sprayer (a used model valued at just north of $100,000) pushing is equipment investment per acre from $484 to $644.

Let’s go back to the 2 fictional examples above.
EBITDA vs Per Acre Eq InvIf we only looked at equipment investment per acre, we would likely conclude that Farm B is in a better situation by only having $400/ac invested in equipment versus Farm A having $500/ac. Yet when we dig further by bringing EBITDA into the calculation (EBITDA is Earnings Before Interest Taxes Depreciation & Amortization) we discover that Farm A generates stronger EBITDA per acre than Farm B, and is therefore possibly justified in having a higher investment per acre in equipment. In practical applications, even this doesn’t go far enough to determine which is better, but it’s a start.

To Plan for Prosperity

Delving into management calculations can be daunting and confusing. If we don’t know what to look for, how it compares, or even if we’re not measuring anything, we’re already behind before getting started. Begin by measuring the many facets of your business; in this case, “What is your equipment investment per acre?” How has is changed over the last five to ten years?

Relating back to my client, his EBITDA was a whisker under $120/ac, so his EBITDA to Equipment Investment on a per acre basis was about 0.186:1. This means that with his equipment investment of $644/ac will generate about $0.186/ac in EBITDA. Is that a good metric? As Kevin Hursh closed his column, “It’s unfortunate that more information isn’t available on the typical investment levels in each region. That would allow producers to make more relevant comparisons.”

Canola 100 fail title

Why the Canola 100 Challenge is So Wrong

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Announced two years ago around this time, the Canola 100 challenge baits farmers into taking part in a “moonshot”: an attempt to produce a verified canola yield of 100 bushels per acre. It isn’t that efforts to increase yield aren’t a good thing, because they are. But by what means are we attempting to achieve these yields?

This “contest” may be virtuous in spirit, but it overlooks the not-so-old adage that “better is better before bigger is better.” That applies to this argument too.

The rationale behind my position is supported in this Western Producer article that describes a farmer’s chase of this moonshot, throwing everything including the kitchen sink at his crop in an attempt to cash in on the Canola 100 prize. (Spoiler alert: it failed miserably.) This particular attempt can be summarized in this quote from the article:

The fertility program cost $300 per acre more than what was done to the check field but yielded only 70 bu. per acre, which was 1.4 bu. per acre more than the check field.

The driving factor behind efforts to maximize yields should be ROI (Return on Investment) and Gross Margin. Doing so would focus on maximum economic yield, not maximum production yield. There’s something about that pesky law of diminishing returns that gets overlooked when trying to shoot for the moon…

If maximum economic yield is the target, then Gross Margin is the focus. How that gross margin is achieved is up to each producer, but make no mistake about where the focus needs to be. In my experience, minimum gross margin, that is gross revenue less seed, chemicals, and fertilizers, at MINIMUM needs to be 65% to sustain the business. High cost operations need greater gross margin to cover all those costs.

To put that in reverse, if 35% of your gross revenue can go to crop inputs, then each $1.00 invested into inputs should return $2.86 in gross revenue. To apply this to the example above, the “extra $300 per acre” in fertility should have delivered $858/ac in gross revenue. If Canola was $10/bu, that’s nearly 86 bushels per acre above the check field.

Canola 100 fail

Let’s push the argument harder: if the example above actually hit 100 bushels per acre, and acknowledging the control field yielded 68.6 bu/ac, the gross margin on the Canola 100 plot was $14 per acre, or about 4.67%.

This is IF the 100 bushel yield was achieved…and face it, $14 gross margin doesn’t pay many bills; in fact, it wouldn’t even buy the fuel for the contest plot.

To Plan for Prosperity

Make no mistake about the messaging here: as a producer of commodities, you need the bushels!!! But do not lose sight of the fact that as a producer of commodities, your only chance of remaining sustainably profitable is to produce at the lowest cost per unit. Period. Chasing maximum yield at a 1:1 ROI won’t get it done.

1. What is your historical gross margin?
2. What are your operating and overhead costs?
3. Know these to be able to plan for maximum economic yield.

 

Shaking Hands

Let’s Make a Deal

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Here is an incredible opportunity for you!

You can invest in a business that has grown its assets by 100% over the last 6 years. It has doubled its production and its staff compliment in that same time-frame. Revenues have increased by over 130% since 2005.

Interested?
No…why not? The description is accurate of many farms, maybe even one you know.

We’ve purposefully made no mention of liabilities or retained earnings, nary a word on profitability or cash flow. Sadly, it is because ignoring those is typical when expansion is allowed to be the critical success factor.

Investing in a business that has inconsistent profitability and little (if any) controls over cash flow is beyond risky. Is it any wonder that industry lenders demand detailed and accurate information before investing in your business?

To Plan for Prosperity

Do up a Debt to Net Worth calculation. If your figure is 1 to 1, that means your creditors have equal ownership as you in your business. If your Debt to Net Worth is greater than 1 to 1, your creditors have more skin in your game than you do.

If you wouldn’t invest in a business that cannot prove reliable profitability and consistent cash flow, why would anyone else?

 

Better is Better

Better is Better…

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Would you rather make $50/acre profit on 20,000 acres or $100/acre profit on 10,000 acres?

This is a question I ask any farmer who admits to pursuing aggressive expansion. As was aptly described in a recent edition of FCC’s AgriSuccess  in May 2017, journalist Kevin Hursh discusses cost effectiveness of farm expansion with Kristjan Hebert. Kristjan has been quoted in this commentary a number of times in the past because he is the first person I hear using the term “Better is better before bigger is better.” To his credit, he admits that it isn’t his phrase; he heard first heard it from someone else.

The question posed at the beginning of this piece is meant to evoke an admission of any business flaws that have crept in to the practices and decisions that drive aggressive expansion.

The point is acknowledge that for all the risk undertaken in the operations of any agricultural enterprise over the course of one year, the end result must recognize the effort involved and the risk taken. If you’re working harder and risking more, why would you accept less profit? True, the linear dollar profit is the same in this example, but the profit per unit (in this case, per acre) is half. Anyone who can prove that their whole farm costs, right to the paperclips, are also halved is welcome to step up and prove that bigger is in fact better. I’ll wait…

There are many advisors who have questioned why any commodity production business would want to rapidly expand before doing the best job they can on what they already have. The argument on what led to the mindset of expansion at all costs hasn’t been settled in over 20 years, and won’t be settled here today. But in the end, we can do better, we must do better, because now we know better.

And the words are true: Better IS Better…

To Plan for Prosperity

This week’s piece is purposefully pithy. It is meant to drive awareness of the “Costs and Effects™” of the decisions made in our businesses. Every choice we make has a consequence, and to truly “be better,” we must evaluate each business decision on its merit, not how it makes us feel.

While bigger can sometimes be better, it’s guaranteed that better is always better.