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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.

 

4 R's of Fertility

Easy, Efficient, Effective, or Expensive?

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Let’s get it right out of the way first: I am not an agronomist.

I do, however, have a solid base of understanding relating to agronomy. With tongue in cheek I like to say, “I know enough to be dangerous.” Nonetheless, I took great pride in the significant attention to detail I employed while being in charge of seeding when still part of the farm. I carefully measured TKW (thousand kernel weight) and calculated seed rates accordingly. I was diligent about what fertilizer, and volume of fertilizer went into the seed row (we only had a single shoot drill.) I always slowed down to 4mph or less when seeding canola and ensured to reduce the wind speed to the lowest possible rate to minimize the risk of canola seed coat damage.

I always had a long season in spring from having to cover the whole farm twice: once with a fertilizer blend to be banded, (all of the N and whatever PKS that couldn’t go in the seed row) usually at least 2″ deep; the second pass was with seed and an appropriate PKS blend that could be be in the seed row. It’s just what I did to respect what I’d learned about the importance of fertilizer rate and placement. It took more time in applying, hauling home, storing, etc. It created operational challenges during application (it seems there were never enough trucks and augers available.) It took more time to set the drill for the correct application rate. All of that didn’t matter to me because I only had once chance to get the crop in the ground and fertilizer properly applied (at least at that time, the equipment we had made it so that all fert was applied in spring) and I wasn’t going to leave anything to chance that I could easily control.

The key point in fertilizer management is “The 4 R’s.” Right source, right rate, right place, and right time of fertilizer application make for the best use of your investment. So why over the last number of years have we seen such a boom in spreading fertilizer on top of the soil?

This article was recently published by FCC. There is no ambiguity as to the best and most effective way to apply phosphorus. I’ll ask again, “What’s with the shortcuts?”

I know the answer: time. There isn’t time to incorporate adequate volumes of fertilizer into the soil. We can use a spinner that has a 100′ spread at 10mph (or more;) this permits more fertilizer to be applied in a shorter amount of time, and it permits fewer stops to fill the drill during seeding…all of it saving precious time. I get it.

But where is the trade off? Have The 4 R’s of Fertility been tossed aside completely? Where is the balance?

Casting aside the proven science of the 4 R’s in order to save time by broadcasting is easy and efficient, but is it effective? I suppose that depends on what effectiveness you are trying to accomplish. I’m suggesting effectiveness of the fertilizer you’ve paid dearly for.

Direct Questions

When making important management decisions like fertility, what methods are you employing to determine your best strategy?

Where is your balance between ease, efficiency, effectiveness, and expense when making critical management decisions?

How has your Unit Cost of Production projection changed if you decide to accept only 80-90% effectiveness from your fertility program?

From the Home Quarter

What is easy might seem efficient, we might believe it is effective, but it is most likely expensive. Historically, decisions were made with the goal of minimizing expense with little else given to consider ease, efficiency, or effectiveness. Management decisions that do not provide adequate emphasis on effectiveness will likely see higher expenses. Your focus with your agronomy must be to produce at the lowest Unit Cost of Production possible on your farm. Choosing a fertilizer application method that places more emphasis on that which is easy versus that which is most effective is likely to create a situation that is expensive. Management decisions that focus heavily on one aspect to the detriment of the others rarely achieve results that meet or exceed expectations.

Introducing the Growing Farm Profits 4E Management System™. Details to follow.

farmer tailgate computer

Farm Profitability Indexing

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Farm Profitability Indexing

Late in 2015, I picked up on some interesting farm financial info during a presentation I attended as a part of CAFA. This information represents farms from a geographically vast cross section and revealed some interesting trends:

1. Gross Revenue per Acre has Trended Up

Gross Revenue bar chart

With 2007 being the base year with a value of 100, and also being the first year of the bull run in commodity prices, we can clearly see that while gross revenues are trending up, there is still great volatility in gross farm receipts. True, weather anomalies had a significant effect, but that’s farming, isn’t it?

2. Investment in Crop Inputs per Acre has Trended Up

Inputs bar chart

While gross revenue has seen volatility, and for three years including 2009-2011 gross revenue was at or near 2007 revenue levels, investment in inputs has only once seen a reduction year over year. In 2013, investment in inputs was 77.5% higher per acre than it was in 2007.

3. Gross Margin per Acre has Trended Up

Gross Margin bar chart

While gross margin is trending up, there was a significant decline in 2009 from the previous year that extended right through 2011. Even by 2012, gross margin had not returned to 2008 levels.

4. Operating and Fixed Costs per Acre are Trending Up

Oper and Fixed Costs bar chart

This figure would represent operating costs such as fuel, labor, and equipment costs, as well as fixed costs such as interest, land, and building costs.  Notice the steady increase that has never went down year over year, even through the low margin years of 2009-2011 operating & fixed costs continued to rise.

5. Net Income per Acre has Rebounded from Significant Reductions

Net Income bar chart

Net Income represents what is left over after operating your business, that profit which remains to cover administrative costs, make principal loan payments, and cover that other insignificant cash requirement: living costs (that was sarcasm if you couldn’t tell.)

In this illustration, we have calculated Net Income simply as Gross Margin LESS Operating & Fixed costs. Here we see that the low margin years of 2009-2011 actually extend right to 2012 with net income still below that of our base year 2007. This is the residual effect of increasing costs during a period of low margins (2009-2011) by continuing to have a negative effect on what would otherwise be a successful year in 2012.

Everything Dips but Expenses

This chart illustrates a dangerous trend: even when income goes down, operating & fixed expenses are allowed to continue to rise.

farm profitability line chart

By the end of 2011, net income had dropped to less than 30% of 2007 levels, yet operating and fixed costs were over 145% of 2007 levels. It took 2013 bringing about the largest crop in maybe forever to elevate net income back to 2007 levels.

Direct Questions

If Net Income represents the funds you have generated to cover living costs and make loan payments, how well does your worst net income from the last 10 years cover your living and loan payments in 2016?

What does the trend of your gross income, input costs, operating costs, and net income look like since 2007? Is it similar to what’s been presented here? What changes have you made to your operation based on your own information?

Gross margin should ideally be in lock step with operating and fixed costs. If you aren’t increasing your gross margin, why are you increasing your costs?

From the Home Quarter

This is a very telling experiment, but it is not the rule on all farms. The information presented here is an average across a list that spans all regions of the prairies, but heavily weighted on Saskatchewan. The experiment gets more interesting when you apply it to your own business. To lean on the 5% Rule first promoted by Danny Klinefelter, if in 2013 you could have been 5% better than the average in gross revenue, input costs, and operating & fixed costs as presented here, your net income would be 44% better than information presented, and index to 152.14% of the 2007 base year.

How does that sound?

 

Growing Farm FI

Farm Shows – Is Something Left Off the Table?

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Who doesn’t love to attend the farm shows that scatter the prairie? From the latest equipment
advancements to distinctive new tools to cutting-edge technology, the exhibitors’ wares are tantalizing.
This isn’t unique to farmers; it’s human nature. There are tech shows, auto shows, fashion shows…the
list is endless. But I challenge any other industry’s show to match the diversity that you find at a farm
show.

Last week was the 2015 edition of Canada’s Farm Progress Show in Regina. I typically invest time there
and at the Western Canadian Crop Production Show in Saskatoon. Both are elite events. Both generate
millions and millions of dollars in economic benefits from immediate sales and future trade. And both
are primarily focused on production. (This also applies to Farm Tech, Manitoba Ag Days, Agri-Trade, Ag
In Motion, etc.)

What if we held a 3-day show that focused on management of your business:

  • Would we get 50,000 people coming through the turnstiles?
  • Would we see 500 exhibitors?
  • Would attendees mark their calendar a year out to ensure they didn’t miss next year’s show?

I would suggest the answers are: hell no, not even close, and that’s about as likely as a snowman getting
a sun tan. We all know why: management is BORING! Production is sexy! Grain marketing can be a thrill
ride! Managing and evaluating data…? Yuck!

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Business cannot operate without strong management. Lenders will not offer credit to poor managers.
Vendors will become less interested in doing business with poor managers. Employees won’t want to
work for poor managers. Imagine trying to operate your business without those three critical
factors…never mind trying to GROW your business!

Some farm shows have a smattering of business management features in their schedules by offering a
part day to focused speakers and/or topics around management. There are a number of players at these
shows who offer, or specialize in providing, management advisory services to farm businesses.

Direct Questions

Would you attend a farm show that focused primarily on managing your business?
Do you put as much focus on management as you do on production or marketing? If not, why not?

From the Home Quarter

I’m not picking on the farm shows as they are. I’m just using them as an example to contrast between
what is and what isn’t drawing crowds. What I am doing here is challenging the perception of the
players in the industry to increase their interest and their efforts towards management, so that it might
one day get as much attention as production.
If you’d like help planning your farm for business and personal success, then call me or send an email.

blindside

The Blindside

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No not the Hollywood movie, but the way prairie farmers have been blindsided by these late spring
frosts.

I haven’t done the research, but it’s fair to say that we’d be hard pressed to recall a year when we’ve
had such a string of days where the daily low temperatures are well below freezing. Word has it that
farmers in many areas now are beginning to prepare for reseeding.

Show of hands: how many built reseeding into their 2015 crop plan? I didn’t think so. How many of you
who are reseeding are rejigging your budget and projections? It better be all of you.

It’s not just the extra cost of seed, fuel, wages, etc. It also means later emergence and maturity which
will impact yield, and maybe quality. For how challenging it has been to deliver grain in the last few
years, if late maturity means you now cannot deliver off the combine in August or September as per
your contract, will you be forced to wait until December, or even March? Have you considered how this
could impact cash flow?

Don’t get lulled into oversimplifying the adjustments to your projections. It’s easy to just add in cost for
more seed. But a couple bucks an acre here for labor, and a couple more bucks there for fuel on the
extra pass add up. And I don’t know of too many 2015 projections that have much wiggle room.

Direct Questions

Have you provided realistic amendments to yield and price projections based on reseeding dates and
rates.

Have you considered how the later seeding dates due to reseeding will affect your new crop delivery
opportunities, and therefore, your cash flow?

Do you have sufficient working capital to get through this unplanned extra cost?

From the Home Quarter

Anyone who is dealing with Mother Nature’s blindside string of frosty nights will be significantly
impacted in all 3 critical areas of their farm: production, marketing, and financial management.
Consequentially, the other critical areas of your business will also be affected: family, wealth, and
potentially your health.

You must, at your very first chance, update your projections for 2015 with realistic and conservative
information. And for goodness sake, let your lenders know ASAP, not just next spring when you’re doing
your annual review.

This bolsters my argument for strong working capital. Every farm, your farm, is at risk of a blindside
attack at any time from a variety of sources. Adequate working capital is the best way to ensure you’ll
get through it.
If you’d like help establishing strategies to ensure you build adequate working capital,
then call me or send an email.

sustainability

Sustainability

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I very briefly got into a Twitter discussion on Sunday with a few farmers when the question was posed
about sustainability, specifically if the ag industry in western Canada is actually advocating for
sustainability or just preserving the status quo. I waded in because “what is sustainability?”

My tweet was a question: How do you define sustainability? Is it agronomic, environmental, financial,
family? There are many factors to consider on the farm.

Sustainability means different things to different people. Kind of like the term “organic.” Neither are
clearly defined anywhere in a way that is unanimously accepted. Both then are open to individual
interpretation. I’m not treading into the organic/conventional battle here; I’m talking about
sustainability.

The responses to my tweeted question were all about soil and how if soil health is the primary focus,
everything else *should* fall in line. I respectfully disagreed. Good soil stewardship + poor financial
management ≠ sustainability. I was not trying to discount soil health, just hoping to expand their line of
thinking. I left the conversation at that point. The parties continued to banter about tillage, irrigation,
crop rotations, etc. I just wish we could see that there is more to farming than production.

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Agronomic Sustainability

If you don’t know what Cation Exchange Capacity is, what your C:N ratio means, or how to calculate
SBU, then hire an agronomist (of which I am not one.) Agronomic sustainability is as much an art as it is
a science, and if you’re not well versed in the art, or the science, of agronomy then being sustainable
might be a stretch.

Environmental Sustainability

This is a slippery slope with a whole lot of noise out there. Who should you listen to? I’m not touching it
with a 12’ pole. But all farmers know that the environment is critical to our success. ‘Nuff said.

Financial Sustainability

I could write a book on this. From cash management to proper use of leverage; from strategy to
operational efficiency; from knowing your numbers to management process, the pages would flow!
Same can be said here as for agronomy: if you’re not well versed, hire an expert!

Family Sustainability

This hits me directly right now. Since I made the decision to retire from active farming to focus 100% on
my consultancy business, the family dynamic has changed drastically. Looking back I can identify things I
should have done differently, but those choices were not apparent at the time. One choice that was
apparent was to set expectations very clearly on Day 1. It is safe to surmise that didn’t happen. Whoever
said “It’s never a problem until it’s a problem” is very correct in their vagueness. We all took for granted
that the family will work together and get along, a gross miscalculation as it turns out.

Direct Questions

When you hear the word “sustainability,” do you cringe expecting an environmental sermon?
How many distinct ways can you identify opportunities to improve or incorporate sustainability in your
business?

Are you putting in adequate effort to prepare for the unexpected so as to remain sustainable in all
aspects of your business?

From the Home Quarter

I fear for those who don’t recognize that their farm is about more than just production. I’m not
suggesting that production take a back seat because is it critical to success, but we must expand our
perspectives beyond the crop and the field to the markets, to the balance sheet, to macro-economic
forces, to family dynamics and HR issues, etc. This list could be endless, and everything on it must be
“sustainable.”

None of this is new news; we all know that we must be sustainable in all facets of our business to
survive. But I ask if we are all able to recognize the opportunities and threats to our sustainability in a
way, or in time, to do something proactive about it.

If you’d like help planning your farm for business and personal success, then call me or send an email.

Nurturing Your Business

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In Issue #1 of Growing Farm Profits Weekly, we introduced how nurturing your business was one of
many critical factors that can affect your business success. This week, we’ll look deeper at nurturing
your business and how to leverage this often overlooked aspect of owning and operating a successful
enterprise.

Increasing wealth is the goal of any business, and only a healthy business can deliver accordingly. And
how you view wealth can be as unique as you are. The obvious answer is “profit at the bottom line,” or
“strong equity,” but some will argue that wealth is “discretionary time.” How do you define “wealth?”
Give it some thought; it will provide clarity in how you run your business.

There is a healthy ratio of nurturing that applies to 3 key aspects of your business:

venne
Crop

As discussed in the previous issue of Growing Farm Profits Weekly, your crop gets substantial amounts
of your attention because you know that investing significantly in your crop will grow you a better crop.
And a better crop leads to better marketing opportunities, which lead to stronger cash flow and higher
margins, which lead to profit. Simple as that? If only…

Assets

Yes, this means the tractors and combines, the trucks and trailers, the sprayers and swathers…the equipment on the farm needs to receive adequate nurture; these are the tools of your trade, and they need to perform when you need them. This is why you service regularly, send equipment into the shop for a certified tech to go through it in the off-season, and consistently use recommended operating procedures to ensure you minimize the risk of downtime.

But how much time do you spend nurturing your “other” assets?

Your HUMAN ASSETS (ie. your family and hired staff) require nurturing too. Unlike a piece of equipment
that runs the same whether you yell at it & operate with great disregard or if you treat it like a treasure,
your human assets often require a specialized approach. Just like you can relate and react better or
worse with certain people and their approach, your HUMAN ASSETS will also respond better or worse to
your approach. And if you view your human assets with the same regard you view your equipment, or
with less esteem than you give your equipment, then you’d better take a long hard look at your business
because it will be vastly different in a year or two.

If we consider the cost of owning/leasing and operating your farm equipment, it’s a safe bet you’d be in
the range of $40-$90/ac. Yes, that’s a big range, but there are big differences in each farm’s expense
management (we’ll tackle this in a future issue.) Please note this does not include capital outlay for the
purchase price. The cost of ownership/lease and operation looks at operating costs (fuel, oil, repairs,
etc.) lease costs, and “real” depreciation (not necessarily what CRA allows you to claim as a non-cash
expense.) We also consider custom work when calculating machinery cost per acre. Now that we’ve
established that your iron has a significant cost, why would anyone consider putting a $15/hr operator
in it? In one hour, you’ve paid an operator $15 to run equipment across upwards of 25ac or so that can
carry a machinery cost of $500-$1,000. Again, if you view your human assets as dispensable, this isn’t a
surprise in your line of thinking. But then it also shouldn’t be a surprise when that same operator isn’t

too concerned about stopping to rectify those plugged hoses on the air-drill.

If you’ve spent time building specific processes around HR management, you already recognize the need
to nurture your human assets. Congratulations, you’re on your way to ensuring the future success of
your business. Some processes you will want to implement are:

  • Recruiting, interviewing and selection
  • Performance management
  • Wages and incentives

There are many more items for this list, but we’ll save that for a future issue.

Relationships

While grain farming in North America is a commodity based industry, successful operation of your
business requires your adeptness at managing several key relationships. These relationships cover the spectrum from your professional advisors all the way to the part-time weekend counter staff at the equipment dealer.

I’ve seen some who give their least regard to the relationship with their accountant. True story; they see
the accountant as a “necessary expense” in order to file the “necessary tax forms.” Sadly, there are
many farmers out there who share that view. They do not recognize the importance of evaluating
business results against expectations or projections. I suppose these are also the businesses which do
not make business plans or projections.

How about service relationships? It’s easy to commoditize the grain buyer, the inputs retailer, or the fuel
supplier because there is always competition vying for your business. But if you don’t nurture the
relationship with your fuel supplier, what are the odds you’ll get that urgent May long-weekend
delivery?

Do service relationships extend to your staff? Do you pay them to provide you and your business with a
service, or are they integral members of your farm team? What do they need? What motivates them?
Why are they working for you and not somewhere else? If you don’t know the answers to these
questions, you’ve got 4 more days this week to find out…get on it!

Direct Questions

How do YOU define “wealth?”

Are you getting the most out of your crop? By that I mean “are you maximizing the most efficient
processes” available to produce your crops? It’s not about the highest yield at the coffee-shop; it’s about
gross margin (yet another future issue.)

Have you calculated the ROI on nurturing your human assets relative to the ROI on your iron assets?
What processes and procedures have you implemented to support your efforts to nurture your human
assets?

Ask yourself how you value the relationship you have with the following:

  • Agronomist
  • Business Advisor
  • Accountant
  • Banker
  • Lawyer
  • Commodity Markets Advisor
  • Equipment Dealer
  • Inputs Retailer
  • Fuel Supplier
  • Family
  • Staff

Is there one way you can strengthen each relationship this month?

Are you nurturing one aspect of your farm to the detriment of another? Why? Have you calculated the
net cost of this practice?

From the Home Quarter

We invest our resources in a manner that we expect to provide us with a return. And no matter if that return is tangible or intangible, it all creates the net benefit to our business: positive or negative.

You’ll notice I will rarely refer to the weather in this writing because we cannot control the weather. As a
business advisor, I focus on what we can control. For example, how do we invest and allocate our
resources: financial, intellectual, human, equipment, and most importantly, time. I believe in Alan
Weiss’ theory that “wealth is discretionary time.”

For any business owner to achieve maximum discretionary time, he/she must recognize what they do
best, and get help with the rest. Business owners must nurture their business in such a manner that
maximizes ROI, because as Alan Weiss says, “real wealth is discretionary time, but money is the fuel for
that wealth.”

Don’t get so caught up in earning money that you have no wealth.

Profit is not a swear word.

Time is the most precious, non-renewable, intangible resource we could ever spend. Treat it as such.
Growing Farm Profits™ provides topical and pragmatic business management tips and tools for primary
producers in Canadian agriculture.