change-the-filters

Change the Filters

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Standard practice for those of us who have ever done our own servicing on farm equipment, vehicles, etc, is to change the filters at regular intervals. The oil filters gets changed with the oil; the air filter get changed at least annually, and “blown out” as often as required. We use good quality filters to protect the longevity of our equipment, and to reduce the likelihood of a breakdown.

In today’s connected world, it is far too easy to find ourselves using a “filter” to avoid that which we don’t agree with or want to hear. Instead, we gravitate to those people and opinions that share our line of thinking. Doing so validates our own thoughts and actions, proving that we were right. It also creates what is called a “confirmation bias.” I found a great example of defining confirmation bias at Skeptics Dictionary:

Confirmation bias refers to a type of selective thinking whereby one tends to notice and to look for what confirms one’s beliefs, and to ignore, not look for, or undervalue the relevance of what contradicts one’s beliefs.

If there was ever an obvious real-life example of confirmation bias, take an objective view of the rhetoric right now between proponents and opponents on BOTH sides of the US Presidential Election…if you can stomach it.

Where might confirmation bias affect your farm business?

  • Production
    • agronomic strategy: nobody else is applying fungicide this year;
    • tillage tactics: no-till, min-till, conventional tillage;
    • yields: no one has yielded above 50 in this area.
  • Human Resources
    • can’t find good help;
    • nobody’s worth $20/hr;
    • why train anyone – they’ll just leave!
  • Management
    • bigger is better;
    • asset rich and cash poor;
    • things must still be okay, the loan got approved!

Of course, we cannot fail to mention farm equipment: which brand breaks down more, which is costlier to maintain, which is more efficient, etc?

With so much information available online and elsewhere, it is more important than ever to filter out the noise and rhetoric while not subjecting ourselves only to what confirms our bias. The most successful businesses are open to lifelong learning, getting professional help, and working from a plan (as found in the study titled Dollars and Sense commissioned by FMC and AMI.) Among other practices listed in the study that drive successful farms, these three listed above clearly indicate that seeking to confirm our own bias is not something that successful business people do.

Direct Questions

Social media is a smelting pot for confirmation bias. How do you manage your activity to maintain balance?

Do you enjoy spending time and conversing with people who have different views? Look at your circle of friends, and how you network at events. Does it align?

How do you filter information, to confirm a bias or to expand a perspective?

From the Home Quarter

The notion that our biases will never come into play is not realistic. While a mirror may be the best tool to use when evaluating ourselves, the challenge for each of us is to look beyond our bias and expand our playing field. Listening only to that which confirms our bias can only narrow our view. Stretching ourselves beyond our comfort can broaden our view. With our businesses becoming more demanding, and requiring more diverse skill sets to be successful, which view is better?

Is it time to change the filters?

weakest-link

You’re Only as Good as…

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I had the Cowboys-Packers game on in the background this past weekend when I heard the comment from one of the broadcasters: “Your passing game is only as good as your 3rd receiver.” The 3rd received being the “weakest,” this suggests that even if you have the #1 receiver in the entire league along with the last and second to last receiver, your offence will suck. Interesting theory. How does this apply to your farm?

  1. Production: all the nitrogen in the world won’t grow you a crop if the plants are lacking other nutrients. Even something as overlooked (but gaining more attention) as micro-nutrients, a crop will grow and produce, but will it be the winner you need?
  2. Marketing: “If all you have is a hammer, everything looks like a nail.” Certainly we have progressed beyond selling our entire crop into a cash market; most producers now are using forward pricing contracts. Without them, even grain delivery is left to chance (many grain buyers won’t accept deliveries that haven’t been contracted in advance for that time period.) What about hedging accounts, foreign exchange risk, direct shipping, cross border delivery, etc? Forward pricing contracts today are the minimum, kind of like hauling a load to town and taking the price of the day was the minimum practice 30 years ago…
  3. Human Resources: “Hire for attitude, train for skill.” If you’ve done the opposite (hired for skill,) you’ve likely “fired for attitude.” Your team is only as good as its weakest link. While we can fire a non-arm’s length employee for cause, it is a lot tougher to fire a parent or sibling! Often times, we are not utilizing our team in the best way; many people who might not seem to “fit” can be redeployed, or re-purposed, in a manner or task that allows them to flourish. Training, not only your team for the work you expect of them, but for yourself to be a more effective supervisor, is indescribably critical to success.
  4. Management: “You don’t know what you don’t know…” I find myself spending time with some very successful farmers who don’t have a basic understanding of their financial statements, nor the financial ramifications of many business decisions. They are happy to garner the knowledge and happier still to be able to use that knowledge to improve profits and protect cashflow. Others do not have a game plan, choosing instead to focus solely on operating their farm, and making financial decisions reactively instead of proactively. The reduced tension that can be seen when they understand the benefits of strategy is often quite remarkable.

It’s easy to see how a small oversight in one area of your business, whether it be production, marketing, human resources, or business management, can have significant impact on your financial results. An oversight can be excusable, but negligence cannot. It is up to you as the CEO of your business to identify your weaknesses, evaluate their potential impact, and establish strategy to mitigate the risk. Help is a phone call away if you are not confident in tackling this important management function.

Direct Questions

What are you doing to identify weaknesses in all aspects of your business?

How to you engage in risk mitigation strategies?

What do you do with the weakest link?

From the Home Quarter

In football, players recognize that they are only as good as their last game. There is always someone else who is eager for a chance to take the position on the roster of a player who hasn’t performed to expectations. Reputation will only take a professional athlete so far, they still have to perform. Same can be said for your business. Your reputation with your creditors and vendors is important, and can get you through an occasional “difficult time,” but at the end of the day, they still want to be paid. It’s your performance, not your reputation, that will get them paid.

A chain is only as strong as its weakest link…
Your production system is a chain.
Your marketing practice is a chain.
Your HR approach is a chain.
Your management strategy and execution is a chain.

Your farm’s success is linked by production, marketing, HR, and management. Ignoring the trouble spots makes you the weakest link…

dichotomy

Dichotomy

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Here is a throwback to an article I wrote in August 2015 titled Is Data Management Really Important? where I highlighted a conversation between a friend and I that included his opinion that even large corporations let their “focus (be) primarily growth & profits and how to accomplish it, with information management being thrown together afterwards.”

While I believe that statement to still be true both for large corporations and farms alike, there is something in that statement that opens up what seems to have become the dichotomy of prairie grain farming: growth or status quo.

Let’s not get hung up on “growth’ as a single definition. In March 2015, my article Always Growing…Growing All Ways clearly described a few of the many ways we can achieve growth in our businesses that does not have to be pigeon-holed into the category of “expansion.”

So let’s clarify the dichotomy as “expansion or status quo.”

Now let’s compare a couple different scenarios.

  1. In the spring of 2016, I met with a young farmer who started out in 2000 with nothing but an ag degree and desire. As he prepared to sow his seventeenth crop this spring, he showed me his numbers while admitting that he felt good about his financial position, but didn’t really know if he was good or not. He lost almost 20% of his acres from the previous year, and was happy about it because the cost to farm that land was too high and he knew it.
    When I told him that I’d peg his operation in the top 10%, maybe even the top 5% of all grain farms on the prairies, he paused and said,”OK, so what are the top 5% doing that I’m not?”
  2. There is a farmer who has been calling me off and on for a couple years now. By all accounts, it is quite a feat that he is still operating. Although he’s been farming for well over 20 years his debts are maxed out, leases are burning up cash flow faster than the Fort McMurray wildfire is burning up bush land. He spends more time running equipment that his hired men; he has no clue what his costs are; he has aggressively built his way up to 10,000ac and wants to get to 20,000ac; one of his advisors told me that his management capability was maxed out at 4,000ac.

The first scenario has the farmer focused on growth of profitability, control, and efficiency.

The second scenario has the farmer focused on growth of the number of acres on which he produces.

One would be the envy of 95% of farmers.

The other will never in his entire career get to the point of financial success that the first farmer has already achieved.

Direct Questions

Which are you more like, the first farmer above, or the second farmer?

Which farmer do you want to be like?

What are you prepared to do to get there?

From the Home Quarter

What has been described above is actually a false dichotomy. We’ve been led to believe that farms must get larger in order to survive and that small farms were doomed. What that message failed to deliver was “At what point is a farm large enough?” I am not decrying large farms or the continued expansion of farms…as long as it makes financial sense! The false dichotomy of expansion or status quo need not be black or white, left or right, mutually exclusive. Farms that are not expanding today could be expanding next year, just like farms that are expanding today may not be next year. Some farms that have expanded over the last few years might even be looking at reducing acres in the future.

Growth (expansion) at all costs can often come with the heaviest of all costs.

farming should be like baseball

Farm Management Could Take a Lesson From Baseball

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If you love statistics, then you probably love baseball. Where else can you know with certainty that your starting pitcher has a propensity to throw more fast-balls than breaking pitches to left-handed batters at home during afternoon games in June under sunny skies with a slight north-west wind? While this is a bit of a tongue-in-cheek poke at the nauseating volume of stats that originate from the game of baseball, such statistics and the subsequent use of those statistics have real world applications.

I’m sure many of you have seen the movie Moneyball. (I’m sure most of you have because I watch VERY few movies, and even I’VE seen it.) As the story unfolded, there many beautiful examples of how the management team of the Oakland Athletics baseball club used statistics to improve their team. In this specific scene (I can’t recall who the player was) Assistant GM Peter Brand (played by Jonah Hill) explicitly instructs the player to “take the first pitch” during every at bat.  The reason was because through the use of statistics, and tracking the data, management knew that this player got on base more often when he took the first pitch. In the movie, it worked, and this player’s on-base-percentage increased almost immediately.

What would have happened had this team’s management not had, or used, such important information? The player may have been released, sent down to the minors, or traded to another team, the manager (bench boss) may have been fired.  Spread those “uninformed decisions” across the entire roster, and failure is sure to proliferate.

Livestock and dairy farms have been heading down the road to improved data management for years already. Average daily gain is not a new concept in beef operations. Robotics in dairy parlors bring a whole new level of data management. In conversation with a farm family that is investigating the benefits of robotics in a dairy parlor, I’ve learned that through RFID technology and a robot milker, they will be able to record and monitor milk volumes and milking frequency (a cow can come to the robot for milking whenever she chooses.) The management team can then compare results across the herd to determine which cow(s) is producing more or less than others cows under similar conditions. Informed decisions can then be made.

Grain farms having been catching up in recent years. With field mapping technology we can create yield maps; overlay that with crop inputs applied and we can tell which areas of each field are more profitable than others.

But that is way ahead of where most of the industry is generally at. By and large, many farm operations still don’t know the true profitability of a specific crop on their whole farm, let alone any given field.

The progression of profitability management, which requires stringent data management, begins at the crop level, advances to the field level, and reaches the pinnacle at the acre level.

Imagine:

  • determining which crops to exclude or include in your rotation by clearly understanding which crop makes you money and which one doesn’t;
  • deciding which fields to seed to which crop, or even which fields to renew with the landlord or which to relinquish based on profitability by field;
  • controlling your investment in crop inputs by acre to maximize your profit potential of the field, the crop, and your whole farm.

None of this is new. All the farm shows and farm publications dedicate significant space to all the tools and techniques available in the marketplace to facilitate such gathering of useful information. Equipment manufacturers and data management companies have invested enormous volumes of time and capital into creating tools and platforms to collect and manage your data. But like any tool, its value is only apparent when it is used to its full potential.

Almost all of the farms I speak with achieve greater clarity in the profitability of each crop in their rotation. I have a 13,000ac client that has taken several major steps toward measuring profitability by field. They have found that the extra work required to COLLECT this information is minimal. The extra work required to MANAGE this information is greatly offset by the benefit of clearly understanding that some of their rented land is just not profitable under any crop. Do you suppose they are looking forward to relinquishing some $90/ac rented land that just isn’t profitable enough to pay that high rent?

Direct Questions

Which of the crops in your rotation are profitable? Which are not? How profitable are they? Do they meet your expectations for return on investment?

Collecting the data is easy; managing the data takes some effort. What effort are you prepared to invest to make the most informed decisions possible?

How are you fully utilizing the tools available to you? If you’re not, why would you have them?

From the Home Quarter

Baseball collects gargantuan volumes of data on players, plays, games, and seasons. Much of it seems useless to laypeople like us, but to those who make their living in “the grand old game,” the data is what they live and breathe by. Agriculture should be no different. We should be creating consecutive series’ of data on our fertility, seed, chemicals, equipment, human resources, etc, for each year we operate, for each field we sow, for each person in our employ. Management cannot make informed decisions without adequate and accurate information. Now, with all the tools, techniques, and support readily available to help farmers collect adequate and accurate information, the last piece that may be missing is, “What to do with all that data?” While it can be boring to analyze data and create projections, I can assure everyone that the most profitable farmers I know all share one common habit: they spend time on their numbers, they know their numbers, and they make informed decisions based on those numbers.

You collect the information. I can help you use it. I’ll make tractor calls (as opposed to house calls) during seeding…as long as you have a buddy seat. Call or email to set up a time.

asset rich cash poor

Asset Rich, Cash Poor (Kim Quoted in the News)

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A tweet led to an email, which led to a phone call…

It was back in March that I tweeted the following:

This, and the short Twitter conversation that followed it, garnered an email, and then a telephone interview with Jennifer Blair from Alberta Farmer Express.

Below is an excerpt of what she wrote. For the article in its entirety, click here.

” ‘The funny thing about prosperity and successive years of prosperity is it allows people to form some really bad habits,’…

…And for those producers, being ‘asset rich and cash poor’ isn’t going to cut it anymore.

‘When you look back over the last two generations, it seems like the mantra has been that farmers are ‘asset rich and cash poor.’ It’s almost worn like a badge of honour,’ said Gerencser… ”

Direct Questions

What do you think? Have assets, especially equipment, been increased too fast to the detriment of cash holdings and future cash flow?

What is a reasonable level of investment in assets relative to your net profit? Are you earning an adequate return on your investment?

From the Home Quarter

Bad habits can form easily, but like any habit, bad ones can be broken. Chasing equity is something we’ve always done and that may have worked a generation ago, when the risks were as they are today but the volumes of cash at risk each year were far less. We cannot do what we’ve always done and expect a result different from what we’ve always gotten.

Asset rich and cash poor will not suffice through the next business cycle.

I’d like to hear your thoughts; leave a Reply below.

Shaking Hands

The Farmer-Banker Dating Game

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When I went back to college in my mid-20’s, a mature student by definition, it was because I found a course and career path that would allow me to bridge my passion for agriculture & farming with my finance minded brain. My goal, as my friends and family will attest, was to be the kind of ag-banker that was a partner, not a foe, of the farmer.  My view at that time, which was a time that we were in the depths of a very real farm crisis at the end of the 1990’s, was that farmers “generally” had a poor view of bankers. I aimed to change that perception.

Now as a management advisor, I still aim to bridge that gap. I invest myself into building good relationships with bankers so as to have a list of qualified partners whom I can refer in to my clients for financing requirements. Here are the top 3 points to remember when considering a new bank relationship.

 1. Perfection is Not Required on the First Date

The initial meeting is a first date. Think about it: you’ve met someone you’re interested, you’ve had an interesting conversation that identifies some common interests, and you eagerly and excitedly agree to go on a date. On that first date, it’s a lot of “what do you do for fun?” and “what kind of music do you like?” If you’re really getting into it, you might discuss your date’s political views! You aren’t deciding on the first date if you will or will not marry this person; you’re just hoping to learn enough about him/her to decide if you want a second date.
The initial meeting with a new prospective banker is a first date. You’re getting to know each other. The banker wants to know how your farm is doing financially, how you manage & make decisions, and what you vision is of the future. You want to know how the banker manages his/her client relationships, how the bank would deal with a farm like yours, and how everyone would expect to work together should you take your relationship “to the next level.” On a first date, no one expects perfection. Each person on a first date easily overlooks the little nuances that may, or may not, become an issue later on. No one needs to be perfect on a first date with a banker.

 2. Be Aware of Where You Are At, Where You Have Been, and Where You Are Going

The greatest risk to derailing any chance of a second date is for you, as the borrower, to not have an adequate grasp on the effects to your business from past issues & business decisions. Bankers appreciate accountability when it comes to “what happened” in the past. Own your choices, both the good one and bad ones. Describe what you are doing to rectify your poor decisions from the past and what you are doing to ensure those same choices aren’t repeated. Have an idea (at least) of a vision for what you want your business to look like in 5 years, recognize what it will take to get there, and understand what you need to do in the near term to take positive steps towards that vision.

 3. A “Partnership” Mindset

While taking your relationship with your banker to the next level has been described by some as a “marriage, I agree in figurative terms only. Your relationship with your lender is a partnership, however, and proactive & productive efforts must be initiated by both parties.
While I believe that your banker relationship is akin to marriage figuratively, I do believe that it is a partnership literally. In almost every presentation I’ve made through the winter and spring, I have described the partnership as follows:

“If you have a Debt to Net Worth figure of 1:1, that means your debts are level with your net worth. At that point your creditors have equal skin in the game as yo do; your lender’s ‘investment’ in your business is par with yours. You have a 50/50 partner.”

There are many farms with Debt to Net Worth figures that are 1:1 or higher. Where do you stack up? Do you have a “partner” by the definition of equal investment in your farm? It is only decent and respectful for both parties to behave in the relationship like a partnership.

Direct Questions

What is your mindset with it comes to your relationship with your lender? Is it friend or foe? Necessary evil or business partner?

How prepared are you, as the CEO of your company, to discuss your current situation and share your vision of your farm?

Are you excited for a dance or two on a first date, or are you expecting your date to be on bended knee by the end of the interaction?

From The Home Quarter

This is penned in large from the message that my old boss from my banking days used to lean on: early interactions between bankers and borrowers are like courtships; everyone spends time getting to know the other(s) and jostling for position to make the best impression. It takes time to build a trusting relationship, and like any first date, if either party pushes too hard too soon for too much, a second date is unlikely.

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.

ic_leap

Experience: LEAP – – Leadership, Engagement, Authenticity, Passion

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Leap year only comes around every 4 years, so to some people, it’s kind of a big deal; to others, not so much. I will have spent the 2016 leap day by taking part in a unique event, Experience: LEAP.

Experience: LEAP is an initiative of the wonderful people behind Project: SHINE Inc. Their passion is for everyone to live the fullest life possible, to be their true self, and to experience life with passion and purpose. The key message is for everyone to learn that where you are is not where you have to stay. The message applies to us personally, but also has business implications.

In the case of this event, LEAP is an acronym as follows:

Leadership

Leaders are made, they are not born. While some people are born with the characteristics that are often found in great leaders, the fact is leadership skills are learned, and therefore, leaders are made. This has 2 different aspects that apply to your farm:

  1. You are the current leader of your operation.
  2. You need to identify and develop a leader to take your place for when you’re no longer leading the business.

We often learn from experience, or learn from others’ examples, but rarely do farm business owners ever get sat down and taught how to be an effective leader. Everyone in your business will perform in direct correlation to their response to the leadership of the organization. It is like the old saying, “Would you rather be in an army of lions led into battle by a sheep, or be in an army of sheep led into battle by a lion?” If you find yourself questioning the effectiveness of your employee(s), first gauge your effectiveness as a leader.

As a leader, you need clarity in the results you expect in your business, the strategy for achieving those results, and the tactics in execution of the plan. Naturally, sharing this information with your team is critically important in effective leadership.

Engagement

One cannot expect to build a profitable business or an effective team without being engaged. A person who is disconnected and unattached will achieve sub-par results, and find the same in their team. How does one become more engaged? What can be done to increase the engagement of a team? By and large, it begins with purpose. Clarifying the “why,” which means “why are we here; why do we do what we do; why are we the best people for the job?” Clarifying purpose by answering the “why” helps teams, and individuals, recognize that they are a part of something bigger and that they have a key role to play in the organization. By turning a basic employee, a laborer per se, into an engaged and contributing member of a highly functioning team will pay dividends to your business that may astound you.

Authenticity

To be authentic is to be real or genuine. This involves interactions with your staff, your business partners, your family, your vendors, but most importantly with yourself.
I find it curious that authenticity is required for true engagement, which is required for effective leadership. Passion affects everything.

Passion

Passion can be difficult to describe because it is a feeling like few others. Passion can consume you, drive you to heights never imagined, and lead to immeasurable levels of joy or even anxiety. Passion can often create infallible commitment, which, if not balanced with sound rationale in decision making has potential to lead to undesirable outcomes. Unbridled passion sounds poetic and profound, but it can be dangerous if not balanced with reason and objectivity.
Yet, life (or business) with no passion becomes an insufferable task to endure. Most farmers I meet are passionate about their farm, about the land, about growing things, about the family legacy they are living and plan to leave behind. “Life becomes work” if there is no passion. But don’t forget balance, because “work can become life” on the opposite end of that spectrum; neither is desirable.

Direct Questions

How are you gauging the effectiveness of your leadership? (HINT: this isn’t a “self-assessment.”)

What are you doing to match your engagement to that of which you expect from your team?

How would you describe your passion?

From the Home Quarter

Recently, I listened to a presentation where the crowd was polled: If you could sell all your land for 25% above market value today, and rent it back for life at half of current rental rates, how many would take that deal? No one raised their hand. The presenter then acknowledged that no one in the crowd was a farmer, but actually a land owner. Everyone laughed in subtle agreement.
The point is to define your passion, your “Why.” Clarity in what you do, why you do it, and how you do it is no longer something that only applies to large corporations who need that “feel-good mumbo-jumbo” as part of their strategy. Make no mistake, farms of the future will require processes that were once foreign, or only found in corporate cultures. The need for social license becomes greater each day. The need for strong and committed teams becomes greater each year. The need for passionate, authentic, engaged leadership becomes greater with each new generation in the family business.

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?

 

ag excellence

Musings from the Ag Excellence Conference

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Last week, I attended the Ag Excellence Conference. Facilitated by Farm Management Canada, this year’s edition was held in Regina. Touching into 3 days of information sessions, speakers, and networking opportunities, I was impressed by the quality of content and the discussions that arose.  The following are some of the major questions and statements of which I took note during the conference:

  1. Will continued population growth in developing countries be enough to sustain the price and demand levels we’ve currently enjoyed?
  2. Why do we try to hire the cheapest labor available but expect it to meet high expectations?
  3. Are farmers losing their “social license” to farm?
  4. Why is there such a low priority put on advancing business management among farms?
  5. Just how far can automation advance production agriculture over the next generation?
  6. Are our water ecosystems at risk?
  7. How will Saskatchewan land values be affected with new ownership rules taking effect?
  8. Are you entrepreneurial or intrepreneurial, and can you be both?
  9. Physical (crop) yield does not equal financial yield.
  10. Strategy is nothing more than a dream without a tactical plan.

From the Home Quarter

Unlike most agriculture industry events which focus almost entirely on production, the Ag Excellence Conference focused on business management. Attendees recognize the need to elevate management awareness and skills to help ensure the future viability and sustainability of farm businesses.
The questions and statements above were asked/stated explicitly, or simply implied during conversations. These points stemmed from various regions of Canada, and various sectors of agriculture (from grains to cattle, to vegetables, to dairy, poultry, and egg.) Everyone in agriculture is asking the same questions, and raising the same concerns.
Give consideration to each of points above. Do you have a thought or response to any or all? We hope to tackle these and other issues in the coming weeks of Growing Farm Profits Weekly™.