Commitment

Commitment

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Knowledge is recognizing that a tomato is a fruit.

Wisdom is not putting it in a fruit salad.

A fellow farm advisor called me last week to ask for my opinion. The scenario illustrated a farmer’s plight of whether to seed or not to seed.

More specifically, this 1,800 acre farmer, a bachelor nearing 60, had put together a 5-year plan before the 2011 crop to retire from farming after 2015. After the 2015 crop, a review of his plan indicated he would have yielded a comfortable $400,000 after total farm dispersal. For a guy with no family and a willingness to drive someone else’s tractor in the busy season, that’s not terribly bad.

Despite a plan being in place, despite a nice tidy sum to live on from the sale of farm assets, despite being at the brink of achieving his own stated goal, he felt he wasn’t sure if he could actually retire. So he put in another crop for 2016.

Now in early May 2017, after poor yields and quality on what he actually could harvest, with about 300 acres left to harvest before 2017 seeding can even begin, as the bank is not prepared to extend further operating credit, my colleague asked the farmer, “Do you even want to put in a crop in 2017?”

Let’s summarize:

  • About 16% of last year’s harvest is still in the field as of May 10;
  • What crop did come off was poor quality;
  • There are 1st and 2nd mortgages on owned farm property;
  • Working capital is virtually non-existent;
  • Operating credit has been denied.

Even if this farmer wants to seed a crop in 2017, I don’to see how he will be able to.
What to do?

To Plan for Prosperity

Why did this farmer not stick to the plan he initiated and helped build, that plan that would have left him in a reasonably comfortable spot? Did he review it over those 5 years? Was it adjusted? What changed?

It’s likely that he made the plan at the urging of his advisor, and that he himself was never really committed to it. If that is the case, then the effort, the document, and the strategy are about as valuable as durum with 20% fusarium…throw in all in a pile and burn it.

Collectively, farm advisors have been clamoring for years for farmers to put more effort into planning. Yet without commitment to act on the plan (for whatever the excuse,) any plan is absolutely worthless. It is, in effect, the same as not planning at all, except that we can pat ourselves on the back because we “made a plan.”

No one makes a crop plan then does not act on it. Why does the financial, transition, management, or capital expenditure plans not get the same commitment?

The plan exposes and elevates the knowledge, but it’s the wisdom to act that makes it valuable.

MISmanagement

Operational MISmanagement

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I recently had an experience on my least favorite Canadian airline which was so bizarre that laughter was all I could do in the moment.

The original plan was as follows:

  • 5:50pm Chicago to Toronto;
  • 2.5 hour layover at Pearson, relax, eat, maybe get some work done;
  • 10:55pm Toronto to Regina.

While waiting to board the 5:50pm flight, watching time tick on and on, and even though our plane was at the gate and empty, there was still no one boarding the aircraft at 5:50pm. Yet, the information screen at the gate insisted that our flight was “on time.”  I snapped this picture and tweeted it.Operational MISmanagement

At 5:55pm, an announcement was made: due to runway construction at Toronto airport, our departure from Chicago was being delayed until 9pm. We were instructed to go relax, find something to eat, and come back to the same gate at 8pm. (If you’re keeping track, that is a three hour delay which would have us landing in Toronto at 11pm…5 minutes after my flight home was to leave Toronto for Regina. Clearly, I’m not going to make my connection.)

After to speaking face to face with an airline “customer service agent” (you can infer that the quotes are meant to imply sarcasm) I was informed that there were no other flights on other airlines that might get me to Toronto to make my connection. When asked who would be picking up the cost of my hotel room in Toronto since it was clear my connection would be missed, the response was “We (the airline) don’t do that. But I can give you a food voucher for here (Chicago O’Hare), just be back by 8pm to board this flight.” He hands me a $15 voucher, which was about enough to buy a bottle of water and a piece of gum in O’Hare…

As I begin to circle around to find somewhere to eat, I find myself walking right past my gate, and see a line of people boarding the plane!! The information screen at the gate now says the flight will leave at 6:50pm (If you’re keeping track that is 1hr delayed from the original schedule, but a full 2hrs ahead of what was we were told 15 min earlier.) So I board the plane.

Despite the posted 6:50pm departure time, an announcement from the flight deck is made at 7:15pm: “We’re just waiting on a few passengers and then we’ll push back from the gate. Due to runway construction at Toronto Pearson, we will be unable to reach our gate in Toronto upon arrival. So we’re going to push back and sit on the tarmac in Chicago for 1 hour; we can sit on the tarmac here or in Toronto, it really doesn’t matter. So you know, it’ll be about 1hr from push back to liftoff.” I still can’t understand why we needed to board just to sit in the aircraft when we could have remained in the terminal and actually had something to eat…

Finally we have inched our way to the runway. Wheels up at 8:10pm. One hour flight to Toronto, plus the time change, and we touch down at 10:10pm. Because it’s Toronto, there is 15 minutes of taxiing; we’re at the gate at 10:25. I have 30min to clear customs, clear security, and make my connection home. Now if only the 22 rows in front of me on the flight had been courteous enough to let those of us with a connection off the plane first… To their credit, the airline did request that other passengers without a connection remain seated. No one complied.

long lineMy legs still ache from being at a dead run, with luggage and wearing a suit coat, for what seemed like a mile despite likely only being half that. My Nexus card allowed me to bypass the 308 people in line at customs (I was at a dead run, no I didn’t stop to count them) and thankfully at 11pm, there was no line at security. I am grateful to my fellow passenger coming from Chicago, just as late as I, trying to catch his connection to Montreal. He new where to go to get to our concourse (his departure gate was 2 down from mine.) I would have been lost had I not been following him.

They closed the doors to the jet bridge as I ran up to my departure gate. Through gasped breath, I explained in 2 sentences why I was late (regretfully, I may have used a few expletives.) The gate agent was without a doubt the best person I’d been in contact with from this airline on this day. She let me through, I boarded, and got home as planned.

 

To Plan for Prosperity

Operational MISmanagement costs airlines millions of dollars and immeasurable goodwill. Just have a look at United Airlines’ woes over time… Here are my questions relative to my experience described above:

  1. Runway construction at Pearson did not start unannounced on that day. The airline would have known about it for a long time. Why would we only be notified AT the time of original departure (5:50pm)?
  2. How can a 3 hour delay turn into a 1 hour delay in 15 minutes?
  3. Why rush to board only to sit on the tarmac for an hour before liftoff?
  4. People actually missed that flight, and in my mind it was because the airline told them to come back to board at 8pm but was now leaving the gate by 7:20pm. Part of the delay pushing back from the gate was because their luggage was being removed from the plane. I can’t even formulate a question for this, it is so asinine!!
  5. I was likely to miss my connection due to no fault of mine, yet the airline wouldn’t offer to pay for my hotel. How much do they value their passengers?

M-I-S is capitalized because if refers to your Management Information System. Your Management Information Systems, whether you’ve formally addressed them or not, are put to the test as you approach spring seeding. Tracking inventories (seed, fertilizer, fuel, parts, etc.), people (who is operating what & where), and cash (keeping vendors paid, moving grain as required) are all part of your M.I.S. Lose control of one piece of your M.I.S. and see how things are affected.
What are the impacts of seeding too soon, seeding too late, missing a pesticide application window, running out of fuel, or running out of capital…?

You have a system to get your crop seeded, to get it harvested, to manage all aspects of your business in between. It keeps your business running without a glitch, or in the case of a hiccup it provides adjustments to get back on track.

If Air Canada has any sort of “system,” it’s not working. I’m not sure how they stay in business. They could benefit from a good business advisor…

shaking my head

Shaking My Head

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There are so many instances where I’ve heard someone say this to me in the last number of months. Here are some examples of what I’ve heard.

“I’m shaking my head…

  • wondering how we got talked into this.”
  • at these guys who push their rotation trying to get a big payday.”
  • trying to figure out how they can keep getting more credit when I can’t.”
  • at these guys who haven’t learned from the mistakes of others.”
  • at these guys who keep going full throttle when they don’t know their numbers. Do they even have a clue how they’re doing?”
  • at how some of these guys just keep spending. Where is it coming from?”
  • why we didn’t buy that land 5 years ago.”
  • why we paid so much to rent that land 2 years ago.”
  • trying to figure out how anyone can be profitable paying that kind of rent.”
  • at what it’s going to take for the people who need help the most to realize they need help!”

While these aren’t my words, I concur with most of them. We must not punish ourselves by berating yesterday’s decision because of today’s new perspective. We can’t change the past, we can only move forward. BUT, we can apply future risk management to today’s opportunities when determining what decision to make.

To Plan for Prosperity

Lately at most of the events which I’ve been speaking, I’ve been giving reference to “the ripple effect.” This pertains to the effect that today’s decisions will have on other aspects of our business, especially future results. We often see long term decisions being made (especially around land, buildings, and equipment) based on short term results (Eg. one year’s profitability.) I continue to be a proponent of “long term assets securing long term debt” and if you subscribe to that logic, then shouldn’t long term decisions be based on long term results?

farmfutures farm survival

Derived from Farm Futures “Survival Plan”

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This opinion piece was published on farmfutures.com on April 3, 2017. Titled What’s Your Farm’s Survival Plan, the author, Mike Wilson, describes how farm income in the US Mid-west is falling and thus challenging working capital to remain at adequate levels. As you have read here, and on my Twitter feed (if you follow me) is how borrowing  is becoming more difficult for US Mid-west farmers. I’ve posed the question several times is “Who thinks this can’t happen here” (in western Canada?)

Wilson lays out five practices that farmers can use to improve their chances of keeping a good relationship with their lender. Before discounting the suggestion by saying, “Yeah, well it’s different in Canada,” give it a read and appropriate consideration. Unless, or course, you believe it can’t happen here…

Snip Farm Futures Farm Survival The graphic is a screen capture of an excerpt of the article from the Farm Futures website. The text has been copied below, with my comments following each one:

What do lenders think when you walk through the door? If you do these five things, financing shouldn’t be much of an issue:

  1. Lenders will work with farmers who can communicate and execute a plan, whether it’s for marketing, cash flow, or both.
    *KG: we’ve discussed here many times over the years how important it is to communicate with your lenders who typically don’t like surprises. And while we’ve been preaching for years the value of planning, there is a key word in the statement above that, if ignored, makes planning the useless task so many farmers feel it is: execute.

2. Understand breakeven analysis and keep family living expenses low. Look for that extra dime in your marketing plan. Watch for opportunities to keep yields above average. A lot of that is just paying attention to details.
*KG: break-even analysis is one part of it. Utilizing Unit Cost of Production (UnitCOP) is critical not only to your break even analysis, but also your marketing strategy. It provides a built in sensitivity analysis to both prices and yields. It will clarify the importance of “that extra dime” in your marketing plan. It provides a level of detail that most farms still don’t employ in decision making…

3. Lenders need to know how you will pay them back. You can walk into their office, tell them about the 50 acres that just came up for sale next to your farm and expect to be approved — but that’s not how it works. They need to see that you’ve done your homework. They need to see your accurate balance sheet, income statement, accrual income adjustments, and other key financials. They need to see the numbers before they can pull the trigger.
*KG: Bankers make informed decisions; “they need to see the numbers before they can pull the trigger.” If the numbers are absent, it’s a hard stop. If the numbers are questionable, meaning that the credibility of the figures come into question, it’ll also be a hard stop. Several years ago, I witnessed a would-be borrowing get slammed by several quality bankers because the borrower provided sloppy info that was unverifiable. Lenders won’t make a decision to proceed without quality information; neither should you.

4. Be conservative with your money. “This will be a learning experience,” says Dan Gieseke, Missouri Farm Service Agency farm loan chief. “Many have not been through a tough time. They need to be conservative now, so they can be ready to take advantage of opportunities when they come along.”
*KG: The best time to be conservative with your money was 5 years ago. The next best time is right now. My old pal Moe Russell says, “If you are greedy in the good times, you’ll be on your knees in the bad times.” While shiny paint often feels better than a big bank balance, it is that bank balance (the life-blood of your business: working capital) that will not just help you survive the bad times, it will propel you through them; it’ll maybe even help you thrive during those bad times when your competitors are on their knees…

5. Use records to do analyses. “My fear is that farmers don’t use them,” says Purdue economist Freddie Barnard. “In the ’80s, we got beat up. But the tools to do the analyses then were not out there. There are tools now. Just use them, and try to make informed decisions.”
*KG: there are so many tools available, so much information available, that I would have a hard time arguing against someone who is admitting that “it’s overwhelming.” It is. While I would empathize, I wouldn’t accept that as an excuse. There are many qualified people in this industry who are ready, willing, and able to help you sort through the overwhelm, and establish a strategy to develop and implement a process to get you to a working level of comfort with data management, analysis, and decision making.

To Plan for Prosperity

“Do what you do best, and get help for the rest” is a cornerstone of my advisory work. If none of the five points above strike a chord with you because you don’t know how to do them, or don’t like doing what they suggest, then take a moment to ask yourself if the five points above are actually important to you.
If they are, but you’re not sure where to start, then start by picking up the phone and calling someone for help.
If they’re not, then good luck to you. You’re going to need it.

Your business, your family, and your legacy are too important to be left to chance.

Average

Don’t Settle For Average

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It was the headline that struck me.

Don't settle for average _embedded

Settling for average in any aspect of your business will lead to certain demise. If everything was average (yields, quality, market prices, rainfall, heat units, weed pressure, disease pressure, input prices, equipment repair frequency, wages, overhead, etc, etc, etc…you get the picture) then farming would be easy.

But it’s not.

Fair to say that if you are projecting average yields and prices for 2017 you’ll be measuring those against higher-than-average costs. This is likely to total down to a negative bottom line.

I’ve never been a fan of “average.” As my old friend Moe Russell likes to say, “You can drown in a river that averages a foot deep.”

Average, to me, is nothing more than a feel good guide when looking to validate poor results. For example, acknowledging that yields were only a couple bushels below average means nothing Table for Averagewithout quantifiers like market prices (meaning we’ve calculated gross revenue), like input cost (meaning we’ve calculated gross margin), or like operating costs (meaning we’ve calculated profits from operations.) Here is a table to illustrate what I’m getting at:

If average is profitable over the long term, then we must acknowledge the need to adjust all facets of our profit calculation when one facet is below average. The problem is that generally we are seeing farms operate with higher than “average” costs and trying to pay for them with “average” yields.

To Plan for Prosperity

Our profitability is not determined by where it falls on a bell-curve, so why would we accept “average?”

 

ThinkingMan

Thinking Time

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This is following through on something I sort of dared myself to do in a tweet recently:

Thinking Time

I smiled at Danny’s tweet about about the lack of bites while ice-fishing and how it was contributing to crop plan changes for this spring’s upcoming seeding season (or “planting season” as it is also called.)

Thinking time is something that we seem to have less and less of these days. With the constant bombardment from numerous social media platforms, phone calls, text messages, and emails, it is amazing we are able to get anything done. Quiet time, disconnected from our “devices” is not only critical to staying sane (disclaimer: I am not a psychologist and that is not a psychological prescription) it is also required for some thinking time.

Consider the many aspects of your business, and the thousands of decisions you make every day. This doesn’t even touch on the “major” business decisions that need to get made through the course of the year. Many of those daily decisions are reactionary because the situation is something you’ve been through many times before, or you may have prepare for the decision with some planning. Other situations require that you stop what you’re doing to make the decision, whether that be from the situation being something you’ve never dealt with before, or possibly because you just hadn’t considered it and you’re therefore not prepared.

For me, thinking time happens all too frequently; it’s just how my mind is (always grinding away on something.) The challenge for me is that if I’m not prepared to record or act upon (what i think is) a brilliant thought or idea, it can get lost. It’s been suggested that I keep a note pad or recording device with me all the time. A great theory that is tough to enact when I”m driving, or when I’m laying awake in bed trying so hard to fall asleep; both are situations when my quiet time, my thinking time, seems strongest.

My new strategy is to dedicate a portion of each day to thinking time. It’s not scheduled, nor is it rigid in practice. I allow myself the time, possibly a few times each day, to do the creative thinking I need to do in my business when the juices begin to flow. This allows me to take notes of my brainstorming, to elevate my confidence in that I have captured what are (in my mind) brilliant thoughts and ideas, and reduces angst over the “I had a great idea on _____________, and I lost it!” <insert curse words here>

When I was farming, some of the best opportunity for thinking time was in the tractor; I’m sure it’s the same for many of you. The problem is that thinking time in the tractor while seeding is too late to be crop planning. Although, it is a terrific time to give thought to your financial reporting from the previous year and tactics to improve for the current year.

To Plan for Prosperity

There is an almost immeasurable amount of information coming at us from the virtual world and from the plethora of farm shows scheduled across the prairies all winter. To sort out all of the information available to you, and not be overwhelmed in the process:

  1. Set aside some designated thinking time on a regular basis (unplugged, no devices, no distractions;)
  2. Enlist the guidance of advisors who experts in their field;
  3. Give yourself the leeway to make mistakes. Perfection is unattainable.

Thinking time should not be limited to current issues or the next three months. Also include the next three years. Your business is an ocean freighter, not a speed boat; changing course and making adjustments cannot happen quickly, they take time and deliberate action.

Free Land

Free Land

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Getting farm land for free, whether it be purchase or rent, still won’t be profitable if operating and overhead costs are too high. If overall farm operations require high yields and prices to cover your break-even point, then you’re running way too close to the line.

Ask yourself if your 2017 break-even yield is near, or well below, your 5 year production average. If it is near, then there isn’t much wiggle room, is there? Everything needs to go right, including the external factors you cannot control, like weather.

Does your 2017 crop plan include a sensitivity test? What is your sensitivity to a 10% decrease in yield? What is your sensitivity to a 10% decrease is price? How close do either, or both combined, bring you to break-even?

To Plan for Prosperity

To quote my old friend Moe Russell, “What rabbits are you chasing?” Using Moe’s analogy, the rabbits you should be chasing are found in your operations costs: machinery, labor, repairs & maintenance, fuel, etc, and in your overhead costs: interest, carrying costs, etc. These are the internal factors, the factors that you can control.  And if these have gotten out of control, even free land won’t be profitable.

CYFF

CYFF (Canadian Young Farmers’ Forum)

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Greetings from CYFF

The Canadian Young Farmers’ Forum brings together farmers from across Canada. This past weekend in Ottawa, they held their annual convention and invited me to speak as part of their agenda.

There were many takeaways from the event; here are a just a few, with my perspective following in brackets.

  1. Agriculture is incredibly diverse right here in Canada. (We shouldn’t just stay in our little echo chamber with others who produce the same as what we do.)
  2. Even with such diversity, young farmers face similar challenges across all sectors and across all provinces & regions:
    1. Building and protecting adequate working capital is difficult (I’ll keep preaching the importance of this;)
    2. Profitability is cyclical (we may have heard this before;)
    3. Competition is increasing for land, labor, etc (and they’re stressed out trying to figure out how to handle it;)
    4. Small farms struggle to compete with large scale & well capitalized operations (yes, there are large potato, berry, vegetable, dairy, poultry, & egg farms like there are large grain and cattle farms, and competing with them for land and labor is just as tough;)
    5. Young farmers feel lost when trying to determine if/how their parents ever plan to slow down/retire (this also applies to every other family business, not just farms.)
  3. The desire to learn more and be better is strong (learn, unlearn, relearn.)
  4. The desire to take part in something bigger, such as industry groups with lobby or policy influence, is significant.

CYFF is for farmers under 40. Based on the passion of these young farmers, and their desire to learn & be better at everything they do, I think the future of agriculture in Canada is in good hands.

To Plan for Prosperity

The issues you face, the challenges you struggle with on your farm are the same as almost countless other farms. The relief and comfort seen on the faces of these young farmers when that became evident was obvious. They felt less stressed and less alone when they realized that they are not the only ones feeling the angst, the despair, or the helplessness that dogs their personal situation at home.
Don’t sit alone and wallow in your own anguish over what challenges you in your business. Sharing your trials and tribulations will not only help mentor the passionate successors to our industry, it may help you find comfort in knowing “you’re not alone.” It might even turn up a solution.

dashboard view

Dashboard

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What’s on your dashboard?

If you’re thinking about your trucks & tractors, the answer might be anything from gloves to a coffee mug to a clip for the rifle.

What I mean is “what are you watching on your dashboard?”Truck Dashbaord

  • Oil pressure?
  • Coolant temperature?
  • Exhaust temperature?
  • Seeding Rate?

All of these are important, and no doubt they all get significant amounts of your attention.

What are the consequences if any of these go into the RED?

 

What about your BUSINESS dashboard?

  • Working Capital?Financial Dashboard
  • Debt:Asset or Debt:Equity Ratio?
  • Unit Cost of Production?
  • Gross Margin?

What are the consequences if any of these go into the RED?

 

Which set of gauges get most of your attention? A failure on which set would be catastrophic?

When I was still farming, the first day of seeding in 2014 had one of these go into the red, only I didn’t know it because the gauge failed. In short, the tractor needed an engine overhaul because of severe overheating. Did it break the farm? No. Did it make seeding extra costly, and take longer than otherwise would? Yes. Did we survive? You betcha.

To Plan for Prosperity

We tend to do what we do best, what we like to do, and what we understand. Understanding the safe range, the limits, and the consequences of oil pressure or coolant temperature running into the red is something that is ingrained into us as youngsters who were imploring that we be able to run equipment. Yet, if no one teaches business owners the safe range, the limits, and the consequences of running their working capital or gross margin “into the red,” how will they know what to watch, or to watch at all?

For an intensive strategy on setting up and monitoring your business dashboard, call or email me anytime.

iconic backstop

Backstop

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What’s your backstop?

Recently, I read an article from some economist on interest rates. The premise was that interest rates have to rise in the short term, even though the economic signals aren’t yet supportive of an interest rate increase. The rationale: if the economy hits another pothole, and rates have remained at their historic lows, then there is little in the way of monetary policy options available to kick-start the economy. In other words, if rates stay low and the Bank of Canada (or the US Federal Reserve for that matter) needs to reduce rates to stimulate spending, how can they reduce rates that have no more room to go down? Do we toy with the idea of negative interest rates? It appears we have no backstop.

The challenge now is how to prepare for a potential future trouble spot when there is presently no wiggle room. To increase rates now will all but guarantee that our fragile economy will stumble. By not raising rates now leaves no room to reduce rates in the future (if needed) and all but guarantees that a potential trouble spot will be far more than a spot, it would be a huge stain. Damned if you do, damned if you don’t. I do not envy Governor Stephan Poloz’s job at all…

Does it seem as though there was too much confidence from policymakers, thinking like it can’t happen to me? Some might say that the policymakers didn’t want to to what it took to prevent fire and now may have to fight fire.

This thinking can also apply to child rearing. Kids who typically get what they want, especially after whining, usually fall into tantrums when parents offer a firm “No.” Without laying a baseline for what is acceptable and tolerable behavior from their children, tantrums ensue. In other words, the parents have left themselves with no backstop.

An effective backstop for your business can apply to many different facets: personnel, equipment, agronomic, risk management, etc. From the financial perspective, your backstop should be made up of several key pieces:

  1. Working Capital (especially cash)
    Strong working capital solves many problems, and prevents even more. It reduces cash flow risk, takes significant pressure off of market risk, and best of all it creates growth opportunities.
  2. Equity (and its relation to debt)
    If your business is weak in working capital and strong in equity, these low interest rates offer the best opportunity to recapitalize your farm. On the other hand, I smiled at a comment made by a client late in 2016 when he was postulating how fun and profitable farming would be without burdensome debt obligation weighing (him) down and pressuring (his) cash flow.
  3. Management Strength and Discipline
    Too often I’ve seen farm businesses that were strong in working capital and equity whittle away at their backstop to satisfy their expansion desires. Strength and discipline is required to not get caught up in the euphoria of more and more assets. It is also required for the business to keep growing (not just in size and scale;) large cash holdings and significant equity can sometimes be a sign of poorly allocated capital. Strength and discipline refers to avoiding both (opposite) extremes, and staying on task and on point with your strategic business plan.

Ideally, your financial backstop is a balance of all 3 points above. Too much, or too little, of any one point will be far less effective as a functioning backstop.

To Plan for Prosperity

Knowing your risks and actively managing them is the key step to understanding how much of a backstop you need. Under-emphasizing your risks or over-emphasizing your backstop both have potential to be detrimental to your business’ health.