control-word-cloud

Control

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Happy New Year! My wish for your 2017, as I’ve extended to everyone regularly so far, is “peace and prosperity.” That may have been fortuitous as this, the first weekly commentary of 2017, carries a new name: Pragmatic Prosperity™.
Prosperity is not only my hope for the entire agriculture industry, it is my goal for every business I work with. Pragmatic describes the advice, strategy, and solutions we bring to each engagement. We are very excited about this evolution in our branding.

 

How do you employ control in your business? Is it over operations, people, cash flow? Those are quite broad descriptors, and when it comes to people, please recognize the difference between control and influence.

Here are the top areas to control in 2017 to achieve greater prosperity.

  1. Cash
    Working capital, especially cash, is a critical component of any successful business. Over the life of this weekly blog, you’ve read my constant rant about improving working capital. More and more important, the piece of working capital that needs focus, will be cash. A big part of working capital is inventory, but in a time when it is all too common for inventory to fall subject to grading issues, delivery glitches, etc, farms need the stability that comes from increased cash on hand.Expenses and debts unabashedly punish your cash. What are you doing to protect it?
  2. Marketing
    Even though we’ve had (generally) another banner year on the crop side, we have to give credit to the insulation from the commodity slide that we’ve enjoyed thanks to our slumping Canadian Dollar. Should the dollar strengthen, we’ll feel more of the pinch that our American neighbors are living with today. How would your cash flow look if you had to manage today’s expenses with 2010 prices?
    Far too many farms rely only on forward contracts. The reasons for it, I won’t speculate. Many tools and advisors exist to help you control your marketing (versus letting your marketing control you.)  When you’ve got full control over operating expenses (Point #3 below…keep reading) your marketing opportunities become more clear. This allows you to confidently price profitably.
  3. Operating Costs
    When we make more, we spend more (despite a contrarian strategy discussed here on May 17, 2016 – Spending Less is More Valuable than Earning More.) As farm incomes rose, so did farm expenses; what used to be “nice to have but could live without” has now become “must have” (in mindset anyway.) If we are to compare 2017 expenses to 2010 income (as suggested above,) why not look at 2010 expenses too? How have operating costs changed in your business over the last 7 years (2010 to 2016 inclusive)?

To Plan for Prosperity

You’ll note that the first item listed, cash, is at the top for a reason. However, if you start at the bottom, you’ll see how it is connected, how it flows and will get you to the results you desire, the results you may not think are achievable…but most certainly are.

Start with 3, it will have great impact on 2, which will lead to strength in 1. Control them all as you would control your equipment.
Make sense?
3…2…1…GO!

 

change

Critical State – Unwilling to Change or Adapt

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As we prepare to close out 2016, let’s look at change. No, not the coins in your pocket; no, not swapping your attire.

We change

  • when we see value (Eg. switching to minimum tillage practices.)
  • when we are forced (Eg. a health scare.)
  • when the pain of staying the same is greater than the pain of changing (this is hard to quantify because there is comfort in the familiarity, not matter how painful.)

change-venn

Value:
Change to achieve value is easy. We see benefit to doing something different, and we implement change. Although, this is incredibly difficult to define, and can be as diverse as each individual person’s opinion of “value.”

Forced:
Sometimes we get feedback from our doctor, or our banker, that is bleak, stark, or harsh. If we do not change X, we are certain to face Y. If Y is scary, unimaginable, or intolerable, the change to X is usually made pretty quick.

Pain:
Pain is subjective. And it has been found that pain tolerance can be surprisingly high if it means avoiding change.

Look back at 2016, and few years prior to that as well, and consider what drove the change(s) you made:
PAIN isn’t what drove you to acquire a new pickup. Neither was it FORCED. So what was the VALUE?
Was there FORCE or VALUE that led to a plan to improve working capital?
Was it VALUE or PAIN that led to having hired help on the farm?

Determining the factors that brought about the change(s) you are evaluating is a worthy, albeit difficult, exercise. Once we understand what it is that motivates us to change, not generally but specifically, we can use that understanding, that knowledge, to make better decisions.

Direct Questions

What is the most common theme for the changes you’ve made in your life and in your business: value, force, or pain?

Significant changes are easier to evaluate. How do you determine what leads to small changes: value, force, or pain?

How has the fear of change cost you, personally, financially, or otherwise?

From the Home Quarter

Charles Darwin is often credited for saying, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”
Danny Klinefelter is quoted as saying, “The future will always belong to those who see the possibilities before they become obvious.”
Kim Gerencser is quoted as saying,”(Business) cycles will hurt some, but offer opportunity for others. The difference between who suffers and who prospers is who’s ready.”

Change, like 2017, is coming whether you’re ready for it or not. Buckle up!

2016 year end review

Reviewing 2016

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We often get so focused on process that we fail to stop to take a look back now and again. If you feel like you’ll never reach your goal of <fill in the blank>, take some time for review to see how far you’ve actually come.

Where were things one year ago? If you were like most, you were highly optimistic about the potential of 2016. While durum was still troubled by fusarium, there was tremendous, widespread excitement to climb abroad the lentil train! After an usually warm and dry winter, from one of the strongest El Ninos ever recorded, the concerns of a potential late and wet start to seeding were quickly cast aside.

The way 2015 started out (with multiple late spring frosts) you might have been cautiously optimistic about the 2016 crop, even though it looked like it was setting up for a repeat of the 2013 record yield. Diligent pesticide applications meant to protect this potential boomer of a crop may have worked well, unless we’re talking about chickpeas and durum. The rain didn’t allow for the desired warm dry autumn, and the 2016 harvest literally became a marathon. While I haven’t done any calculations, I’d be placing my money on an approximate 70-75 day average harvest duration in 2016.

Yields were all over the map, and this has again kept many income statements looking tight. There were far too many discouraging sides to crop rotations everywhere, and many of those farmers who tore up their long term crop plans to chase big returns are feeling a little sore. Fertilizer prices dropped in the summer and stayed low most of the fall, allowing those farms that have strong working capital to buy their 2016 fertilizer cheaper than they have in recent memory. Saskatchewan reelected its government; Manitoba voted in a new one. And we found ourselves gobsmacked by goings on leading up to the US election.

And so, in looking back over 2016 we want to focus on progress, innovations, shortcomings, and of course, lessons learned over the last 12 months.

Direct Questions

What progress did you make on your long term goals? Short term goals?

What innovations did you employ this year?

How have you evaluated results to determine their success or failure?

From the Home Quarter

There was a pointed competitive advantage described in the article above; did you pick it out? In a business that produces commodities, you need to create every advantage possible to give your business the best opportunity for sustained profitability.

Where did your business fall short of expectations in 2016? Where did it exceed? What did you learn from it, and what will you do different?

Does this sound familiar? I wrote something very similar a year ago. One year later, it still applies.

My First Tractor

Why Tractors are Sexier than Spreadsheets

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Blame Kenny Chesney. He didn’t sing “She thinks my spreadsheet’s sexy.” Across all genres, I’d bet there is no one immortalizing accountants, bankers, and financial analysts in song.

Chesney’s 1999 release, She Thinks My Tractor’s Sexy is one of my favorites. At a time when farming didn’t get much attention and wasn’t garnering a lot of respect, it was a feel good jam that pumped me up every time I heard it. Seventeen years later, it still does.

Please realize that my opening statement above is tongue-in-cheek. I do not hold Kenny Chesney accountable for why tractors are sexier than spreadsheets. But the question still begs, why are spreadsheets unpopular when compared to tractors? Both are tools with specific uses. Both tools are effective, highly powerful, and multi-functioning. Both can create efficiency that is almost immeasurable.

Business owners can hire someone to run either tool, the tractor or the spreadsheet. If you were to follow one of the cornerstones of my advice, “Do what you do best, and get help for the rest,” then you’ve already likely hired someone to drive the tractor, right?

A long tenured ag professional, who will remain nameless, recently during a conversation with me describing one of his frustrating client experiences quipped,”If driving tractors is more important than running the business, we’re very near the end.” We laughed at the absurdity of the words, yet were stymied by their truth.

In a meeting with a client recently, we were discussing their growing ability to gather data from their operations. They shared the question posed by their equipment specialist “What are you going to do with all this data?” I instantly shot back,”Just collect it; we’ll figure out how to use it.” The goal is to make data collection a natural part of business activity, a habit, not a challenging task on the ever growing “To Do List.”

What we will do with that data, collected in part by/from the tractor, is more than likely import it to a spreadsheet. In that spreadsheet, we will be able to delve into the figures, sort them into a usable format, and ultimately make decisions that are more informed than ever before.

Direct Questions

Does running the tractor take priority over running the spreadsheet? Why?

If you’re not running your spreadsheet, who is? Does this pose a risk in your mind?

Do you make equipment purchase decisions without consulting the spreadsheet?

From the Home Quarter

Informed decisions lead to higher profitability. Higher profitability has a way of reducing risk. Reducing risk increases confidence.

Since spreadsheets make for informed decisions which ultimately increases confidence, and since confidence is sexy, doesn’t that make spreadsheets sexy?

Back to you Mr. Chesney…

 

 

agex-conf

Musings from the AgEx (Agricultural Excellence) Conference

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For those of you who are regular readers of this commentary, you know full well how I feel about farm shows in general and what it takes to draw crowds. Every major farm show on the prairies is so heavily focused on production, when we are already some of the best, if not THE best producers, in the world. Where we are lacking (generally speaking) is on the management and financial side of the business.

That is why I am such a fan of the Agricultural Excellence (AgEx) Conference. It is 2+ days dedicated exclusively to management. No presentations on crops, weeds, fertilizers or equipment; although, had there been, we would likely have seen 4-5 times the number of attendees. Overheard during networking at AgEx:”Want to get 1,000 farmers in the room? Show them some new equipment, give them a hat and a hotdog…that’s how!” If that rhetoric has more than a grain of truth, it sustains my railing on on the problem we have in the industry.

The title of this year’s AgEx was “Plan and Prosper: Set the Course for Farm Success.” This isn’t a typical preach from the podium event; the format included live debate, panel discussions, bear-pit sessions, and a choice of six concurrent workshops. If you couldn’t attend in person, it was broadcast via webinar.

Here are some of the very high level points made at the conference:

  • As a producer, you sell into a global community. Understand how that affects you (and that means deeper than simple “supply and demand.”)
  • If you expect to remain relevant in an ever changing industry, you must face change with confidence not fight it with vengeance.
  • There is still a large gap to bridge between the generations who farm together.
  • There is a TON of great information, resources, and advice available to you as a producer. All you have to do is ask!

There is much work to do, both on your part as producers and business owners, but also on our part as advisors:

  • We (as an industry) need to collectively come to agreement on how to calculate major financial metrics, such as gross margin.
  • We (as advisors) need to create synergies with all of our clients’ other advisors so as to better service each client.
  • We (as advisors) must elevate and consistently deliver the message that success is defined by management…period.
  • We (as an industry) must support each other to provide a unified front against those who would rather we fail.

From the Home Quarter

It is not difficult to find yourself pumped up and motivated when leaving an event like AgEx. The quality of information and networking available is second to none. I rubbed shoulders with a National Director from one of the largest ag accounting firms in Canada, an international farm advisor, a former diplomat, among others…oh, and I now also have a tour guide on PEI in the form of a young potato farmer!

Excellence is within all of us if we choose to focus on it. If we let fear hold us back, our results will show it (and we shouldn’t be surprised.)

As I will continue to say, “Do what you do best, and get help for the rest.”

Over-Optimism (a.k.a “It Can’t Happen to Me”)

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Recently I’ve sensed great concern from some bankers regarding the effects on the cattle market because of this TB outbreak in Alberta. The effects are still not definitive but could prove devastating.
The fallout from this recent harvest in western Canada is still being measured. Creditors are in full disaster preparation mode so as not to be bombarded by voluminous delinquent payments over the next 5-6 months.

A valuable part of the work I do is to help clients make capital expenditure and credit decisions. After a number of difficult crop years from excess moisture, many farms have great concern over their financial stability and fully recognize that they have very little room for error. Pains are being taken to consider how every decision could affect the farm’s future profitability.

Many long term business decisions have been made on the premise of $12 canola and $8 wheat, or $2/lb weaned calves (as a kid, I sold my first calf for $0.80/lb.) Servicing debt on land and/or equipment payments during the high points of the cycle is easy, but as we’ve seen, the debt often outlives the business cycle.

Some farmers, especially those who are relatively new to farming, have never experienced tough financial times. They have no first hand experience of BSE or the 2004 frost; they know little outside of high yields, good quality and strong grain & cattle markets. Sadly, there are many who have first hand experience of those dramatic market influences yet have permitted themselves to have short memories.

I remember giving a presentation in 2013, in a community I won’t name so that I don’t shame them, where the audience was verbally angry with me for stating that we were a “global average crop, not a bumper crop but an average crop globally from $9 canola and $4 wheat.” They thought I was crazy because, in their opinion, canola had a new floor price and it was $12.

Regularly I am forwarded an article from some US agency (it varies week to week depending on who is forwarding it to me) that provides insight into the rapidly decreasing appetite for risk into grain farming from US lenders, or the sizable decline in land rent rates, and the reduction in land values. I often tweet these articles with the question, “Does anyone think this can’t happen here?”

I am encouraged by a shifting focus among farmers that centers more on ROI (Return On Investment) and less on size & scale. It bodes well with a saying (it’s not mine) that I like to lean on: Better is better before bigger is better.

Direct Questions

How do you view risk and its potential to affect business results when making business decisions?

Have you considered how a major market shock could affect your profitability, and if so, what have you done?

If your profitability will be sub-par in 2016, what adjustments are you planning to make for 2017 and onward?

From the Home Quarter

While no one can deny that “things are different now,” there is still much we can learn from history. Maybe the most important lesson from history is that major business-impacting events are very unpredictable. As such, maybe we should be more prepared for the predictable events so that the unpredictable ones aren’t such a major shock…

success criteria

Success Criteria

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It is always interesting to listen to the variety of different opinions on how each farm views “success.”

For many it is measured by a tangible: number of acres under cultivation, number of combines in the fleet, etc.
For others, it is an intangible: family harmony.
Most of the time though, year by year success is measured in bushels.

Here is my response to a tweet just the other day:

Profit is always the supreme success criteria. Generally, I stop there because so much of the focus at the farmgate is primarily, almost exclusively on production, and it drives me crazy! But we simply cannot ignore the basic tenet of primary production: you need the bushels!

In the commodity business, and I don’t care if it is grains, livestock, oil, or minerals, the only businesses that produce commodities with consistent profitability are those that produce at the lowest cost per unit…period.

What’s the best way to lower your cost per unit? Produce more units, and in this case that means more bushels! Of course, the caveat is that you must produce more bushels without incurring more cost, or at least if costs must increase that their increase is not linear to (ie. less than) yield increase.

I am continually challenging my clients to find ways to reduce their overall costs. In an industry that has dedicated immeasurable amounts of focus on production, it is not unreasonable to admit that many farms are already producing maximum yields for their region, soil type, weather patterns, etc. Without further advancements in plant genetics, increases in yield beyond the average will mostly be achieved by the good fortune of ideal weather during the growing season.

Control what you can control (your costs) and accept what you can’t control (the weather.)

Direct Questions

How do you calculate your Unit Cost of Production (UnitCOP)? Do you calculate it at all?

How do you determine when the chase for more yield is no longer profitable?

What strategies do you employ to reduce your cost per unit?

From the Home Quarter

As read in the tweet above, “How about net profit?” Profit is the reason we’re in business, is it not? A business without profit is not a business, it is a charity!

Business is always evolving, growing, changing…maybe our definition of success should change too.

 

 

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?

inadequate working capital

Critical State – Maintaining Inadequate Working Captial

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I’ve gone on record many times saying that I believe that the lack of adequate working capital at the farmgate presents the greatest single risk to the future of many farm businesses.

Working Capital is calculated by subtracting your current liabilities from your current assets.

wrkgcap-graphic

It is important to calculate working capital correctly, not only to satisfy the requirements of your creditors, but for your own management information as well. Overstating your working capital will give false confidence. Understating your working capital could cause you to unnecessarily inject capital into the business, or to miss out on taking advantage of business opportunities.

Maintaining inadequate working capital carries many risks, both direct and indirect, such as:

  1. Relying on operating credit and trade (supplier) credit.
    Heavy, or total, reliance on outside credit to provide access to the capital necessary to run your farm is as great a danger as a reckless crop rotation. There is no guarantee that these credit vehicles will continue to be available in the future as they were in the past. How will the crop get seeded next year if there is no working capital, and no operating credit, available?
  2. Using debt to pay debt.
    Many businesses have plead their case by illustrating that the debt payments were always made on time. What they failed to recognize was that the debt payments made were sourced from an operating line of credit, and therefore using debt to pay debt.
  3. Loss of profit potential.
    By leaning on outside credit, many farmers are forced to sell grain when they need cash to make payments, revolve credit lines, etc. instead of selling grain at a point of opportune profit. Selling grain when you have to instead of when you want to can mean the difference between profit and loss.

In regards to building and protecting working capital, here are just a few of the tactics I offer:

  1. Know your Unit Cost of Production.
    This goes beyond crop inputs. It includes ALL costs to run the farm from fuel, to insurance premiums, to paperclips for the office. Knowing UnitCOP allows you to clearly understand where your profit is made.
  2. Stretch loan and lease amortization periods.
    Interest rates are low, and recently there are hints that it might go lower yet. Stretching your payback period allows you to enjoy making lower payments. This is especially helpful in a year when cash flow & profitability will be tight. Accelerate payments in years when cash is abundant.
  3. Plan with Strategy; Discipline in Tactics.
    Far too often, we see businesses that operate without a plan by simply focusing year over year on operations (getting the work done) and as such, most decisions are made in reaction to a need or want. By building a clear & well-thought out plan, decisions become proactive when employing discipline through the execution of the plan. Deviating from the plan (IE. a great deal on a new pickup!) can jeopardize working capital and future profitability.

Direct Questions

How often do you calculate your working capital? (HINT: it should be monthly at a minimum)

What is your minimum level of working capital to have available? (HINT: it should be 50%-100% of your annual cash costs)

What is your strategy to increase and maintain adequate working capital?

From the Home Quarter

Inadequate working capital causes business owners and managers to make decisions they otherwise wouldn’t. It forces their hand. It takes away their control.
Abundant working capital creates opportunity, allows flexibility, and puts control of the business in the owner’s and/or manager’s hands.
Critical State can be only a breath away when working capital is inadequate.

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…