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inaction

Critical State – Inaction

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Inaction, or procrastination as it is sometimes called, is the antithesis of entrepreneurial success.

It is true that there are many other factors that can contribute to a lack of success for entrepreneurs, but in farming, the effect of inaction can have immediate and catastrophic consequences. When we opened this dialogue on Critical State, a list of excuses for inaction were provided: not monitoring bins; too cold to haul grain; can’t scout the crop for bugs/disease, we’re at the lake. We all know of these circumstances, and others, as exhibited by our neighbors, shared during a presentation at an industry event, or as we may have learned the hard way ourselves.

If it was someone else’s inaction, we can easily see the effect, quantify the financial ramifications, and then wonder “how could they let that happen?”
If it is our own inaction, we downplay the effect and the financial ramifications, and then bemoan our “bad luck.”
This is not meant as a condemnation. It’s just human nature.

In my work with my clients, I encourage (almost to the point of insistence) that management processes and standardized workflow be developed and implemented. Consider for a moment virtually any business you deal with ever. Here are some examples:

  • Your crop inputs supplier has consistent procedures surrounding safety, receiving & storing inventory, and invoicing.
  • Your grocery store works within minimum and maximum inventory levels on a week by week basis.
  • Your accountant follows a standardized workflow for receiving, sorting, & compiling your information, and for preparing your financial reports.
  • Your favorite restaurant has a protocol for greeting patrons, seating them, & ensuring they are eating in a reasonable time, not to mention criteria for food quality, safety, and handling.

Following a set plan of action almost completely eliminates the risk of inaction. Grain will never heat in a bin if you check it on a set schedule with a short frequency. Crop pests and disease will not bring catastrophic damage to your crops is you scout regularly with a short frequency. And yes, hauling grain in very cold weather is not fun and it does bring about other unpleasant challenges. However, if you, or someone you know, has been unable to move grain on time due to no space at the elevator, no trains, etc, then you know how that can affect cash flow, which leads to late bill payments, or poor revolving of the line of credit, etc. If that LOC has an interest rate penaly for late payment, your profit could disappear to cover that interest penalty. Still think it’s too cold to haul grain?

Direct Questions

Every decision has consequences, be it positive or negative. How do you accurately weigh the consequences when making operational decisions?

Describe how the pleasure of inaction now is more positive than the risk of harm later.

How do your operational decisions impact your financial outcome? If you have trouble making this connection, please call me immediately.

From the Home Quarter

Entrepreneurs are renowned for their tenacity and vigor in achieving their goals. Yet many entrepreneurs fail for many reasons, one of which is inaction. But cut yourself some slack: every entrepreneur does not instinctively know exactly what to do and when to do it, many need guidance. Enter people like me who help our clients in areas where they are not instinctively excellent. One of my favorite phrases is, “You don’t know what you don’t know.” But being oblivious to better ways can become an excuse for inaction. As a farmer, you take far too much risk for margins that are too thin and unpredictable to leave anything to chance.

Crop Failure

Critical State – Crop Failure

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Do you have the financial strength to survive a crop failure?

Considering that most farmers are still primarily production focused, there is likely no greater catastrophe in their mind than a crop failure. With Mother Nature offering challenging conditions every year (even 2013 which had a strong majority of farmers enjoying “the perfect growing season,” there were still many areas that faced insurmountable weather challenges) one would think that prudent risk management would involve many of the following strategies, each with a prescribed weight based on each farm’s specific need.

Provincial crop insurances, Agri-Stability, private revenue insurance, hail insurance, etc. are the most popular risk management tools used by farmers today. Most farms use one of those, or a combination of several. Each farm’s weighting of the various programs will be as unique as each farm. However, many farms use none of these risk management tools. They will each have their own rationale for why. Some are so well capitalized that they can self-insure, take the financial hit from poor production and keep on rolling. Others do not understand how the programs work, and because of their ignorance, they choose not to take part. In the middle is the majority, broken into two parts: one that clearly understands the nuances of each program, and utilizes it to the fullest, most prudent extent (which might mean not using them at all); the second does not bother to gain such understanding and simply does what’s always been done year after year.

There are four distinct factions described above in how many farmers approach risk management. Which one do you fit into?

  1. Well Capitalized, avoids using the programs: you have abundant savings and working capital to withstand more than one year of zero, or near zero, gross revenues and choose to eliminate the premium costs for risk management programs.
  2. Lacking full comprehension of programs, avoids using the programs: you feel that they are too complicated, too expensive, and never pay you.
  3. Intimate understanding of the programs, uses (or does not use) the programs to the best net benefit to your farm: you know the ins and outs of the program(s) better than anyone who answers phones at the respective help desks. You carefully weigh premiums, coverages, and benefits with precision so that all match beautifully with your production practices. This may include not using the programs because the cost-benefit is not sufficient.
  4. Not bothered to learn about program nuances, uses (or does not use) the programs because “that’s what we’ve always done”: you don’t have time to read through the acres of lingo and jargon that are provided to you, so you just blindly take the same coverage you’ve always taken, or not taken any coverage at all. “Just go with what we did last year!”

Of course, these groupings ignore the geographic issues in that, for example, some farms span so many miles that a hail storm is incredibly unlikely to affect the entire farm, some farms are so large that program premiums can represent a small fortune, and some farms (large acres or not) are in such tight proximity that weather risk cannot be “spread out.”

Direct Questions

Which category above do you fall into? If it is #2 or #4, what is your risk management approach?

Do you prefer reliance on risk management programs over building strong working capital? Why?

Production is critically important. How do you manage the risk of crop failure?

From the Home Quarter

Farming is risky business, and the risk of losing a crop can bring a farm to the point of Critical State. How we manage the risks, and in this discussion, the risks pertaining to crop failure deserve attention that is paramount. What certainly gets most of the attention when it comes to managing the risk of a crop failure is inputs. And while there is no arguing the importance of doing all you can to produce the highest yield and best quality crops, there is more to the equation. Much of what will bring success or failure to your efforts in production is out of your hands.

The only way to get off the train of risk management programs (and cash advances, and trade credit, and operating credit) is to build abundant working capital.

You cannot shrink your way to greatness and you cannot spend your way to prosperity.

Overspending

Critical State – Overspending

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Cash in the bank is a good thing. Spending it because it is there is the scourge to many farm’s financial strength.

Years ago, when I was still in banking, I was doing what can be argued young bankers should, or should not, do…I was listening intently to some well tenured, long-in-the-tooth bankers. It was good because of the insights they brought. It was not good because of the cynicism they had. One cynical comment in particular stayed with me; it was when that grizzled old banker said, “Farmers hate having money in the bank…as soon as it’s there, they go spend it!”

Maybe that comment showed his lack of insight into how a farm business is run. Maybe he was fairly accurate in his conjecture in how it relates to the psychology and mindset of a farmer. Although, I believe that “hate” is the incorrect descriptor for how farmers really feel about cash.

You may recall reading Spending Less is More Valuable Than Earning More in this commentary a few months ago. I regularly read comments in ag publications and on Twitter about how “farmers are good at making money, but trying to keep some is the hard part.” Not for everyone…

Investing in your business is something not to be taken lightly. Every year, month, week, and day, farmers battle with the decisions of what to grow, how to fertilize it, what to spray, when to spray it, etc. With almost the same frequency, many farmers are also looking at the tools to get the job done (ie. farm equipment.) “Newer, bigger, better” seems to be the name of the game when it comes to equipment. And less frequently, farmers consider expanding the land base. Whether to rent or to purchase is but one of the questions pertaining to land.

It is my belief that the issue of overspending would not be an issue if more discipline was used in ensuring that all expenditures met an ROI (Return on Investment) threshold. I’ve learned about the following instances in the last year that clearly show a lack of understanding the concept of ROI:

  • disastrous chickpea crops despite as many as 6 fungicide applications (at $15-$20 each, that’s an extra $90-$120/ac in inputs)
  • $90/ac rent paid on 640 acres that has only 420 acres available in the entire section due to excess moisture (so he’s actually paying $137 per cultivated acre)
  • inability to make loan payments because the operating line of credit is maxed out.

I have gone on record many times in my prognostication that credit, specifically operating credit, will be difficult to maintain (and likely impossible to get) in the not-too-distant future. Those operations that do not run on cash, therefore relying on operating credit, will face insurmountable hardship when credit policy changes.

Control your own destiny:

  1. Build working capital reserves, specifically CASH;
  2. Discontinue relying on operating and trade credit to cash flow your farm;
  3. Sell your production when it meets your profit expectations instead of when you need to make your payments (cash in the bank allows you to do this!)

Direct Questions

How would you describe the rationale employed when determining how to deploy resources, specifically cash?

As a percentage of your annual cash costs, what is your minimum cash balance to keep on hand?

From the Home Quarter

In a business within an industry that is renown to have multiple cash and cash flow challenges, it is not unusual to learn that adequate (or abundant) cash on hand is not common. And so when cash is available, the need (or temptation) to upgrade this or replace that can be too much to handle. Disciplined decision making, backed by a sound strategy, is often the difference between successful, highly profitable farmers and surviving, occasionally profitable farmers. Which would you rather be?

For guidance, support, or butt-kicking in developing your strategy, and the discipline to stick to it, please call or email my office.

Redmans

Vision (by guest contributor, Dean Robinson)

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Preface:

The following is provided by a guest contributor, Dean Robinson. Dean is a principal in the firm Redmans, a family business advisory practice in New South Wales, Australia. Dean and I are part of the same community of professionals and became instant friends at a recent event. Dean’s recent blog post, Vision, hits home as it relates to strategy and execution in family business. I hope you enjoy!

– Kim

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One of my big criticisms around modern Australian politics is that we no don’t have a clear vision for where Australia is heading as a country. For me, the Hawke, Keating and Howard Governments were all clear on vision. Each government set a future, then trod down the path towards it. Yes, there was some anguish. At times, decisions were made that were unpopular. However, in each of those governments, we had Prime Ministers who saw the bigger picture and understood there would be hiccups along the way. In my opinion, the years since 2007 have been devoid of the big vision.

Which leads me to family business. Unfortunately, too many of them are also unclear on their vision. They unlock the doors each day, take all comers, deal with issues like the Rural Fire Service deals with a bushfire outbreak, then lock it all up at the end of the day, ready to do it all again tomorrow.
In many respects, you can boil this down to three problems:

  1. Lack of a clear business strategy; or,
  2. If there is a business strategy, lack of implementation of it; or,
  3. If there is a business strategy, and it has been implemented, a lack of commitment to it.

A business that lacks a strategy doesn’t know where it is going, an obvious statement I know. However, the number of family businesses that lack a clear and documented business strategy is surprisingly high. This means they’re running all over the place, usually being all things to all people and creating stress for themselves in the process.
If a family business has developed a business strategy, the place where it falls over the most is in the implementation phase. Any client we have worked with on the development of a strategy that says they don’t need our help to implement it has always failed to implement. Without exception. Once the strategy planning day is done, they go back to what they’ve always done, which is generally be reactive. The only thing that works for implementation is accountability. Plenty of school children would not do their homework if they didn’t have to hand it in the next day. The same applies for family business owners.
Finally, if there is a strategy and it has been implemented, any lack of commitment to it from anyone in the management team can de-rail it. Everyone needs to be on board with the direction. If your business strategy is to produce widgets, you gear your factory up to produce more widgets, then find that you’re really not that interested in the widget market after all, you’ve just blown significant resources in the business and potentially taken resources away from parts of the business that work.
My questions to you are:

  1. Do you have a clear strategy for your family business that you can articulate succinctly and with passion?
  2. If you have a strategy, what is your process for implementing it and who is holding you accountable?
  3. If you have a strategy and have implemented it, is anyone undermining the strategy? If so, what are you doing to bring them to account.

This Week’s Tip

Lack of Strategy = lack of direction.
Lack of Direction = business anarchy.
Anarchy – a state of disorder due to absence of non-recognition of authority or other controlling systems (Oxford Dictionary.)

 

 

Goals and Strategy _corn rows

Goals and Strategy

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Never trade what you want most for what you want at the moment. It only leads to failure.

Those are profound words. While “failure” is not absolute, I believe in this perspective failure means “failure to reach your goal.”

What is your goal in business? What are you working for? Some business-people in primary production agriculture have defined their goals: one aggressive young farmer I know has made it clear that his goal is “to leave the land for the next generation in better condition then when he got it.” His desire for a newer tractor or more land never trumps his goal, and therefore his decisions reflect his goal.

I often speak to farmers who describe their goals as ” reducing debt” and “improving profitability” yet they trade those goals, whether consciously or unconsciously, for what they want in the moment (typically additional equipment)…which usually increases debt and can often have an adverse effect on short term profitability.

Does that mean the farm will fail? Does that mean the farmer is a failure? No. It means that there is failure is reaching the goal of reduced debt and increased profitability.

This leads me to circle back; ” What is your goal in business? What are you working for?”

We touched on this a few weeks back in Growing Farm Profits Weekly – Eat to Live or Live to Eat. It is no one’s place to tell you your goals are wrong. Just be honest with yourself about what’s really important, and expects results accordingly.

I work with farmers who acknowledge the need to have strong business goals that align with their personal goals. All of them are grateful to have some help to clear the air when making decisions and to take the emotion out of the equation. I have done the same in my own business: I have an advisor who I’ve hired to help me wade through the issues, and the emotional roadblocks, that could potentially affect my business.

Here are the Growing Farm Profits™ 3 Keys to Reaching Your Goals:

  1. Start with with a goal in mind, and set tactics later. Starting with tactics enters into a never-ending cycle.
  2. Plan for adversity, strategize how to adjust, and respond as required.
  3. Stay on course; get any and all help you need to keep from straying off the chosen path.

Direct Questions

What information do you need to allow you to clarify your business and personal goals? Who is helping you get it and sort through it?

Who do you lean on to help strategize when mapping your business and personal goals?

How do you manage the desire to trade what you want most for what you want in the moment?

From the Home Quarter

It is not unusual for farmers to get caught in the cycle of “head down, shoulder to the plough, get the work done, plant the crop – harvest the crop – sell the crop – repeat.” And after 20-odd years of doing just that, and finally looking up, most find that they’ve built something they never expected or planned for. Now facing the thought of planning for life after farming, many are asking “What now?”

Beginning with an end goal in mind is a critical key to successfully reaching that goal. Stay on course, and do not trade what is wanted most for what is wanted now.

hide and seek

Hide and Seek: How Perfection Kills Success

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While on holidays in early July, I watched our group of 3-5 year olds playing hide and seek. They were having a ball because each of them is learning to count so being the seeker was their chance to show everyone how high they could count, because the thrill of the chase is invigorating, and because the risk of getting caught (found) adds an element of excitement.

What I found consistent while watching these children play was how all of them, no matter how long the “seeker” counted, kept moving from one hiding spot to another. Yes, these are small kids, aged 3 to 5; yes, they are too young to grasp the strategic concept of the game; yes, they were actually hoping to get found. It appeared as though they would hide, then identify a spot that looked better, so they’d leave their first hiding spot to go to another. Once there, they’d realize that it either wasn’t as good as it looked, or that they see yet a better hiding spot elsewhere. And the cycle continued until the seeker was done counting.

The point is not meant to be critical because it applies to older kids who do understand the strategy of hiding stealthily so that the seeker can’t use his other senses to pick up a hint where the hiders might be. Either by making noise while hiding, or by wasting their precious lead time looking for the ideal place to hide, they often leave themselves vulnerable by trying to find the perfect hiding spot.

These children were exhibiting a behavior that we, as adults, emulate far too often. We regularly short-change ourselves by seeking perfection, or our personal idea of it; we jeopardize success in the now because we we see something that we “think” is better.

The young children playing hide and seek spent their entire hide time, while the seeker counted, their entire hide time was spent moving from spot to spot, often giving up a great hiding spot for a poorer one. The older kids playing hide and seek waste their hide time by trying to find that perfect spot that no one has thought of, and when they can’t find it by the time the seeker announces “Ready or not, here I come,” the hiders are usually not ready and end up settling for a terrible hiding spot just so that they actually hide and aren’t caught just standing there in the open…

How does this apply to you or your business?

  • How much time over the winter is spent researching the “perfect” seed variety to grow?
  • How much time is invested into monitoring equipment prices and inventories to feed the desire of owning a seed tool (sprayer/tractor/combine) which might be “that much better” than the one on farm now?
  • How much time is spent in frustration thumbing through all the resorts available to choose from in the Caribbean so that your winter vacation will be “perfect?”

Direct Questions

Is there more analysis put into short term decisions than long-term or even permanent decision?
(It took 3 months to decide what canola to seed…but we’ll just expand that bin yard over there!)

Is there more analysis put into what we find fun and less into what we don’t enjoy?
(I know precisely how many combines like mine are for sale in Manitoba right now, but I haven’t bothered to consider if I could reduce my interest rates.)

Have you passed by a really good hiding spot because you were trying to find the perfect one?

From the Home Quarter

“Paralysis by Analysis” is a not so old adage that I lean on regularly. It is a challenge for detail guys like me because we want to be sure we’ve got everything right and in place before we take the next step. “Paralysis” because sufferers never take the next step; they justify their inaction because the “analysis” isn’t complete. News Flash: it is never complete!

I have made great strides in shucking that condition. It pokes its head out occasionally…I treat it like “Whack-A-Mole!”

Your farm will succeed if your canola variety yields 3 bushels less, but stands better than the other variety you desired. Seeking a marginally better sprayer probably won’t make enough difference in your overall profitability to cover the added cost. And take the damn vacation…you deserve it, you’ve earned it! Stressing over picking the “right resort” kills part of the fun. It’s like trying to pick the juiciest apple on the tree by looking at them from the ground.

family succession

Critical State – Lack of a Succession Plan

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I have been incredibly impressed with the service and quality of work at Queen City Glass. I stumbled onto them a number of years ago when I got a stone chip on my truck’s windshield right at the the beginning of a November cold snap. I knew that tiny chip would spider-web in a big way the first time I cranked on the windshield defroster. Going to the glass shop I had frequented up to that point and being told to come back in 3 days or so, I was about to accept the fate of my front glass when I drove by Queen City Glass. With nothing to lose, I whipped in to see if they could help me out.

They took me right in without an appointment and did a great job of repairing my windshield. I didn’t have glass coverage at that time so the fee would be coming out of my wallet. Not knowing what to expect, having never paid for a windshield repair before, I was happy with what they took from me.

While I was waiting for the work to be done, I learned that they do all kinds of glass, almost anything that one might custom order. The guys in the back were sharing stories of building display cases for jewelry stores and fighting with 10′ high panes for shopping mall store fronts. They admitted to doing a lot of work for antique cars, as well as farm equipment.

Coming back from a recent client meeting, my windshield got hit by a rock which left a chip. Almost as big as a quarter right away, I knew I had to get the damage repaired soon or it would be too big to fix. I pulled over on the highway at about 2:20 pm and called Queen City Glass. They told me if I could get there by 3, they’d have me done in time to get to my 4pm obligation. One of the owners was doing the work on my truck. After he shared with me the story of the company’s ownership,how his father acquired the business in the 1960s and has since passed it down to him and his sister, I asked him what was his succession plan. He replied, “Freedom 85, man!” I clarified that I didn’t mean his retirement plan, but the plan for the future of the business when he and his sister no longer want to work it (sometime after he turns 85 as per his declaration.) He admitted that there is no interest from the 3rd generation to own and operate the business and that if it couldn’t be sold, it would probably close.

As I stood in that shop and considered all the amazing glass work that would have been done there over the years, including a turn-of-the-20th-century hand carved piece of furniture in which they were installing a custom mirrored back that very day, I realized what a shame it would be to not have this business carry on what is most likely a storied legacy. As the late great George Jones once sang, “Who’s gonna fill their shoes?”

Direct Questions

Family business is the backbone of Canada’s economy, and farms are often the most enduring of all family businesses. What is your plan to ensure the progression of your farm carries on?

With family or without, you have opportunity to transition your business without selling everything. What options do you have beyond immediate family?

Whose gonna fill YOUR shoes?

From The Home Quarter

Queen City Glass will be at the point of critical state when one or both of its current owners decide they’ve had enough work, and want to retire. I would argue they are at the point of critical state right now, if not very close to it. With no succeeding generation currently involved in the business, should either of the 2 owners become disabled or killed, the business would likely face an immediate upheaval and could be forced into a final closure. Any family business in any industry without a succession plan faces a similar potential fate; none are immune. If you are the beneficiary of a proud family legacy, what are you doing to ensure that legacy continues?

 

 

go fishing

If You Are Happy Just Floating Along, Go Fishing

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I wasn’t trying to be funny when I quipped what is the title of this commentary while in a meeting with an excellent banker and the exciting young prospective client he introduced me to. It just sort of rolled off my tongue in the moment. It was a hit; both men enjoy fishing.

The premise of that particular conversation was profit. In my work as a lender and a consultant, I venture to say I’ve looked at hundreds and hundreds, maybe thousands, of financial statements. Those statements have told a vast array of stories, from the depths of successive and devastating financial losses to the opposite end of the spectrum with profits that make you wonder if your’re drunk when reading it. Many hang around the middle, somewhere south of an impressive profit , but still north of a fundamentally adverse loss. It is sad to discover than many farmers create this break-even situation by choice.

The choice is often centered around tax and the great lengths taken to avoid payment of income tax. The list is long and arduous; it won’t be found here.

Let’s put this in real terms. Most farms I’ve analyzed range from approximately $250/acre on the low side to $400/acre (or even higher) as the figure that represents whole farm cash costs. That is the amount of cash required to operate the entire farm for one full year. Now, I got my math learnin’ in a small town school, long before calculators were allowed in the classroom, back when cutting edge computer technology was the Commodore Vic 20, but math is math, so if we consider a 10,000ac farm with $400/ac costs, we’re looking at $4,000,000…each year!

Granted, there aren’t too many 10,000ac farmers who are happy to break-even each year, but they are out there. At the end of the day, I don’t care if you’re 400 acres or 140,000 acres, expect a profit!

Farmers take far too much risk each year to not expect a profit. If you walked $4,000,000 into any bank, could you get a better return than 0%? Of course! You could get a risk free rate in GICs that would probably approach 3% (or maybe 4%…any bankers reading this what to comment???) So I ask why, if you could get a risk free rate of 3% or 4%, why would you take a sh_t-ton of risk to accept a 3% or 4% return farming?

Direct Questions

Investing $4,000,000 in GICs and getting a risk-free 3% annual return grosses $120,000 per year before tax. Could you live on that?

Land owners/investors demand a rent that mimics 5% return on the value of the land. If you invested $4,000,000 in land, you could earn upwards of $200,000 gross in rent, plus enjoy the long term capital appreciation…could you live on that?

What is an acceptable return to demand from your business…based on the amount of risk you take each year?

From the Home Quarter

Farming is not for the faint of heart. Farmers accept the financial risks that come with farming because they understand them. The opposite if often true of stock markets: farmers aren’t typically investors in equity markets because generally they don’t fully understand the risks. But savvy stock investors who do understand the risks still expect a positive return, they aren’t happy “just getting by.”

If you’re happy just floating along, go fishing.

If you expect to get well paid for the risks you take, call me.

 

Renting Farmland

Are You Renting Farmland?

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An online article published by Country Guide about land rent contained some points that many of us have pondered. Much of the article centered on a lack of useful data on rented land, such as recent crop rotation & yield, pest pressure and pest management, soil type, residual fertility, or recent rental rates.

While this poses a challenge to those who insist on making the most informed decision possible, recent history indicates that the appetite for more land to increase a farm’s size and scale has grossly overshadowed rational analysis when making a decision whether or not to rent a piece of land. The article quoted a 2012 survey that was funded by the Saskatchewan Ministry of Agriculture which tabulated approximately 2,000 cash and share rent agreements. The article reads, “The company hired to do the survey found an astonishing range of rental rates, ranging from an almost unbelievable low of $6.25 an acre to a high of $140.60 an acre.” It’s probably fair to say that $6.25/ac isn’t “almost unbelievable,” but straight up unbelievable. My vote is that some wise-guy wanted to skew the data and provided a false figure. It’s the high figure, the astronomical $140.60/ac, that is the head-scratcher. I have lost count of the number of pencils I have used to try to pencil out a profit at that rental rate. It requires the perfect storm of yield and price to marginally make it work. The guys paying this kind of rate must have some sort of magic pencil I have yet to find.

Here’s where it really gets good. Another excerpt in this CG article reads, “In the short term, taking on more land that won’t necessarily pay for itself might still be a winner in the farmer’s eyes in that light, especially if it allows them to spread fixed costs and labour costs over a larger land base.”

So let me take a shot at paraphrasing:
“Our fixed costs are really high, so in order to justify the bad decisions we made when we took on too much debt and allowed other fixed costs to rapidly increase, we will make another bad decision by overpaying for land that won’t make us any money so that it makes our fixed costs look better by spreading them out over more acres.”

What?

OK, that was wordy, let me shorten it:
“We’ve got all this equipment so we need to run it over more acres to justify having it.”

Still too long and soft? Alright, one more try:
“Pride is more important that profit.”

Eww, ouch! That stings!

But if the thinking is that we must take on more land in order to justify high fixed costs (usually for shiny new equipment) then it is clear that the pride of possessing such equipment and the pride of farming “x” number of acres is more important that being profitable!

Here are my 3 “Growing Farm Profits” Tips for renting land:

  1. Know your costs.
    By knowing your costs, you can easily determine what is or is not a reasonable rent to pay and still remain profitable. Without knowing your costs, you’re shooting from the hip…in the dark.
  2. Invest in assets in the correct order.
    Taking on more equipment than you need, then frantically trying to “spread it out” over more acres to justify the decision is backwards. It’s like buying a seeding outfit before buying a tractor: you might end up paying more for the tractor you need, or buying more tractor than what is required because of a lack of available selection. Secure your horsepower first, then find the drill to pair to it.
    Secure your land base first, then invest in the iron to work it.
  3. Nurture your landlord relationship.
    Let them know how your year was. Explain your farming practices. Help them understand how profitable their land really is. This goes a long way to establishing goodwill at renewal time.

Direct Questions

How much at risk is your working capital if your fixed costs are too high?

What steps are you taking to ensure your investment in rented land accentuates your profitability and not diminish it?

Is the goal to be the biggest or the most profitable?

From the Home Quarter

“Better is better before bigger is better” is a phrase that I hang my hat on quite regularly. While I cannot take credit for coming up with that one, it is so remarkably accurate in its simplicity.

If we can all acknowledge that threats to working capital should be our greatest concern in the short-to-medium term, then we must also acknowledge that adding unprofitable land in an effort to justify fixed costs will only accelerate the bleed of precious working capital.

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.