Passive aggressive.

Proactive or reactive?

Okay, passive aggressive doesn’t REALLY apply…or does it?

A recent conversation with a banker had him using terms & phrases such as:

• they have no idea what they owe, to whom, or what their payments are;
• they leave out information in what they send to us;
• after a year of battling over their lack of cash management, the bank is viewing their risk profile as ‘high.’
• the promised to put together a plan months ago, but it seems there was always ‘something more important’ to do. Now that the bank is downgrading them, they’re in a hurry to get the plan in place.

The borrowers that this banker was speaking of have consistently displayed a behavior that is reactive. They:

• only provide info to their lender when threatened;
• do not follow the terms set out in their borrowing agreement;
• only got serious about making a plan when the bank indicated that their credit risk profile was being downgraded.

Situations like this are, sadly, not uncommon. All too often, financial professionals see impending challenges and offer advice that is pertinent based on their experience. Whether the advice is heeded or ignored is out of our control.

What can be done? At risk of sounding like a broken record…

1. Preserve cash by building strong working capital;
2. Do not acquire capital assets with working capital…borrowing is still incredibly cheap!
3. Drive down overhead costs so you can produce at the lowest Unit Cost of Production.

The challenge, of course, is now during a period of low commodity prices, how does one go about preserving cash to build working capital. A pessimist might say “that ship has sailed” with the end of the commodity boom. Notwithstanding any significant production issues somewhere on the globe, this may be true. And to bring it back around to the open of this commentary, proactive or reactive, it seems that by and large farms are reacting to the profitability challenges and positive cash flow challenges of the day. Proactive would have acknowledged that the good times were cyclical and would not last forever…

Plan for Prosperity

PUSH yields. In commodity production you need the bushels, but focus on optimum yield for profitability, not maximum yield for coffeeshop bragging rights!

PULL efficiency. You need to do more with less in low margin environments.

PUSH costs down. The lowest Unit Cost of Production (UnitCOP) wins. Period.

PULL management effectiveness to new heights. During times of questionable profitability, it is management that will rise to the top.

And the (projected) data looks bleak.

With only four crops expecting a net profit to exceed $50 per acre by any respectable amount, the profitable options for 2018 are few and far between. No wonder the common sentiment this winter is “I don’t know what to grow this year; doesn’t look like anything will make a profit.”

Considering the four crops in the Rayglen projection that are close to abundantly profitable are 1 variety of chickpeas and 3 varieties of mustard, it’s pretty clear that your geography becomes part of your challenge. Yes, wheat, barley, flax and canola are also projected to be positive, but are any of them sufficient based on the risk and/or your personal circumstances on your farm?

Here are some questions that I feel must be asked:

1. Is crop rotation holding you back from loading up on what few profitable options are available?
   I recently heard a lender suggest that those who blow up their crop plan to chase the perceived winner, by his account, usually miss out.
   This can be often true because of the long cash conversion cycle in production agriculture. Farmers bet on a crop plan that they expect will make them money, but a lot can happen between February and harvest…the market giveth and the market taketh away! If there is one thing Western Canadian grain farmers can do, it’s produce! We can overproduce a commodity in as little as one crop cycle, and as such in July or August drive down what was a winning price back in February!
   The lender referenced above went on to say that sticking to your proven crop plan is the way to hit a winner most years, maybe even multiple winners!
2. Is $50 per acre or even $75 per acre net profit realistic, or even sufficient?
   How much was expected yield and/or price “padded” in that projection? How much were total costs “softened”? Were there 4-6 applications of fungicide built in to those chickpea projections?
   Generalist type of prognostications like this one need to be taken with more than just a grain of salt. Do the “variable” and “total” expenses displayed reflect your farm? What is included in each category? Are they including all expenses, including the PAPERCLIPS? There is much ambiguity in figures like these.
3. Do whole farm expenses reflect the capability of the crop plan, or is the crop plan now expected to meet the ever-increasing farm expenses?
   Recently, I’ve overheard a couple of pundits suggest that whole farm expenses are now nearing $400 per acre. If true, that relegates many crop plans into the underworld of “operating loss.” I’ve gone on record several times suggesting that the elongated commodity boom recently ended has allowed many bad habits to form at the farmgate. The habits in question surround the insatiable appetite for newer/bigger farm equipment, larger land base, and higher living standards. It wasn’t long ago that top tier farmers kept their operating costs (described by some as labor, power, & equipment) in the range of $90-$100/ac, and these pundits now suggest that the best of the best are in the $140-$150/ac range. That $50/ac increase in what is the most controllable facet of farm expenses clearly has shaken the profitability potential to its core on many farms. And that only applies to those whose operating costs have increased by ONLY $50…

Plan for Prosperity

The recipe for profitability is simple:

• Have a plan (how/why/what you do);
• Run lean;
• Know your numbers & market to your numbers;
• Maintain discipline.

Of course, if it was as simple to do as it is to describe, everyone would simply do it. Also, did you notice that nowhere was there anything in that recipe about production or farm size? In the commodity business, the winner is the one who produces at the lowest cost per unit of production; the best way to achieve that is to have a plan and maintain discipline to it, get lean and stay that way, and finally market your production to your numbers (not to your emotion.) If you’re have challenges with any of the four ingredients in that recipe, why haven’t you picked up the phone and called for help already?

This “contest” may be virtuous in spirit, but it overlooks the not-so-old adage that “better is better before bigger is better.” That applies to this argument too.

The rationale behind my position is supported in this Western Producer article that describes a farmer’s chase of this moonshot, throwing everything including the kitchen sink at his crop in an attempt to cash in on the Canola 100 prize. (Spoiler alert: it failed miserably.) This particular attempt can be summarized in this quote from the article:

The fertility program cost $300 per acre more than what was done to the check field but yielded only 70 bu. per acre, which was 1.4 bu. per acre more than the check field.

The driving factor behind efforts to maximize yields should be ROI (Return on Investment) and Gross Margin. Doing so would focus on maximum economic yield, not maximum production yield. There’s something about that pesky law of diminishing returns that gets overlooked when trying to shoot for the moon…

If maximum economic yield is the target, then Gross Margin is the focus. How that gross margin is achieved is up to each producer, but make no mistake about where the focus needs to be. In my experience, minimum gross margin, that is gross revenue less seed, chemicals, and fertilizers, at MINIMUM needs to be 65% to sustain the business. High cost operations need greater gross margin to cover all those costs.

To put that in reverse, if 35% of your gross revenue can go to crop inputs, then each $1.00 invested into inputs should return $2.86 in gross revenue. To apply this to the example above, the “extra $300 per acre” in fertility should have delivered $858/ac in gross revenue. If Canola was $10/bu, that’s nearly 86 bushels per acre above the check field.

Let’s push the argument harder: if the example above actually hit 100 bushels per acre, and acknowledging the control field yielded 68.6 bu/ac, the gross margin on the Canola 100 plot was $14 per acre, or about 4.67%.

This is IF the 100 bushel yield was achieved…and face it, $14 gross margin doesn’t pay many bills; in fact, it wouldn’t even buy the fuel for the contest plot.

To Plan for Prosperity

Make no mistake about the messaging here: as a producer of commodities, you need the bushels!!! But do not lose sight of the fact that as a producer of commodities, your only chance of remaining sustainably profitable is to produce at the lowest cost per unit. Period. Chasing maximum yield at a 1:1 ROI won’t get it done.

1. What is your historical gross margin?
2. What are your operating and overhead costs?
3. Know these to be able to plan for maximum economic yield.

]]> https://www.growingfarmprofits.com/100-challenge-so-wrong/feed/ 0 https://www.growingfarmprofits.com/dashboard/ https://www.growingfarmprofits.com/dashboard/#respond Tue, 21 Feb 2017 07:30:37 +0000 http://www.growingfarmprofits.com/?p=920 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?”

• 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?
• 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.

For too long, “cost of production” was “inputs.” Seed, chemical, and fertilizer were all that were considered when discussing “cost of production.” Slowly, the recognition of fixed, or operating, or overhead costs came into play. But even then, I still find that much is left to be desired.

Regular readers of this commentary know that I preach “Unit Cost of Production (UnitCOP).” The thinking behind UnitCOP is to evaluate what it cost your business to produce one unit, whether that be a bushel of canola, a tonne of barley, an “eight-weight” steer, a kilogram of butterfat, etc. Obviously, the more units you can produce without increasing overall costs lowers your UnitCOP, as does producing the same number of units but with a lesser total cost.

The mindset of including all costs and expenses when determining cost of production continue to evolve. When in discussions with anyone, client or stranger, about cost of production, I often need to look for clarification about their parameters by asking “Whole farm?” Even this leaves much open to interpretation: whole farm to some means “every acre.” To me, it means every acre, yes, but also every expense.

An example that makes me scratch my head is when I read new articles containing info or quotes from someone in Manitoba Ag. Recently, I read this article about management of agronomic economics, when as with other similarly sourced articles I’ve read in the past the content describes “break even prices and yields” for various crops excluding labor. Why? Will the crop magically seed and harvest itself?!?!

Every cost, every expense must be considered when calculating cost of production. Right down to the paperclips for the office.

To Plan for Prosperity

The business of farming is difficult enough without making it harder to define profitability by ignoring some of your costs. While paperclips may not be critical to “production,” as a farmer/rancher/dairy-person/etc, you are in the business or producing grain/beef/milk/etc. And the costs to run your production business includes things like paperclips.

When evaluating results that might not have met expectations, ask yourself if you remembered the paperclips.

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!

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.

This opens up the perennial challenge for farmers: costs are increasing with no guarantee that production prices will increase as well, margins become questionable, and emotional decisions get made. Is it better to keep the swather and plant cheaper canola seed? Or follow through with straight-combining canola, sell the swather, and grow the expensive variety that works better with straight-combining?

Aside from the cost/benefit sermon that would fit very well here, I believe that the real issue is differentiating between emotional decisions and informed decisions.

While I could go into a diatribe that includes harping on the how and why, instead, I’ll offer a list of questions that may help you determine whether or not to “sell the swather.”

1. Will the more expensive seed provide enough extra yield to offset the added cost?
2. Have you included the savings to your operating costs from eliminating the expense of swathing the crop?
3. Does that saving to your operating expense include staff costs for you, or hired help, to run the swather?
4. Have you considered the cost of owning the swather, and how eliminating it affects your fixed/overhead costs?
5. How have you substantiated (actually measured) the seed loss from straight-combining and compared it to the loss from swathing?
6. How cheap can you get new canola seed without sacrificing yield?
7. What other benefits are you prepared to relinquish by opting for cheaper seed?
8. Which canola variety matches your crop rotation, pest pressure, and operational timing & strategy?
9. Which canola variety is most profitable?
10. If you literally need to sell the swather to afford canola seed, can you see that there are bigger issues at play?

Selling assets to generate sufficient cash to cover operating costs is the beginning of the end. Selling assets that are minimally used to free up cash & leverage that could be redeployed elsewhere is a good strategy.

The answers the questions above are yours, not mine. There is no solution that I am prescribing by posing those questions. The solution will come from your answers. What I am prescribing is taking the time required to make informed decisions.

From the Home Quarter

Emotional decisions, made in haste, like shooting from the hip, will offer benefit…to someone…but not you.

Informed decisions keep you in control, on plan and on task, by ensuring there is benefit to you, your business, and your family.

For personalized guidance on determining if selling the swather is the right decision, call or email and ask about our Farm Profit Improvement Program™.

• The commodity super cycle is over.
• We’re into a new era of a sluggish, more sideways rangy kind of market.
• Canola is not overvalued and Jubinville feels that $10 is the new canola floor.
• Wheat should bring $6-$7/bu this year.
• $10 for new crop yellow peas is a money making price.

This last point gets me. If I had a dollar for every article that claimed a “money making price” on a commodity in such general terms, I’d be making more money! In all the thousands of farm financial statements I’ve reviewed over the years, I can say unequivocally that there are no two farms the same.

In saying that, it is abundantly clear that what is a profitable price on one farm may not be a profitable price on another. And just because $10 yellows may have been profitable last year does not for one second mean that $10 yellows will be profitable this year. Why? It depends entirely on the choices you have made in changes to your business, as well as on the differences in a little thing called YIELD.

Yield can make a once profitable price look very inadequate very fast. In fact, a 15% decrease in yield, from an expected 45 bu/ac to 38.25bu/ac, requires a 17.65% increase in price, from $10/bu to $11.76/bu to equate to the same gross revenue per acre. This factor is not linear: an 18% decline in yield requires a 21.95% bump in price to meet revenue expectations. Alternatively, an 18% bump in yield requires a price that is 15.25% lower than expected to meet the same revenue objectives.

The point is if yield is down, achieving the objective price may not be profitable. Or at the very least, it would be LESS profitable. But the bigger issue is this: How can it be stated what is or is not profitable without intimate knowledge of a farm’s costs?

If the farm’s costs and actual yield create a Unit Cost of Production of $10.20/bu, I’m sorry Mr. Jubinville, that “money-making” $10/bu price you mentioned is not profitable!

Direct Questions

How are you determining what is an appropriate and profitable selling price for your production?

What are you doing to ensure you are including ALL costs incurred to operate your farm?

If you find that your projected Unit Cost of Production is not profitable, what measures are you taking?

From the Home Quarter

Far too often, we can get caught up in making critical business decisions based on what we “think” is appropriate, on a hunch, or on pure emotion. Using Unit Cost of Production calculations to validate your farm’s profitability is an incredibly empowering exercise. I’ve been in a meeting with a client and witnessed the entire crop plan change during the meeting based on Unit Cost of Production information.

What is not measured cannot be managed, and measuring your profit is pretty darn important.

A client of mine recently shared a sample of information that they collected from their equipment. The information shared with you is specifically from their sprayer:

A simple pie chart creates an “A-Ha Moment” that no one saw coming. I am sure you can all imagine the conversation around the table when this information was presented. What would your response be if this was your data?

As the discussion progressed, it became clear why the number of hours spent idling was what it was:

Admittedly, no one was tracking the number of idling hours that were attributable to any of those 4 points, but there was little argument that loading and rinsing contributed the largest share to the number of idle hours.

What can be done with this information? Since this sprayer is on a lease contract, the “cost per hour” is very easy to calculate. Now that we know the cost per hour of running this sprayer, we know how much all that idling costs. Now let’s go back to those 3 potential responses to first seeing this original data:

What this client of mine is now doing is evaluating the cost/benefit of putting a chem-injector system on their sprayer. Such an addition will:

To truly test this option, we would need accurate data over the period of at least 2-3 growing seasons measuring:

Naturally, very few, if any, farms record this data. Yet we can clearly see the effectiveness of having such useful information available to make the most informed decision possible. Without it, we are using emotion and our best guess. Obviously, our best guess can be way off, as is seen in just how much this sprayer spent idling in 2015.

Direct Questions

How are you managing and using your business data?

If you are not measuring it, and therefore cannot manage it, what are you using to make business decisions if accurate and useable data is not available?

How many decisions relating to improving efficiency can be made on your farm with better data?

From the Home Quarter

The report that contained this information (including the pie chart above) provides much greater detail to the goings on of that one machine than just usage by hour. Some of it, like the 8,970,000 yards this sprayer has traveled is not necessarily useful, but knowing that the 92.2hrs spent in transport used 910 gallons of fuel is.

While laughing and pointing around the table when comparing similar data from the combines, and identifying “who is the best combine operator” is interesting and fun, it is the action that comes out of the data that has the greatest impact. Positive action can and will impact your bottom line…but then so will inaction.