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toe the line of critical state

Critical State

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Critical State…it’s a subjective term, but is often defined in science literature as “the point at which something triggers a change in the basic nature or character of the object or group.” To paraphrase: something can be referred to as being in a critical state when at the point of significant change.

How many triggers of change do you, your family, and your business face each day, each month, and each year that could cause significant change? How many ways are you riding on or near the line of a “critical state?”

While there is little doubt that the list could be far longer, here are ten of the most important circumstances (many of which are ignored) that could put you at, or beyond, a critical state:

  1. Disability or Loss of Life: whether it be one of the major stakeholders in your business, a member of your family, or one of your employees, this is often the most catastrophic change.
  2. Lack of a Succession Plan: see point #1 above.
  3. Inability to Communicate: with family, partners, employees, vendors, etc.
    Does any more need to be said on this one?
  4. Debts Get Called: sometimes lenders make adjustments to their portfolio to manage their risk. If your debts get called, how do things change for your business?
  5. Overspending: cash in the bank is a good thing. Spending it because it is there is the scourge to many farms’ financial strength. Do you believe cash is king?
  6. Crop Failure: do you have the financial strength to survive a crop failure?
  7. Timing: trying to time the commodity markets is almost like trying to pick winning lottery numbers; both are nearly impossible. Regarding major purchases, there clearly is a right time and a wrong time to be taking on more debt, investing in more or upgraded assets, expanding, etc.
  8. Inaction: not monitoring bins, too cold to haul grain, we’re at the lake (can’t scout for bugs/disease,) etc. Poor excuses that can quickly create a critical state.
  9. Maintaining Inadequate Working Capital: believe it or not, but the chronic dependence on operating credit from lenders and vendors leaves a farm at the precipice of a critical state. Operating credit should not be counted on year over year. What if it isn’t there when you needed it most?
  10. Unwilling to change and adapt: “We’ve always done it this way,” are the 6 most deadly words in business.

Direct Questions

How many of the 10 points above might apply to your farm?

How would you gauge your ability to critically analyze your own business relative to the 10 points above?

What is your strategy to remain “well back” of the line that crosses over into critical state?

From the Home Quarter

In the battle against weather, insects, disease, market prices, etc, it is easy to get caught in a routine. When we succeed at managing through the day to day, the “extra” stuff, the “other” issues seem like they can wait. “It’ll never happen to me” are some of the most famous last words.

Too often, we operate at the very brink of critical state. Too often, we get away with it, which allows to be become “something we’ve always done.” So I’m left to ask,”Isn’t it better to avoid a crisis than deal with one?”

 

cash is not king

Cash Isn’t King

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I think this phrase has gained such popularity because of alliteration. The hard “c” in cash just rolls with the word “king.”

Let me emphatically disagree with the ideology that cash is king.

One could argue that the king rules all, answers to no one, and has absolute power. While I’m sure that is what the king would have everyone believe, the truth is that kings have always been influenced by the likes of his queen, his advisors, other diplomats, etc. Is he, then, truly the top, unflappable, incontestable?

Since we live in a democracy and are no longer ruled by a king or queen, when I hear such terms I think of cards. The card games I enjoy the most are 3-Spot (also known as Kaiser) and Poker. In both games, the king is soundly trounced by one card that is even greater.

Yes, I’m saying it.

Cash is not King.

It’s the ACE!

If cash is king, then that means that something else is the Ace, something else is more important than cash. This is simply not so.

Cash is the ace, the pinnacle, the life blood of your farm.

Imagine how the decisions would be different, the decisions that are made every day and every year on your farm, imagine how they would be different if you had an abundance of cash:

  • Instead of gambling on trying to time the commodity market high, you could sell your production whenever was most convenient and/or at an appropriate profit point.
  • You would cease the need for operating credit, vendor credit, or cash advances.
  • “Cash management” would no longer be juggling between various creditors and hoping you can deliver grain in time to make payments, but instead it would be paying bills on time (ahead of time?) and selling grain when it made the most sense.
  • Risk management programs would be a non-issue.
  • Equity loans to recapitalize the business would be a completely foreign concept.
  • Acquisition decisions (land, buildings, equipment) would be easier, faster, and more empowering.
  • YOU’D HAVE LESS STRESS!
    (That is capitalized for a reason.)

Cash is the Ace. It ranks above precision planting, Group 2 resistance, or the latest technology trends. The Ace outranks the King; it outranks all the other cards.

Direct Questions

Has cash always been your Ace, or have other things become more important?

What are the top three benefits to you and your business if cash was abundant?

How confident would you be to have TWO Aces in your hand?

From the Home Quarter

We often regard agriculture as doing amazing things with scare resources. Cash does not have to be one of those scarce resources even though that has been the mantra for generations (a.k.a Asset Rich – Cash Poor). Assets do not pay bills, cash does. The desire to convert cash into assets needs to be squelched at a time when debts are high, cash flow is tight, and profit margins are narrow.

Since cash is the life blood of your business, and a critical contributor to your financial health, when is the last time you had a checkup?

With your year-end financial statements now done, you’re ready for a checkup. Email your financial statements to me and I’ll provide you with a financial health report card. Normally a $500 value, this service is free if booked by June 13, 2016.

 

dichotomy

Dichotomy

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

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

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

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

Now let’s compare a couple different scenarios.

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

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

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

One would be the envy of 95% of farmers.

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

Direct Questions

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

Which farmer do you want to be like?

What are you prepared to do to get there?

From the Home Quarter

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

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

Spending Less

Spending less is more valuable than earning more….

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Let’s start with a handful of truths:

  1. You need to spend more to earn more, but it is incremental such as…
    • When you go beyond the exponential benefit (spending $1 extra to earn $2 more,)
    • When you move into the realm of linear benefit (Earning $1 for each $1 you spend,)
    • When you push on and find yourself in a negative benefit (each $1 spent earns less than $1 return)……we may have reached the beginning of the end.
  1. Earning more leads to spending more.
  2. In what is our “consumer society,” we are driven to spend more.

 

Ok, so let’s expand a bit for some clarity.

Spending more to earn more applies to your crop inputs.
Does investing in a $200/ac fertility plan earn you more than $200/ac above what you’d earn without any fertilizer? Of course it does. How much more…have you figured it out?
If spending $20/ac on fungicide can earn an extra $60/ac in revenue, it’s a no brainer. Can it? If you expect to yield 40bu/ac on a wheat crop, will that $20 fungicide earn you a $1.50/bu premium? What’s the spread between #2 and Feed? If it is $1.50/bu or less, why invest in the fungicide?

When we earn more, we spend more. It’s just the way it is. Does it have to be this way? No, of course not, but in our consumer society where we need instant gratification, usually achieved with retail therapy, our consumerism appetite is nearly insatiable. We’re all guilty of this to some extent…even me.

The title, “Spending less is more valuable that earning more” is a line I read in an Op/Ed piece and that line is attributed to Andrew Tobias from his book The Only Investment Guide You’ll Ever Need. I have not read Tobias’ book, so I cannot offer anything on his intention or his message. What I can do is share some of my perspectives on the realities of how we spend.

  • “I just got a raise, so let’s go out for supper. I’ve never had escargot before, but hey, I’m earning more now, so why not?”
  • “We just closed that deal and it will put me over the top for the bonus I’ve been waiting on. I’ve had my eye on that Ferrari for so long…paying off my line of credit can wait until next bonus!”
  • “Wow, we’ve had a banner year! We’ve never seen this kind of cash flow before! Interest rates are so low. I bet I could get a deal on a new <shop/tractor/combine/etc.>

From my days at the bank, I saw a client pay approximately 10-15% more than market price for land, and then 1 year later, pledge to buy a brand new combine with cash. At the time, their working capital was adequate, not especially strong, but it was adequate. They were prepared to use up all of their working capital to buy this new combine because they had a strong year (and felt that many strong years were to come.) I gave them good advice: do not use up your cash to acquire a depreciating capital asset. As a thankyou, they didn’t even give me the loan (they went to another lender.) The very next year, they got hammered with excess moisture and were a breath away from getting all their loans called. Imagine if they hadn’t taken good advice!

Early in my banking career, I heard a grizzled old banker say “Farmers hate having money in the bank; as soon as it’s there, they spend it!” Recently, I listened to a very progressive farmer admit to keeping a set balance in his operating account by shifting excess cash out to a savings account. His rationale: if I don’t see it I won’t spend it; I know it’s in another account, but I don’t track it like my operating account so it’s not available to spend on something I really didn’t need!”

Beautiful!

In our chase to “earn more” we can easily get caught in a cycle of working harder & longer, and investing (spending) more in our business in an effort to boost revenues. Yet the tradeoff of return versus investment must be considered. Investment isn’t just monetary.

Just the other day, I was talking with a client who is considering adding an enterprise to his farm. (For the sake of confidentiality, I won’t give more detail than that.) This new enterprise would very likely bring significant positive cash flow to his farm and family, with very manageable new debt required for equipment to perform the work. He is a strong relationship marketer from previous work outside of farming, so “business development” isn’t a risk for him. The question I asked, the question he couldn’t yet answer, was, “How much time are you prepared to take from your farm and your family for this venture?” His investment wildcard is “time.”

Direct Questions

We’ve discussed ROA and ROI in the past. How are you implementing a reasonable “return” for your investment in inputs, assets, and time?

How would you feel to have 1/10th of your net worth sitting in the bank as cash? That’s $1million in cash on a $10million net worth. Would that burn a hole in your pocket, or give you a calm and serene sense of security?

Where is your mindset when it comes to generating profit: is it from increasing revenue or decreasing expenses…or both?

From the Home Quarter

Andrew Tobias has received many accolades for his writing, and he was the one who wrote “Spending less is more valuable than earning more.” If that applies in a practical sense or not, we could argue all day by bringing up economies of scale, leverage, and tax rates. I am contending that it applies to a mindset of earning a profit and hanging on to it, building those retained earnings, establishing that “war chest,” and setting yourself and your business up for riding out the rough spots in the economic cycles.

Taking all your profit from the last go-round and reinvesting it all on the next one has a place.

It’s called a casino.

 

 

old school farming

Social License and Its Impact on Farming

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Last week at our local CAFA chapter meeting was the second time I got to hear a presentation from Shelley Jones. Shelley is the Manager of Agriculture Awareness with the Saskatchewan Ministry of Agriculture. Her topic, both times, was Social License. Social License is becoming as much of a buzz word in agriculture as it is becoming a major issue not to be ignored. I’ve blogged in the past (a couple years ago now) about how I feel that agriculture is “under attack” from well funded activists and industries whose gain would come at the expense of conventional agriculture. While I hoped that the activism was a fad that might fade away, clearly it hasn’t; we as players in this most remarkable and diverse industry need to understand the impact of social license, recognize our role in the discussion, and enthusiastically take action.

We in agriculture are not alone. The oil & gas industry and the coal industry, among others, are also under attack. Those industries are putting together plans of action to deal with the activism. Sadly, it seems none of us were prepared for this ahead of time, and now feel like we have to “catch up” in getting our message out.

We had a great discussion at CAFA during Shelley’s presentation. Opinions were varied. One in particular suggested that we as farmers need to take that nobility we so proudly hold and check it at the door. The mind set that we “feed the world” and the never-ending gratitude that we are entitled to because of it is actually causing us harm, said this one opinion. His point is well taken: the consumer hasn’t always been our focus because we know we produce safe quality food. We know we farm in the most sustainable manner we can. Isn’t that clear to everyone? Why would the consumer put up any resistance?

What we’ve forgotten, or maybe it is that we just haven’t taken notice, is that our population is no longer ag focused. It was said today in the meeting that “years ago, no one planned any major events in May or late August through October because of seeding and harvest respectively. Now, there is little concern to planning weddings or vacations during those times because fewer people are affected; a wedding on September long weekend might only exclude one family from the long list of guests.” Translation: fewer people are farming.

Of course we know that fewer people are farming today than 10 years ago, than 20 years ago, etc. And while we feel we’ve reacted to that trend by farming more acres and increasing yields, what we haven’t done is anticipated how severe the disconnect between John Q. Public and primary food production actually would become. The average non-farming person has almost no clue where food comes from or how it is grown.

In fact, most still sadly believe:

  • that farmers are overall wearing, pitchfork carrying, laborious people;
  • that the proverbial “little red barn” and an open tractor are normal;
  • that any farm that is bigger than said red barn and open tractor must be a “corporate farm” owned by some large eastern Canadian corporation or a US conglomerate;
  • that chocolate milk comes from brown cows.

How did this happen? How did our society swing from a primarily agricultural base to what it is today? Without getting onto a tangent of socio-economic trends, which have been debated feverishly through the 80’s and 90’s, what I’m really asking is “How did such a disconnect come about?”

It comes from taking things for granted for too long. Farmers took for granted that they were trusted, that they produced safe food in a sustainable fashion. Non-farmers took for granted that the food they purchased from their grocery stores was abundant, safe, and cheap. The internet has changed all of that by giving a platform to activists.

I felt so completely naive over the winter when on the agenda at a conference I was attending was a man who’s business it was to lobby the federal government. Wait, lobbyists are for hire? They’re not just people with conviction and a drive to change something they passionately believe in? Nope. You can hire a lobbyist. You can hire a person or firm to grind on the government, get face time in the media, and generally cause a ruckus…all for a fee, of course. These lobbyists, or activitsts as it were, represent their employer, the entity that hired them to promote a specific agenda. Fact, rationale, residual effects begone! These activists don’t need to be in Ottawa, or any provincial capital. They have the internet; where anyone can be a celebrity, spew rants of blatant falsehoods with an abundance of sensationalism to garner enough of a following that uninformed people simply believe that “it must be true.”

Combine this with how it is common among marketers to no longer promote what the consumer wants, but to promote what the consumer doesn’t yet know he wants, and we have a perfect storm. Consider technology and gadgets. Before HD television, did any of us know we wanted a 720p or a 1080p or now a 4K television? I still don’t know what the hell any of those are, but darn it all, the consumer now expects it! Did the electronics manufacturers build a few 4K TVs first to see how they’d sell, or did they go full out into producing 4K TVs and let the marketing look after creating a demand? We all know it is the latter.

Back to farming, we now have well funded activists with a platform that knows no bounds, who are free to generate as many half-truths, cherry-picked facts, and blatant falsehoods as they like in order to advance their agenda. Do they give a rat’s keester about how it affects you, your family, your community, or your industry? Nope. I believe that you or I do not matter to these activists. They don’t care one iota how you farm or if you’re still farming next year. They are only here to stir up a ruckus and gather “followers,” uninformed people who latch on to these revocable fallacies, minions who are intended to carry the momentum that the activists have started. Poor sheeple, if only they knew they were nothing more than pawns in a game.

The danger really comes into focus as the sheeple begin to do the activist’s work for them, shouting their “truth” from the rooftops and gaining more followers and momentum, convincing other people to “vote with their wallet.” I vote with my wallet regularly in how and where I chose to spend my money. We’ve been groomed to live by the old adage that “the customer is always right.” But, what about when they’re not?

Readers who have followed my writing have read it several times and will continue to for a while yet: you don’t know what you don’t know. These consumers don’t know what actually happens on your farm, in your pastures, or in your barns. They get their education from the University of Google where facts are not checked and reality is whatever you want to believe.

Are these activists, and their loyal followers, getting in front of legislators? Yup.

Will they influence future laws and regulations that will affect how you run your business? They might – – they’re sure trying!

Does getting into a fight with any of them online help? Nope.

What “we” can do in this has been well documented already in many different places. Farm & Food Care Saskatchewan is a great place to start: https://farmfoodcaresk.org/. There is also Farm & Foodcare Ontario: http://www.farmfoodcare.org/ Both of these entities are focused on informing the consumer and would benefit from your volunteerism. If you haven’t yet watched License to Farm, do it soon: http://licensetofarm.com/. The list of “to-do’s” for what you can do in this situation does not need any additions from me.

Direct Questions

How would your farm be different if the laws forbade you from using certain (or all) pesticides on your crops, certain (or all) vaccines on your livestock, or mandated how and when you managed your production?

We talk regularly about financial risk in these articles. You consider market & production risk regularly. Currency risk  and interest rate risk will become more dominant in future conversations. How will socio-economic risk affect your farm?

From The Home Quarter

One of the greatest benefits of farming is the independence, the connection with the land, and contributing to society in a way that few others can. For any of us to think that the independence we enjoy, and maybe even take for granted, is safe for us and our future generations is a bit naive. There are major factors at play, any or all of which could affect your future in this dilemma we call social license. You, me, and everyone in the industry can step up and make a positive impact. Or, we can take our way of life for granted and risk getting trampled by a stampede of sheeple.

 

4 R's of Fertility

Easy, Efficient, Effective, or Expensive?

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Let’s get it right out of the way first: I am not an agronomist.

I do, however, have a solid base of understanding relating to agronomy. With tongue in cheek I like to say, “I know enough to be dangerous.” Nonetheless, I took great pride in the significant attention to detail I employed while being in charge of seeding when still part of the farm. I carefully measured TKW (thousand kernel weight) and calculated seed rates accordingly. I was diligent about what fertilizer, and volume of fertilizer went into the seed row (we only had a single shoot drill.) I always slowed down to 4mph or less when seeding canola and ensured to reduce the wind speed to the lowest possible rate to minimize the risk of canola seed coat damage.

I always had a long season in spring from having to cover the whole farm twice: once with a fertilizer blend to be banded, (all of the N and whatever PKS that couldn’t go in the seed row) usually at least 2″ deep; the second pass was with seed and an appropriate PKS blend that could be be in the seed row. It’s just what I did to respect what I’d learned about the importance of fertilizer rate and placement. It took more time in applying, hauling home, storing, etc. It created operational challenges during application (it seems there were never enough trucks and augers available.) It took more time to set the drill for the correct application rate. All of that didn’t matter to me because I only had once chance to get the crop in the ground and fertilizer properly applied (at least at that time, the equipment we had made it so that all fert was applied in spring) and I wasn’t going to leave anything to chance that I could easily control.

The key point in fertilizer management is “The 4 R’s.” Right source, right rate, right place, and right time of fertilizer application make for the best use of your investment. So why over the last number of years have we seen such a boom in spreading fertilizer on top of the soil?

This article was recently published by FCC. There is no ambiguity as to the best and most effective way to apply phosphorus. I’ll ask again, “What’s with the shortcuts?”

I know the answer: time. There isn’t time to incorporate adequate volumes of fertilizer into the soil. We can use a spinner that has a 100′ spread at 10mph (or more;) this permits more fertilizer to be applied in a shorter amount of time, and it permits fewer stops to fill the drill during seeding…all of it saving precious time. I get it.

But where is the trade off? Have The 4 R’s of Fertility been tossed aside completely? Where is the balance?

Casting aside the proven science of the 4 R’s in order to save time by broadcasting is easy and efficient, but is it effective? I suppose that depends on what effectiveness you are trying to accomplish. I’m suggesting effectiveness of the fertilizer you’ve paid dearly for.

Direct Questions

When making important management decisions like fertility, what methods are you employing to determine your best strategy?

Where is your balance between ease, efficiency, effectiveness, and expense when making critical management decisions?

How has your Unit Cost of Production projection changed if you decide to accept only 80-90% effectiveness from your fertility program?

From the Home Quarter

What is easy might seem efficient, we might believe it is effective, but it is most likely expensive. Historically, decisions were made with the goal of minimizing expense with little else given to consider ease, efficiency, or effectiveness. Management decisions that do not provide adequate emphasis on effectiveness will likely see higher expenses. Your focus with your agronomy must be to produce at the lowest Unit Cost of Production possible on your farm. Choosing a fertilizer application method that places more emphasis on that which is easy versus that which is most effective is likely to create a situation that is expensive. Management decisions that focus heavily on one aspect to the detriment of the others rarely achieve results that meet or exceed expectations.

Introducing the Growing Farm Profits 4E Management System™. Details to follow.

bin row

Crop Price Rallies (will be) Few, (and) Short

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That is the headline in the recent edition of The Western Producer. Penned by Sean Pratt and primarily sharing the views of Mike Jubinville, the article contains the usual verbiage found in most articles that get classified under “commodity outlook.” Here are some of the biggest points made by Jubinville in the article:

  • 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.

 

barometer

Farm Business Barometer

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It’s harvest time. The weather has been uncooperative. The crop is generally not ready to go. Quality is diminishing. The August and September contracts Fred* had in place will not be delivered on time, even though the elevator has room, because his grain is still in the field and not in the bins. (* Fred isn’t anyone in particular. This story is fictional, but we need a lead character and decided to call him Fred.)

Finally, it looks like the weather will break, forecasting two weeks of high pressure, clear skies, and warm temperatures. Fred even has enough help between the hired staff, and family who have offered to come home for a week or so. He must get this crop off quickly, as fast as possible. Fred needs another combine.

Fred cannot afford to think about this for too long; everyone is in the same situation, and they could be looking at adding a combine to their farm as well. He heads into town, speaks with his salesperson, and acquires a quote. It’s higher than he wanted, or was expecting, but Fred is in a bind. He just heard that there are 2 other quotes on the same unit. He writes the cheque for a deposit.

Now comes the hard part – seeing the banker.

Fred recalls the feedback he was given before seeding time: things have been a little tight, and pulling back on any capital expenditures for a couple years would be best. What if this gets declined? How will he get the crop off in time? Is his deposit refundable? Fred scolds himself for not asking when he wrote the cheque.

Fred arrives at the banker’s office unannounced. Luckily she’s in the office today. Thankfully he doesn’t have to wait long. He explain the situation: things are getting worse by the day with poor weather degrading crop quality, and thereby crop price; he has lots of help to run extra equipment to get harvest done in record time…if he had another combine. When she asks if a decent combine can even be found at this juncture, Fred proudly produces the quote he just received no more than a half hour ago. She says she’ll take a look at things, and call right after lunch.

Fred heads home. The temperature is climbing and the wind is blowing; he thinks he could maybe get going this afternoon. Everything is serviced and ready to go; after all, he’s only done 150 ac so far. Fred heads in for lunch early, hoping that will speed up the call he is anxiously awaiting from the banker. He scans his phone for afternoon market updates, text messages from any neighbors who might be rolling, and that critical phone call from the banker that just isn’t coming fast enough.

He can’t sit around; Fred fires up the combine to go out and get a sample. The wheat sample looks bleached. He figures he’ll be lucky to get a #2. Sticking his hand in the pail Fred thinks “It feels close.” He rushes back to the yard to test it: 14.8! That can go in aeration! Let’s go!

Fred reaches for his phone to let everyone know to get ready to go, but realizes he left it in the combine in the field from which he just took a sample. Fred jumps in the semi, and even though it hasn’t warmed up enough yet, he hustles out to the field. Word will get to everyone via the house phone, and they’ll get out to the field right away.

Once back in the combine cab, Fred finds a message on his phone: it’s the banker! She wants him to call her right back. He does, and the call goes straight to voice mail. Fred swears.

She calls back in the time it took to fill one hopper. As Fred unloads into the truck, she tells him that she cannot approve a loan for the combine. She says that Fred’s cash flow is too low and his debt levels are too high to take on another liability for a “nice to have” asset. She talks about other options for this harvest, and offers clear feedback on what needs to happen in the future to not have these kinds of interactions with her again, but Fred has already stopped listening because he’s moved on to thinking about who else he can call for financing, wondering if the dealers program can turn an approval in less than an afternoon…

Fred immediately calls his salesperson at the dealer, and a couple other leasing companies, to ask them to begin an urgent credit application. They’ve got all his information now; he’s been in touch with them a couple times this year already when the banker has denied his other requests. Fred begins to wonder why he even bothered with the bank this time.

An hour later, Fred gets a call from the dealer; their financing division has approved his combine loan application. The interest rate is higher than his other loans, and the payment terms are more rigid, but he is not worried about that now – Fred can get that extra combine!

Jubilation turns to anxiety: the dealer cannot deliver until next week, and it hasn’t been through their shop. Fred will need to invest a half-day to have someone drive it home (who can be freed up to do that now that the harvest is rolling again?) Fred realizes this combine will probably need some repairs and some parts (more trips to town on the weekend.) On top of all that, he realizes that he’ll have to shut down himself to go in to town, sign the loan, sign the equipment sale agreement, and hopefully get to the insurance office before they close for the weekend. At this point, Fred might as well drive it home himself!

Yup, having a 3rd combine will make short work of Fred’s 5,300 acres! He acknowledges that he’ll have a serious amount of harvesting capacity for his farm size, and despite what he was told by the banker in spring and again today, Fred still got approved the loan. And if Fred got the loan, his business can’t be in as bad of shape as the banker says, right?

Direct Questions

Why does Fred exclusively use his creditor’s approval or decline of his credit applications as the barometer of his business’ financial stability and position?

How does Fred account for the differences in lending criteria and motivations between creditors when using their feedback as his business barometer?

What do you use as your barometer of business health?

From the Home Quarter

In our story, Fred clearly does not take the time, nor does he have the interest in understanding the financial ramifications on his business from the emotional decisions he makes. He continues to forge ahead by using any and every source of credit he can grasp. What happens when his requests are denied? Is it only then that his farm is in a position of financial weakness?

When focusing on priorities, I advise my clients that there are often times more important issues than upgrading equipment and constructing more buildings because credit is (relatively) easy to get, and has been for some time. As such, using credit approvals as the only, or primary, business barometer is narrow in scope, biased in feedback, and lofty in risk.

 

insurance contract

Risk Transfer (a.k.a Insurance)

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I spend a lot of time thinking about risk management. Often the focus is around “cost-benefit” and the “what-ifs” that need to be applied to every business decision we make. But recent conversations with some of my insurance buddies have sparked this writing and a discussion on how you can take advantage of risk transfer.

Risk transfer is as the name implies: you are transferring the risk of harm to a third party. That third party wants to be paid to take the risk, and as such asks you to pay a premium. This is nothing new for almost all of us.

There is a piece of this equation that may be unclear for some people. Similar to how a lender won’t finance 100% of the value of an asset, insurance companies won’t necessarily insure 100% of the value of an asset. They need some comfort in knowing that you will also incur a loss in a claim situation which they expect would incite you to take appropriate measures to protect the asset. This coverage gap, combined with the deductible, is the risk you retain. The amount of risk you wish to transfer (insurance coverage) and the amount of risk you are prepared to retain determine the amount of the premium that the insurer will expect. Again, this is nothing new, but the part that is often overlooked is the value of the asset in the policy.

A couple of years ago, I made a referral in to an insurance broker for a full farm review. What the broker discovered was that a brand new fully loaded farm shop was insured for replacement value, but only for $20,000 in contents. This was easily $80,000 too low based on what was actually contained in this particular shop. In this situation, the insured (the farmer) had to acknowledge 1 of 3 things:

  1. He chose to retain $80,000 of risk (plus deductible) if the shop and contents were a total loss;
  2. He was unaware that he was grossly under-insured;
  3. He was unaware of just how much the contents of his shop were valued.

In this example, the farmer was poorly advised in 2 of 3 points above because “being unaware” of coverage gaps is an excuse your insurer won’t feel sorry for, nor with they pay. The other point (retaining the risk) may have been strategic, but the broker doing the review did an excellent job of identifying these kinds of coverage gaps. When assets are bought, sold, or used up & discarded, the effect on your insurance coverage can be significant. If you have not reviewed your coverage thoroughly for a few years, you may be holding coverage that is far from meeting your needs.

The other aspect of risk transfer that is too often ignored is liability. Liability is very affordable, yet, according to many insurance advisors I speak with, it is rarely included to a suitable scale in farm risk management strategies.

Direct Questions

When was your last insurance review? Like your business plan, your crop plan, and your estate plan, your insurance plan should be reviewed at least annually.

How well can you describe your liability coverage on your farm? What is covered? What is not covered? Can you afford to find out AFTER an insurable incident?

Do you have contractors, salespeople, and visitors on your farm at any point through the year? Are you covered if they get hurt while on your premises? What about on your rented land, who is liable: landlord or tenant?

From the Home Quarter

My company and I carry different kinds of insurance for different reasons. For your interest, I carry a Commercial General Liability policy. This covers me when I’m on YOUR property. YOU can take solace in knowing that if I should somehow cause damage to your property, I have paid to transfer that liability to a third party.

The risk you face from allowing an uninsured person onto your property can be staggering. Imagine the ramifications if a delivery of anhydrous ammonia went wrong while a visitor was on your property? If that visitor, or the driver, was seriously injured from the NH3, and if your supplier was not covered or insufficiently covered, the ball gets handed to you. Make sure that those who you allow on your farm carry their own coverage, and ensure you have your own coverage too.

sustainability

The RISK 2-Step

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Here is a quote I recently read that was attributed to John D. Ingalls in Human Energy:

“The degree to which ambiguity can be tolerated determines the amount of difficulty
the individual can, and is willing to, meet and overcome in coping with the problems of
human life and in taking advantage of the opportunities life has to offer.”

Let’s make a few changes and see how it applies to business:

The degree to which risk can be tolerated determines the amount of variability the
business owner can, and is willing to, accept and manage in coping with the cycles of
business and in taking advantage of the growth opportunities that risk presents.

A good fair portion of any given week has me speaking with some very smart farm business owners,
lenders, and other business advisors. I continue to hear the same message: “guys (farmers) just don’t
understand the risk they are taking when they “

Risk is something every entrepreneur faces. We get paid for taking risks, and the more risk we take, the
higher the expected payday. Of course we all also recognize that the more risk we take, the greater the
potential loss as well.

But isn’t that pretty much what John Ingalls said above (or at least the paragraph I amended?

  • The risk averse cannot tolerate variability, is unwilling to manage cycles, and fails to capitalizeon growth opportunities.
  • The risk ardent embrace variability and cycles as opportunity to grow and expand.

The first step in being rewarded for taking risk is understanding the risk. It cannot be understood until is
acknowledged. Acknowledgement happens either when one steps out of his comfort zone and takes a
good hard look around, or when an outside party brings their perspective to the table, such as a
creditor, who might for example, change the terms of the relationship due to an inappropriately
managed risk.

Acknowledging that a risk exists, and recognizing its potential impact on your business can often be
difficult, scary, or even embarrassing. It can be hard to admit that we don’t know or understand
something that we (society) feel(s) we “should know.”

The second step in this 2-step, once you understand the risk, is to manage the risk. You’ve heard me say
many times “you can’t manage what you don’t measure,” which holds true for risks as well. Managing
the risk takes an understanding of how it could affect your business, measuring that effect and the
opportunities to mitigate the risk (think of it as a projection of best case and worst case scenarios.)

What does this all mean from a practical standpoint? Let’s consider a real world example from 2015.
Many growers were struggling on whether or not to apply fungicide to their durum. They were looking
for ways to reduce costs. The crop wasn’t looking so great (frost in late May and no rain until mid-July.)
The environmental factors that contribute to high fusarium were not as apparent as 2014.

The risk was the potential detriment to crop yield and/or quality from eliminating the fungicide
application to durum in 2015.

To understand and manage the risk, here are some questions that needed to be addressed:

  • How much damage can you withstand before lower quality grading eliminates profit potential?
  • How will lower grading affect ability to sell/deliver? (impact on cash flow)
  • Is there enough crop now growing to pay for the cost of fungicide if grade and yield are 100% protected? (cost/benefit consideration)
  • Is the crop at an even enough maturity to facilitate proper timing of the fungicide application?

Once these, and many other, points have been given appropriate consideration, one can make the best
management decision he/she can. In the case of the 2015 durum fusarium issue, some farmers sprayed
and still had toxic levels of fusarium; others didn’t spray and had manageable levels of fusarium. The
outcome is never guaranteed, but the process empowers you to make the best decisions possible.

Direct Questions

How are you determining which risks to pay attention to, which risks to manage, and which risks to
simply live with?

Even if you can’t dance, The RISK 2-Step does not require fluid movements or talented feet, but may still
require a lesson or two; who is interested in some “dance” lessons?
Are you risk averse or risk ardent? Knowing is important in being able to manage risk.

From the Home Quarter

Don’t kid yourself when answering the 3rd Direct Question above. We all know we need to be able to
handle some risk; my goodness, if we couldn’t, we wouldn’t be able to farm! But deep down at your
core, how do you handle risk? Consider this the “warm up” before stepping onto the dance floor for The
RISK 2-Step: truly acknowledge where your approach to risk lies, and then start the dance.