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inadequate working capital

Eat to Live, or Live to Eat

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This week’s title is common phrasing when dealing with people who struggle with weight loss. While there are many factors that come into play for those who struggle with weight, a person’s caloric intake is often a major contributor. Making smart decisions about what to eat, when to eat, and how much to eat can be challenging for many people who are trying to do a better job of managing their health, not just those with weight issues. The question of “why” they eat gets into the psychology of the issue, which, coincidentally, leads into the real topic behind this week’s commentary.

Spending time at Canada’s Farm Progress Show in Regina each June has been something I’ve looked forward to for as long as I can recall. Remember, I knew I wanted to farm since I was less than 10 years old, so the Farm Progress Show was a more tantalizing buffet to the teenage me than even an actual buffet! (BTW, I still have an appetite like an 18 year old farm boy.)

The desire for more and new farm equipment seems almost insatiable, and begs the question:

Do we have all this equipment so we can farm, or do we farm so we can have all this equipment?

  • I recently met a young farmer who, while struggling to establish adequate cash flow, explained why another 4WD tractor on his 2,000ac farm will make him more efficient (he’s a sole operator with no hired help…how one man can drive more than one tractor at one time is something I can’t quite wrap my ahead around.)
  • You may recall from a few months ago the fictional story about “Fred” and how he NEEDED another combine. Despite his banker’s advice, he forged ahead.
  • Conversely, another farmer I speak with frequently is feverishly trying to rid himself of the over-abundance of iron on his farm.
  • Another is protecting his farm’s financial position by keeping the absolute bare minimum amount of equipment on his farm. Nowhere is there a “nice to have” piece of equipment on that farm; everything is “fully utilized.”

During the week of the June show in Regina, I read a tweet from an urban, non-farming young lady who was seeing the Farm Progress Show for the first time; it said (something along the lines of) “all this big beautiful equipment makes me want to go farming!”

Direct Questions

What circumstances must be present for you to consider additional equipment?

Does any equipment deal have to make for a sound business decision, or simply fill a desire?

Is your equipment a tool to operate your farm, or is it the reason you farm?

From the Home Quarter

In these weekly editorials, you have read about Mindset, about Strategy, and about Focus; these topics (and many of the others) challenge the conventional thinking in the industry today.

Those who bow to the mistress that is their farm equipment are only enjoying short term excitement. The mistress entices her suitor, subservient to the raucous cycle, and she soon becomes the one in charge.

Just ask anyone trying to get out of multiple leases…

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.

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.

farming should be like baseball

Farm Management Could Take a Lesson From Baseball

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If you love statistics, then you probably love baseball. Where else can you know with certainty that your starting pitcher has a propensity to throw more fast-balls than breaking pitches to left-handed batters at home during afternoon games in June under sunny skies with a slight north-west wind? While this is a bit of a tongue-in-cheek poke at the nauseating volume of stats that originate from the game of baseball, such statistics and the subsequent use of those statistics have real world applications.

I’m sure many of you have seen the movie Moneyball. (I’m sure most of you have because I watch VERY few movies, and even I’VE seen it.) As the story unfolded, there many beautiful examples of how the management team of the Oakland Athletics baseball club used statistics to improve their team. In this specific scene (I can’t recall who the player was) Assistant GM Peter Brand (played by Jonah Hill) explicitly instructs the player to “take the first pitch” during every at bat.  The reason was because through the use of statistics, and tracking the data, management knew that this player got on base more often when he took the first pitch. In the movie, it worked, and this player’s on-base-percentage increased almost immediately.

What would have happened had this team’s management not had, or used, such important information? The player may have been released, sent down to the minors, or traded to another team, the manager (bench boss) may have been fired.  Spread those “uninformed decisions” across the entire roster, and failure is sure to proliferate.

Livestock and dairy farms have been heading down the road to improved data management for years already. Average daily gain is not a new concept in beef operations. Robotics in dairy parlors bring a whole new level of data management. In conversation with a farm family that is investigating the benefits of robotics in a dairy parlor, I’ve learned that through RFID technology and a robot milker, they will be able to record and monitor milk volumes and milking frequency (a cow can come to the robot for milking whenever she chooses.) The management team can then compare results across the herd to determine which cow(s) is producing more or less than others cows under similar conditions. Informed decisions can then be made.

Grain farms having been catching up in recent years. With field mapping technology we can create yield maps; overlay that with crop inputs applied and we can tell which areas of each field are more profitable than others.

But that is way ahead of where most of the industry is generally at. By and large, many farm operations still don’t know the true profitability of a specific crop on their whole farm, let alone any given field.

The progression of profitability management, which requires stringent data management, begins at the crop level, advances to the field level, and reaches the pinnacle at the acre level.

Imagine:

  • determining which crops to exclude or include in your rotation by clearly understanding which crop makes you money and which one doesn’t;
  • deciding which fields to seed to which crop, or even which fields to renew with the landlord or which to relinquish based on profitability by field;
  • controlling your investment in crop inputs by acre to maximize your profit potential of the field, the crop, and your whole farm.

None of this is new. All the farm shows and farm publications dedicate significant space to all the tools and techniques available in the marketplace to facilitate such gathering of useful information. Equipment manufacturers and data management companies have invested enormous volumes of time and capital into creating tools and platforms to collect and manage your data. But like any tool, its value is only apparent when it is used to its full potential.

Almost all of the farms I speak with achieve greater clarity in the profitability of each crop in their rotation. I have a 13,000ac client that has taken several major steps toward measuring profitability by field. They have found that the extra work required to COLLECT this information is minimal. The extra work required to MANAGE this information is greatly offset by the benefit of clearly understanding that some of their rented land is just not profitable under any crop. Do you suppose they are looking forward to relinquishing some $90/ac rented land that just isn’t profitable enough to pay that high rent?

Direct Questions

Which of the crops in your rotation are profitable? Which are not? How profitable are they? Do they meet your expectations for return on investment?

Collecting the data is easy; managing the data takes some effort. What effort are you prepared to invest to make the most informed decisions possible?

How are you fully utilizing the tools available to you? If you’re not, why would you have them?

From the Home Quarter

Baseball collects gargantuan volumes of data on players, plays, games, and seasons. Much of it seems useless to laypeople like us, but to those who make their living in “the grand old game,” the data is what they live and breathe by. Agriculture should be no different. We should be creating consecutive series’ of data on our fertility, seed, chemicals, equipment, human resources, etc, for each year we operate, for each field we sow, for each person in our employ. Management cannot make informed decisions without adequate and accurate information. Now, with all the tools, techniques, and support readily available to help farmers collect adequate and accurate information, the last piece that may be missing is, “What to do with all that data?” While it can be boring to analyze data and create projections, I can assure everyone that the most profitable farmers I know all share one common habit: they spend time on their numbers, they know their numbers, and they make informed decisions based on those numbers.

You collect the information. I can help you use it. I’ll make tractor calls (as opposed to house calls) during seeding…as long as you have a buddy seat. Call or email to set up a time.

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.

ROI and ROA equipment

Farm Acronym Challenge: ROI and ROA

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ROI (return on investment) is a metric I lean on heavily when working with clients to illustrate an expectation of profit. Each farm deploys (what feels like) unprecedented volumes of capital every year in an effort to grow a crop; there should be an expectation of profit for doing so, and I expect my clients to demand an ROI that reflects the risk they take. Accepting lesser returns is insufficient and could be realized with less risk by deploying said capital elsewhere.

We can break down ROI by measuring a return on various aspects: crop inputs, investment in equipment, annual cash costs, etc. Some of the many options against which we can measure ROI are highly useful, others less so. We try to decide which metrics to measure based on which gives us the most useful information. Of course, the ability to have an accurate measurement of ROI depends entirely on quality information and your ability to collect it.

ROA (return on assets) is a measurement I will be using more in the future than I have in the past. More and more I am finding that there are excess assets on farms, especially equipment, that are using good capital yet providing an inadequate return.  Here is what I mean.

ROA is defined as a company’s net earnings relative to total assets. By dividing net earnings by total assets, we see how efficient management is at using assets to generate profit. A company that generates $1,000,000 in net earnings on $5,000,000 in assets has a 20% ROA. A similar company generating $1,000,000 profits with $10,000,000 in assets has a 10% ROA. It’s simple math. And the question begs: if you had invested $10,000,000 elsewhere, could you get better than a 10% return on those assets?

Before the argument about land values is thrown out there, let’s just curb it right away. Yes, ROA can be manipulated (as can ROE – return on equity) by owning fewer assets. Banks do it all the time: they sell their owned real estate such as stand alone bank branches and ivory office towers in order to lower their total assets, thereby making their profitability (when measured as ROA) look fantastic.

Today, let’s focus on the asset that gets much love: farm equipment.

How would we measure ROA when it comes to farm equipment? I prefer to use Fair Market Value (FMV) because that figure represents both what it would cost you to acquire said asset and what you could reap should you sell said asset; it is arguably the asset’s intrinsic value. Online searches and blue book values are great ways to validate FMV. I summarize it as “when the auctioneer’s gavel drops, what would you get for that piece of equipment?”

Focusing on ROA as it pertains to equipment only, and excluding land, levels the playing field so to speak. All things being equal, this approach will clarify which farm management team is efficient with how it invests in equipment, and which is not.

Direct Questions

How do you measure the effectiveness of your investment in assets, specifically equipment?

Are you over-invested or under-invested in equipment? What evaluation methods do you use to validate your position?

If you were to invest your capital elsewhere, what return would you expect? What return do you expect from your farm? Is there a difference? Why?

From the Home Quarter

When calculating ROA, consider multiple criteria: all assets (land, buildings, equipment;) land and equipment only; equipment only. The ROA will obviously be much lower when including more assets, but don’t let that sway you into selling land to improve your ROA. Land ownership has been, and will continue to be, the anchor of a farm’s wealth.

What is a target ROA? The jury is still out. Simply put, there isn’t a large enough sample with adequate accurate information available to draw from.

So let’s find out!

With the utmost confidence and maintaining your privacy always, I am proposing an experiment: Email to me your net earnings, your cultivated acres, and your fair market value for each of land, buildings, and equipment for 2015. I will compile the data with no identifying criteria so that you maintain privacy. The compiled data will be available only to those who take part in the experiment. Include 2014 and 2013 as well if you’d like to see how you are trending.

As a thank you for taking part, Growing Farm Profits will offer an analysis with feedback on your ROA  and ROI calculations and trends at NO CHARGE! (Normally a $470 value!)  – Offer expires April 20

 

 

AITC

Shock and Awe During Ag In The Classroom

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It’s something I should have done long ago, but finally took the step and volunteered for Ag in the Classroom. Considering the rapid disconnect that non-farming people have from their farming roots, which is typically as many as 2 or 3 generations now past, we as passionate AGvocates must do our share (and more) to help bridge the gap, both the knowledge and culture gap, so that we all can achieve a greater understanding of each other.

My experience took me to 2 classrooms: Mrs Ewart-Molesky’s grade3/4 class at Grant Road School in Regina, and Mrs McMurtry’s grade 3 class at Jack Mackenzie School also in Regina. I was not surprised to learn that none of these children lived on a farm; the closest any of them came was one child in each class whose grandparents still farm.  What did surprise me was how many of these youngsters had never been to a farm. That reinforced my perception of just how far removed these young people are from agriculture.

Part of the program was for me to read the children an ag based story. The book that was provided to me by the Ag in the Classroom program was titled What’s Growing Around Us. The story journeyed through the experience of a school aged girl whose mother took her to several different locations to learn about where food really comes from as part of her own school homework. The children listening to me read this story were fascinated by how many products from their daily lives, products beyond food, are derived or partly derived from agriculture.

I took the liberty to give these children some perspective on just how much Canadian farmers can produce. I used real life examples of how big a field can be, how big an acre is, and just how much can be produced on that acre in terms that these children could understand. The “shock and awe” from these students at the number of loaves of bread that can be produced from one acre of wheat was quite entertaining.

I closed my presentation to these students by taking some more liberty. I found some pictures online that I used to clearly illustrate what a farm is today versus what is a stereotypical view of a farm. The faded red barn, open tractor,  handful of cattle, and a farmer in overalls is what the stereotype is, and as I expected, it is what the children gravitated to. The pictures I shared with these students of modern grain farms and equipment brought more “shock and awe.” Some of what I shared with them that day included an aerial view of a modern farm yard, complete with a grain leg, several large shops, and a large modern home; the inside of a tractor cab with all the monitors and controllers needed during seeding; and a drone (which was the REAL wow factor.) I explained that while they see the drone as a super-cool toy, farmers use the drone as a highly efficient tool for checking crops, livestock, etc.

I left no doubt in their minds that farming is very technologically advanced, probably more so than their homes, entertainment systems, and video game consoles combined. I felt it was incredibly important to stress that the perceptions of what is a farm have changed, and will continue to change.

Direct Questions

With farming practices and food production garnering more attention and press than ever before, what are you doing to share the positive message about agriculture?

How are you managing your operational practices against the message that we deliver to non-farming people to ensure that what we say and what we do are consistent?

What are you doing to be an agriculture advocate (or as we prefer to say, “agvocate?”)

From the Home Quarter

While I thoroughly enjoyed my time volunteering for Ag In The Classroom, it came and went very quickly. I will certainly make myself available to visit more schools and educate more children in the future. It was a very rewarding experience.

What I would like to do at some point is speak to a class of high-schoolers, young minds that are forming their own opinions on issues of the day whether influence comes from the media, at home, or their teachers, in an effort to challenge them on any misconceptions about agriculture. The Grade 3’s were hanging on every word I said, and soaked up the message like a sponge. The older kids will hopefully want to “get into it” a little bit where we could ideally have an open and respectful dialogue.

Can you tell I enjoy a good argument?

equipment efficiency

Managing Operating Efficiency

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“You can’t manage what you don’t measure.” It’s been said time and time again, by me and many others. Here is an example that should get everyone buzzing.

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:

Sprayer Utilization pie chart

 

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.

ag excellence

Musings from the Ag Excellence Conference

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Last week, I attended the Ag Excellence Conference. Facilitated by Farm Management Canada, this year’s edition was held in Regina. Touching into 3 days of information sessions, speakers, and networking opportunities, I was impressed by the quality of content and the discussions that arose.  The following are some of the major questions and statements of which I took note during the conference:

  1. Will continued population growth in developing countries be enough to sustain the price and demand levels we’ve currently enjoyed?
  2. Why do we try to hire the cheapest labor available but expect it to meet high expectations?
  3. Are farmers losing their “social license” to farm?
  4. Why is there such a low priority put on advancing business management among farms?
  5. Just how far can automation advance production agriculture over the next generation?
  6. Are our water ecosystems at risk?
  7. How will Saskatchewan land values be affected with new ownership rules taking effect?
  8. Are you entrepreneurial or intrepreneurial, and can you be both?
  9. Physical (crop) yield does not equal financial yield.
  10. Strategy is nothing more than a dream without a tactical plan.

From the Home Quarter

Unlike most agriculture industry events which focus almost entirely on production, the Ag Excellence Conference focused on business management. Attendees recognize the need to elevate management awareness and skills to help ensure the future viability and sustainability of farm businesses.
The questions and statements above were asked/stated explicitly, or simply implied during conversations. These points stemmed from various regions of Canada, and various sectors of agriculture (from grains to cattle, to vegetables, to dairy, poultry, and egg.) Everyone in agriculture is asking the same questions, and raising the same concerns.
Give consideration to each of points above. Do you have a thought or response to any or all? We hope to tackle these and other issues in the coming weeks of Growing Farm Profits Weekly™.

GFP FI 4

Knowing Your Costs – Part 2: “Misplaced Priorities”

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Last week, this article weighed in on the trend of increasing costs in certain areas of the farm, namely
Operations (equipment, fuel, people,) and Facilities (buildings, land, financing.) These are the two most
controllable expense areas in farm management. These are the two cost areas that have seen the
biggest increases.

Over the winter, an old colleague and friend made the following tweet through @RCGFarmWise:
tweetMoe Russell has spent well over 30 years in farm finance
and management, and he has been tracking this kind of
info for a long time. I trust his integrity and his
information. Essentially over 5 crop years, this says that
farmers have increased equipment costs 100% faster
and land costs 400% faster than they’ve increased input
costs. In a time of high commodity prices with yields that
were typically above the long term average, this was not
uncommon.

Recently I took part in a Farm Business Development Initiative (FBDI) seminar that brought together
approved consultants and learning providers (of which I am both) to discuss updates to the program.
(Lean more at https://fbdi.gov.sk.ca/) During a conversation there, I overheard one attendee saying
how he listens to farmers “bemoaning the $60/ac they spend on seed, but nary a word to the $60/ac
increase in equipment costs they just took on.”

It is not surprising to see farmers looking to inputs first when trying to find ways to cut costs. We justify
it by lamenting increases to seed, fertilizer, and chemical prices. We validate cutting inputs by
acknowledging that inputs require the highest cash cost per acre of anything else on the farm. There are
sound ways to cut inputs; I was enjoying listening to many clients describing how they are using generic
herbicides this year, focusing heavily on scouting to verify the need for fungicides versus just spraying
anyway, etc. But when I heard one who wanted to eliminate a broadleaf herbicide in his cereals to cut
costs, even though I’m no agronomist, I quickly brought risk management to that conversation. Every
decision needs to have a risk/benefit or cost/benefit consideration. There is too much at stake!
More to the tweet above, looking under the right rock is not easy because it will force each of us to
acknowledge how and where we’ve allocated our capital. If we know we should not have increased our
“operations” cost, it’s difficult to face that reality, swallow pride, and make a better (or corrective)
decision. This is magnified in year like 2015 when excess moisture ahead of seeding turned into drought
for most of the growing season, and adding to that the late spring & early fall frosts, we could find that
many will miss their production targets. Are you confident you were using the most efficient agronomic
plan possible? Will your “operations” costs be harder to manage with missed production targets? Will
you be looking under the “inputs rock” to find ways to cut costs?

It has been said many times that “you cannot shrink your way to greatness.” Cutting inputs for the sake
of reducing costs is “shrinking” your ability to generate strong revenue. Even the best marketing cannot
make up for lost production. Your priorities need to continue for you to be:

1. The most proficient manager you can be to build a strategic and tactical plan that maximizes
ROI, personal wealth, and family values;

2. The most efficient producer you can be to lower your Unit Cost of Production;

3. The most equipped marketer you can be to hedge market risk, and generate sufficient gross
margin.

By misplacing your cost cutting priority onto the critical facets of your business as listed in the 3 points
above, you would be doing more harm than good, despite best intentions.

Direct Questions

Where have your costs experienced the greatest increase (inputs, operations, facilities)?
In recognizing the 3 critical facets above that require your full investment (management, production,
marketing,) where can you find costs that can you live without?

How confident are you in your awareness and abilities to enact appropriate cost management
strategies?

From the Home Quarter

You won’t hear me condone a general prescription of “more fertilizer,” but you will hear me advocate
for “better use of fertilizer.” It’s not about the producing biggest yield; it’s not about producing at the
lowest cost; it’s about producing the best yield at the most efficient cost. And the most efficient cost
also refers to “operations” and “facilities.” The allocation of your finite resources to those costs also
needs to be highly efficient. As a banker friend of mine likes to say, “Your crop doesn’t care what color
your equipment is.”
…or how new it is.
…or how much rent the landlord is squeezing out of you.
The purpose of your business is to grow your profits, maximize your ROI (return on investment,) and
increase your wealth. Spending over $200/ac on “operations & facilities” costs will not get you there.