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2016 year end review

Reviewing 2015

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

Where were things one year ago? If you were like most, you were concerned about excess moisture from fall 2014, and about how you might get the crop in next spring. If you grew durum, you were likely troubled with how to market a crop decimated by fusarium. If you have hired staff, you may have been thinking about how to keep your good people over the winter so as to ensure you’ve got them in the spring.

Spring changed from too wet to a drought in about a 3 week period. Mix in a handful of late May frosts, and before the first in-crop spray was applied, many of you were not sure what kind of crop you might have. After the frost, many of you had re-seeded a significant portion of your farm. The frost and the re-seeding brought on a new challenge that was unforeseen to many: multiple levels of plant growth/maturity. What fun this created at harvest! Of course, that’s when most of the rains came…August and September.

Yields weren’t the disappointment most of us were expecting based on such little rain through May, June, and most of July. And while this kept many income statements from looking like a total disaster, there were far too many discouraging sides to crop rotations everywhere; returns resembled the early 2000’s rather than the last 4 to 5 years. Oil prices were dropping all year, and many of you began getting phone calls from people now unemployed from the oil industry to come work on your farm.

And so, in looking back over 2015 we want to focus on progress, innovations, shortcomings, and of course, lessons learned over the last 12 months.

Direct Questions

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

What innovations did you employ this year? How have you evaluated results to determine their success or failure?

Where did your business fall short of expectations in 2015? What did you learn from it, and what will you do different?

From the Home Quarter

Without getting too proverbial, if we don’t take the time to review results, we are likely to repeat our previous actions. Decisions that hurt our gross margin, or dramatically increased our controllable expenses need to be acknowledged and rectified. Decisions that maximized profits, or increased efficiency need to be leveraged even further. But we will never know if we don’t stop to look back once in a while.

 

For an impartial view of your farm’s 2015 results, our proprietary Farm Profit Improvement Program™ will clarify your financial position, and help you understand the factors that feed your growth or hinder your progress. Call me or send an email to learn more.

goal planning

Goal Planning 2016

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Thinking about 2016? Here are some of the goals that my clients are making a priority in the new-year:

  1. Reduce Equipment Cost per Acre
    Fully recognizing that equipment costs are one of the few expenses that are controllable on the farm, yet it is this controllable expense that is often least controlled, many farmers are looking hard to find efficiencies in their equipment line. The “nice to have” is being measured stringently against the “need to have” and consideration is being given to divesting assets that are deemed expendable.
  2. Establish a New Lender Relationship
    Each lender that plays in the ag field has an area of strength that makes them unique. Some rely heavily on equity; others focus more on cash flow. One may be strongest when lending for hard assets, another for operating credit, another for quota, and yet another for leasing. When your lender’s strong suit does not match your business plan, it is likely time to find a more fitting borrowing relationship.
    Unfortunately, if your borrowing approach has been piece-meal credit from several sources, the first step is for you to determine what your business goals are before seeking the right lender.
  3. Construct a Workable (Usable) Business Plan
    Having a formal business plan helps immensely when seeking a new lender. But if you’re only building a business plan to appease your lender, then please read on.
    A business plan is not a restriction like the “room seating capacity” on a liquor license. The business plan is your road map, your guide of the best actions to take in the immediate future based on expectations and identified risks. Your business plan will also lay out alternative maneuvers that will help you act quickly in the case of unforeseen circumstances.
    A business plan should not restrain you in a box; it should create awareness of opportunities & risks and lay out the best plan of action based on your existing situation and your goals.
  4. Define Appropriate Land Rental Rates
    In a trend fueled by greed, rental rates in many areas are now at unsustainable levels. Whether viewed as a factor of gross revenue per acre, or a factor of fair market value per acre, there are many geographic regions of the prairies where land rents are unsustainably high. (There are also some areas where rates are still very low/tenant favorable.) The landlords are not entirely to blame for getting us here, or for keeping us here. There first needed to be someone willing to pay exorbitant rates in the first place, and there continues to be those willing to keep paying them.
    Some of my clients desire a plan, a strategy, for determining a mutually beneficial land rent agreement with their landlords.  This can be a challenge when landlords are becoming increasingly distant and isolated from the goings on at the farmgate, not to mention absentee landlords who know nothing of modern farming. The argument for/against cash agreements, share agreements, and flexible agreements depends on many considerations, the most important of which is the relationship between landlord and tenant.
  5. Increase Financial Awareness and Confidence
    Even sophisticated business people find value in having an advisor critique the decisions being made on their farm. In a world with so much “noise,” confidence in our choices can be more difficult to realize when faced with multiple options (and no shortage of propaganda supporting/decrying each.) More and more farmers want an independent unbiased view of their financial position. Knowing where you stand today is key when trying to determine how to prepare for tomorrow.

Direct Questions

What are your goals for 2016? Have you documented them? Have you shared them with your family and/or your team?

How do you prioritize your goals? What makes them realistic and achievable?

What is your plan to ensure you meet your goals? What is your plan if circumstances change?

From the Home Quarter

A plan is only as good as the work that is put into it. It is true that things change very quickly in production agriculture: weather, markets, etc. Being prepared before such deviations will make managing the change easier, more efficient, and provide you more confidence when doing so. A business plan need not be a 48 page behemoth (who would actually refer back such large document throughout the year?) The purpose of your plan is to be prepared, decisive, and responsive. The physical document should reflect that.
We are helping several farm businesses refine their direction for 2016.
To set Your Farm Compass™ Strategy Plan for future success and growing profits, call me or send an email.

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.

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™.

grass

BMP – Best Management Practices

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BMP’s, or Best Management Practices, are also often referred to as “Best Practices.” Commonplace in
corporate culture, the primary benefit served by BMP’s is bringing consistency to methods or techniques
used to accomplish a task or objective. Also focusing on efficiency and ensuring the best use of available
resources, BMP’s are everywhere, even if they aren’t documented in a manual somewhere.

Your farm is no different. Over the years, you’ve likely established a BMP for the way in which you
service the combines in season. With good harvesting weather typically in short supply (especially this
year) you’ve got “a system” for how you deal with blowing out filters, cleaning windows, greasing,
fueling, and the circle check you do to identify trouble spots like belts, bearings, and chains. If, and
when, you have new employees on the farm, how do you convey your “system” to them?

Is it fair to say that the Best Management Practice you’ve worked out for servicing combines, for
example, isn’t available in an employee handbook, or even on a notepad somewhere? It’s in your head.
It’s just what you do. It’s habit. It’s automatic. It’s common sense.

What may be a common sense natural work flow to you might be as abstract as a foreign language to
your new helper, your spouse, or your kids.

You may have felt the same angst as your new helpers at harvest while listening to your banker describe
the nuances of your financing arrangement, or your lawyer discussing tax implications. It can feel like
they are speaking a different language.

In your business, communication is the answer. Any best practices you have developed over time
(documented or not) are useless if not effectively communicated to the right people.
Best Management Practices apply to many aspects of your business, such as:

  • Managing financial data
  • Processing invoices
  • Servicing equipment
  • Soil conservation
  • Employee engagement
  • Etc.

This list is by no means exhaustive and could go on & on. There is likely a best practice you could think of
for just about everything in your business.

Direct Questions

How many specific Best Management Practices do you already have in place on your farm? How many
are documented?

How could your stress level be reduced in the busy season if you had BMP’s documented for new
helpers to review and be comfortable with prior to “trial by fire?”

It isn’t realistic to implement a BMP for every task on your farm, but what would it take to do so for the
most critical functions that take place through the course of a growing season?

From the Home Quarter

Best Management Practices are everywhere, they are all around you whether or not you see them, have
formalized them, or even give them a moment’s consideration. They have helped you expand, do more
with less, and streamline workflow. They are available in all aspects of your business, if you chose to
seek them out and implement them.

Over the winter, I will be spending time with each of my clients working on several issues, with one
being Best Management Practices. If you’re interested in learning more, please email me or call
anytime.

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Innovation in Agriculture

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Innovation
Noun | in·no·va·tion | \ˌi-nə-ˈvā-shən\
: a new idea, device, or method
: the act or process of introducing new ideas, devices, or methods
(Source: http://www.merriam-webster.com/dictionary/innovation)

No one could ever decry the innovation of Canadian agriculture. Often looked favorably upon for
consistently being on the leading edge, Canadian farmers are typically the envy of other nations’
producers for our advanced processes and our willingness to constantly strive for something better.
Innovation takes many forms. It need not be monumental. It does not require a farm to re-identify itself.
While significant innovations like direct seeding and minimum tillage required major capital
investments, many others do not. If you’re like virtually every farm, there is innovation all around you…if
you take the time to look.

Consider the changes you’ve made to your farm since you began farming. Again, not just the big obvious
changes, but the little things too. The little things often make the biggest difference, and yet they are so
easy to overlook. Just think about the positive effect of doing your own grain moisture tests on farm.
I was having a conversation with a client recently about the impact of grain sampling and how the
grading at delivery points can sometimes be a bone of contention. He described in detail how and why
he samples every load as it is being augered from the bin onto the truck. This is an innovation he has
employed to ensure he has taken appropriate measures to protect himself during a dispute. It has paid
off several times in the past, and will likely be of continued value in the future.

An interesting conversation, to which I was privy, among a group of very progressive farmers was about
how each of them managed the challenge of “feeding their help” during harvest. Crews that number
well into the teens require more than a cooler full of sandwiches and donuts. One innovation that I
thought was most creative was the customization of an old Class C motorhome into a quasi food-truck.
While we automatically focus on operations when considering our success with innovation, we cannot
ignore the management side of business. A common issue among my clients this fall is land rent
renewals. Many of them are seeking better ways to access their rented land without taking on so much
risk with these high cost all cash arrangements. As with land prices, rents have also increased
substantially over the last several years (thank you Captain Obvious for contributing to this week’s
article.) Farmers, generally, are becoming less comfortable with the $70-$100+/ac they’ve added to
their LBF (Land, Buildings, Finance) costs for land rent over the years and are now recognizing that they
often can’t make money on that rented land. Unless you’re running a charity, one that benefits your
landlords, “re-think profit” becomes an innovation all on its own.

Innovation is refining your record keeping, automating your payroll services, or focusing on improving
your working capital. While innovation also includes variable rate, advanced water management, or
specialized grain monitoring systems, it need not always be BIG and OBVIOUS. I think the best
innovation for every farm is to examine how it views profit, growth, and wealth.

Direct Questions

How do you view profit, growth, and wealth? I define each as,

Wealth: – discretionary time.

Profit: – that what is required to fuel “wealth.”

Growth: – not necessarily “expansion.” Growth is innovation at any and all levels.
(Remember “always grow; grow all ways!”)

How can you bring about innovation in your management arsenal?

How does innovation make its way into your business? Do you invite it in, or does it have to force its way
in?

From the Home Quarter

I am a firm believer that change will continue to be rapid and drastic in the future. In terms of record
keeping and data management, it will one day be mandatory, so why not get on board before you’re
forced? Regarding my client’s issue on his grain sampling, I believe that future farmers will be forced to
manage their inventory similar to that of a food processor today. And if you have not heard the term
“social license” yet, then let this be the first. A farmer’s social license to farm could face scrutiny like
we’ve never seen before. All of this will require significant innovation. But, don’t fret over the big issues
yet. Start small with manageable innovations today.

Our proprietary Farm Profit Improvement Program™ includes analysis and advice on negotiating land
rental agreements. Please call or email for further details.

blindside

Bad Timing

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I recently spoke with a farm ownership team that needs help. They need help in labor and marketing,
but especially in management. They readily describe all that has gone against them, and quickly list off
all the reasons why they don’t have time to work on the tasks that I propose they tackle. They know I
could help them, but they’re too busy to hire me.

Years ago when I was a bank branch manager, one of the lessons I shared with my staff was “there is a
difference between business and busy-ness.” One will make you money, advance your career, and grow
your wealth. The other just kills the day, eats up precious time, and leaves you feeling empty.
This farm team I speak of is multi-generational. The party with the most at risk has the least control. The
debt has almost become unmanageable. The record keeping is minimal. Management decisions are
fragmented and lacking sufficient foresight. These are not my observations, these are their own
admissions.

The first time we spoke, their financial statements weren’t ready, so it wasn’t the right time. When the
statements were ready, they were seeding, so it wasn’t the right time. Recent follow up finds them with
about a third of their acres left to harvest, so (SURPRISE) it wasn’t the right time.

If we all allowed that thinking to be the rule of law in our lives, we’d never accomplish anything. I would
have never went back to school (attended college at age 25;) I would have never pursued career
advancement; I would have never made the leap from employment to entrepreneurship because there
could always have been an excuse to render it “not the right time.”

Guess what…it’s never “the right time.”

At least that is what we allow ourselves to believe when faced with a task, or an issue that we would
rather not deal with. None of us go shopping for a new canola seed variety in mid-May; we secure that
over the winter. Yet we rarely make a discussion with our accountant a priority until April…because
we’re just too busy?

Managing our respective businesses requires great priority. We take far too much risk in operating a
modern farm to allow our management to be an afterthought, or something that can be put off because
there’s something else to do.

Direct Questions

How often do you permit yourself to be mired in daily tasks and other work to the extent that you
essentially “avoid” the administration and management functions of your business?
How could your business be better if you begin to “make it the right time” to focus on management and
administration?

Is the fear of admitting that help is needed in management your reason for never making it the right
time?

From the Home Quarter

The right time is not when things get tough. The right time is not when the banker is forcing the issue.
The right time is not when there are problems to fix, or a wreck to repair. Preventing a fire is much
easier than fighting one. The right time is now.

When making management a priority it can be daunting to figure out where to look first. Our
proprietary Farm Profit Improvement Program™ takes the guess work out of figuring out where to start
by first providing you with a detailed financial analysis that identifies your danger areas and offers
solutions to mitigate the risks. Call me or email for further details.

doit

Soil Testing

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It’s soil sampling season. Hundreds of thousands of fields are yielding to the soil probe as farmers,
agrologists, and retailers are pulling cores as fast as they can before freeze up. The soil test is a crucial
decision making tool in planning the next year’s crop. Understanding each field’s organic matter,
residual nutrient levels, and pH levels are but a few of many factors that all come together in a soil test
report to allow you to make an informed decision on what it will take to produce a crop that meets your
expectations. Soil experts suggest that every field be soil tested every year. They surmise that each field
should be treated as unique and that using a whole-farm, or even crop specific, fertility management
strategy is not financially efficient. To paraphrase, how can one make decisions about fertility without
knowing what is currently available in the soil?

Despite some arguments that the unused nutrient can remain in the soil for future crops
(notwithstanding the varying disagreements over nitrogen losses,) over-fertilizing will use up working
capital in the current year. Under-fertilizing can limit your yield potential. Both are manageable risks.
So the question begs, “Why don’t all farms soil test all fields every year?”

“Labor” is part of the answer, so is “time.” If “cost” forms part of the reply, I have to seriously consider
mindset. What is the cost of a soil test on one field when measured against the risk of over, or under,
fertilizing? (Not to mention the value in being able to validate changes in your soil over the years.)
I would connect the same mindset to understanding a farm’s financial position before making business
decisions. Many farmers still do not make knowledge of their financial situation enough of a priority and
continue to make substantial business decisions based on emotion, or gut feeling. Pulling together your
net worth, income/expense, and cash flow statements provide you the same informed principles when
making financial business decisions as does the soil test when making crop and fertility decisions.
Understanding your farm’s financial position is crucial to making business decisions. Identifying how
your profitability, your equity, and your cash flow will be affected allows you to make informed choices.
These effects, once appreciated, can be measured against your business and personal goals to allow for
prudent and strategic business resolutions.

This leads directly into the heated debate over Big Data or Ag Data or whatever buzz word you prefer to
use. Without stepping onto that stage, the basis of the argument is the same:

  • Knowledge is power.
  • Uninformed decisions increase risk.
  • You can’t manage what you don’t measure.

While managing ALL you farm data is critical to the future of your success in the industry, I’m not
insisting that getting on the data train be 100% completed by everyone this winter. Like with anything
new, there are innovators & early adopters, and there are laggards, but the majority of us are
somewhere in between. Get over the mindset that the soil test is an excuse for retailers to sell you more
inputs; get over the mindset that “big data” will one day . This is about your business and how you can make
the most informed decision possible. Remember, you can only make informed decisions with quality
information.

Direct Questions

Would you write a cheque without knowing your bank balance? Would you accept regular information
from your bank that was “close,” or do you demand accurate reports each month?

Your soil test creates your “soil balance sheet.” Are you investing adequate time and effort into your
“financial balance sheet?”

The appropriate time for soil testing is after harvest but before seeding; once per year. How often are
you measuring your financial status? (HINT: it should be much more than once per year.)

From the Home Quarter

The parallels that can be made between doing a soil test and doing a financial review are many. While
there are subtle differences as well, the analogy is somewhat uncanny. Mindset comes up in this
discussion, as does data. In the end, it’s up to each business owner to decide how he/she will make
management decisions: with quality information leading to knowledgeable decisions, or by intuition
relying on emotion and gut-feeling. They’re almost as different as “black and white.”

Our Farm Financial Analysis service is akin to a report card, or a soil test report, of you farm financial
status. You get a clear and direct summary of strengths and weaknesses. It will also act as an indication
of the quality of your information (two benefits in one!) Post-harvest is probably the best time for a
Farm Financial Analysis so that you’re afforded opportunity to make changes (if necessary) before your
fiscal year end. Call or email for details.

GFP FI 2

Managed Risk – Part 5: Inaction

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While there could be many more “parts” to the list of topics that would fall under “Managed Risk,” I’ll
end it this week with one that I believe many people, maybe all people, face each day.
The list of reasons (excuses) we provide to support our decision not to act is virtually endless. They can
be found in the 7 Deadly Sins (pride, envy, sloth) or in almost any self-help book (communication issues,
inequality, stress) or even from psychological therapy (apathy, self-esteem issues, narcissism.)
Here are a few of the most monumental farm issues that are affected by inaction:

Business Structure

I recently took a call from a young man looking for guidance on how to manage the complexity of his
current farm arrangement. He farms with his dad and his brother; all three men have their own
corporation and their own land; one brother farms full time with the dad, the other is part time with offfarm
work. Tracking financial contributions and division of labor are a nightmare, and yet both look like
a cakewalk compared to managing “whose inventory is whose?” They are not happy with the increased
efforts needed to deal with these issues, they all know that there is likely a better way, but no one has
taken a step until the day I spoke with one of the brothers.

In this case, the inaction stems from unawareness: none of the men involved in this family farm had the
knowledge of what, if any, options were available, what questions to ask, or who to even ask for help.
It’s also common for inaction to stem from fear – fear of appearing incompetent by asking a “dumb
question,” fear of making the wrong decision, fear of rocking the boat and hurting the family dynamic.

Family Issues

Family issues challenge most intergenerational farms. There are many varieties, and most are worthy of
a book being written on the topic. Elaine Froese wrote Farming’s In-Law Factor. There should be books
written on “How to Fire Your Father” and “Decoding Motivation: How to Translate Boomers, Gen X’ers,
and Millennials.” If only…

The most common reason for inaction on family issues is “I don’t want to blow up the farm.” The
problem is that inaction can blow up the farm with greater odds than if action was taken! Unless the
family member you’re dealing with has truly sinister motivations, the likelihood of a successful dialogue
is quite positive. No one wants to destroy the farm or the family, so with the appropriate approach,
success can be had. The inaction for family issues predominantly stems from fear. Coaching is available
to help families deal with these types of issues.

Transition

Considering the average age of a Canadian prairie farmer today, the volume of farm transitions to take
place over the next 10 years is staggering. The cumulative value of assets that will change ownership
would dwarf the GDP of some small nations. With so much at stake, why does every farm not have a
succession plan already in place (or at least in progress?)
Inaction on this front increases the risk of the following:

  • Future family fighting
  • Colossal tax obligations
  • Destroy the farm business
  • Your legacy lost

Excuses (reasons) for inaction here are unacceptable. It is nothing short of reckless and irresponsible to
leave undone a function with such enormous impact. There is no shame in not having all the answers, or
any answers for that matter. Farm transition is a process, not a result. The process becomes a path of
discovery, but if you insist on keeping your blinders on, don’t be surprised to one day deal with any or all
of the 4 bullet points above.

Direct Questions

What is your main reason for inaction? “No Time” is an excuse. “Fear” is a real reason, but only you can
conquer it.

What have your accountant and lawyer provided you for advice regarding your future transfer (sale) of
assets?

In a family business, inaction increases the probability of irreparable family dysfunction. What is getting
higher priority: family harmony or fear of perceived conflict?

From the Home Quarter

What must happen to make an issue a priority? Is it an immediate tangible loss/damage, like an
equipment breakdown in season? Is it emotional goal, like a new pickup truck? Is it perceived (assumed)
risk, like assuming your employee will quit unless he’s granted a wage increase?

Making an issue a priority is the best way to beat the risk of inaction. The fear of the perceived
outcomes or the fear of not knowing how to proceed gives us permission to keep urgent issues down
low on the priority list. But at what point does reality and rational reasoning take over so that we
recognize that the risk of inaction has more negative potential than that of any perceived outcome?
In retrospect, “inaction” is not so much a managed risk, but an unmanaged risk. Managing our
“inaction” actually reduces, or even eliminates, the risk.

If you struggle with inaction…
For a no charge consultation on where you are best to replace “fear” with “priority,” please call or email
me anytime.

horizon

Managed Risk Part 2 – Interest Rates

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In a conversation recently with a young farmer, who I feel is a poster boy for excellent business
management, he disclosed that he’s far more concerned with rising interest rates than low commodity
prices. During our brief exchange on this topic, I stuck with my position that interest rates, if they move
up at all, will see modest increases because when we consider the volume of credit currently
outstanding, the effect (desired or not) of any increases would be dramatically slower spending and
investment. Currently, I see no reason domestically to raise interest rates. His position involved a
number of macroeconomic factors including China, the US, and the EU. Admittedly, I’m less fluent in
how China’s recession will affect the Bank of Canada’s prime rate or how it will trickle down to Canadian
agriculture, specifically primary producers, but no doubt there is an impact to consider.

Just because the Bank of Canada may not be raising its prime rate does not mean that lenders won’t
raise theirs. The Bank of Canada prime and the chartered bank’s prime are related, but not directly
connected. The Bank of Canada makes its decisions on economic factors. Lenders make their decisions
based on business factors and their expectation of a profit. Lenders most likely recognize that increasing
rates now would be harmful, but again they have profit expectations and dividends to pay.

Is your business the same? Do you have a profit expectation and dividends to pay to shareholders?
It was encouraged in Growing Farm Profits Weekly #11 on March 17, 2015 for everyone to do an
interest rate sensitivity calculation. I would enjoy hearing from readers who did an interest rate
sensitivity to understand what they learned from the exercise. For those of you who didn’t do one, here
are some points to ponder:

  • Interest costs on term credits are controllable only at the time you sign documents, or at
    renewal.
  • History shows that over the long term, floating interest rates are cheaper than fixed rates.
  • While enjoying the consistency that fixed rates offer, consider the ramifications of renewing all
    your fixed rates at the same time. Having no control over, nor any idea of, what future interest
    rates will be, what is your strategy to manage this risk?
    HINT: it’s something you climb, but it isn’t a tree. Call or email if you want to explore further.
  • The interest rate you pay to your lender is a direct representation of 2 factors:
    • The cost incurred by the lender to acquire the funds being lent to you, and
    • Your lender’s view of how risky your particular business is. IE: you might pay more or less interest
      than your neighbor if the lender views your farm as being more or less risky than your neighbor’s farm.
      (This is the significance of knowing what’s important to your lender!)
  • Competition for business is the 3rd factor affecting your interest rate – and it goes both ways.

At the end of the day, your control is over how much you borrow, and for what purpose. Bad debt is
unhealthy enough, but interest on bad debt is worse. Your interest strategy needs a blend of fixed and
floating rates, varying terms, and payment dates that align with your cash flow.

Direct Questions

Consider the pros and cons for each of “blended payments” and “fixed principal plus interest
payments.” Which payment structure best fits your needs?

When doing an interest rate sensitivity test, do the results scare your socks off?

What is your strategy for managing loan interest?

From the Home Quarter

The great equalizer across all farms is Mother Nature. What isn’t equal is how each farm manages risk.
Those who are averse to any debt often miss out on growth opportunities. Those who have a flippant
approach to debt often find themselves painted into a corner. It is a strategic and measured approach to
managing risk that sets apart the players in the game.