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Renting Farmland

Are You Renting Farmland?

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

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

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

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

What?

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

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

Eww, ouch! That stings!

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

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

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

Direct Questions

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

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

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

From the Home Quarter

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

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

asset rich cash poor

Asset Rich, Cash Poor (Kim Quoted in the News)

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A tweet led to an email, which led to a phone call…

It was back in March that I tweeted the following:

This, and the short Twitter conversation that followed it, garnered an email, and then a telephone interview with Jennifer Blair from Alberta Farmer Express.

Below is an excerpt of what she wrote. For the article in its entirety, click here.

” ‘The funny thing about prosperity and successive years of prosperity is it allows people to form some really bad habits,’…

…And for those producers, being ‘asset rich and cash poor’ isn’t going to cut it anymore.

‘When you look back over the last two generations, it seems like the mantra has been that farmers are ‘asset rich and cash poor.’ It’s almost worn like a badge of honour,’ said Gerencser… ”

Direct Questions

What do you think? Have assets, especially equipment, been increased too fast to the detriment of cash holdings and future cash flow?

What is a reasonable level of investment in assets relative to your net profit? Are you earning an adequate return on your investment?

From the Home Quarter

Bad habits can form easily, but like any habit, bad ones can be broken. Chasing equity is something we’ve always done and that may have worked a generation ago, when the risks were as they are today but the volumes of cash at risk each year were far less. We cannot do what we’ve always done and expect a result different from what we’ve always gotten.

Asset rich and cash poor will not suffice through the next business cycle.

I’d like to hear your thoughts; leave a Reply below.

grain terminal

Outlook for Cash

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The biggest issue that I am working on with clients right now is cash. Cash continues to be tight at the farm gate, and our ability to predict cash flow is, as it always is, difficult. Even when we can contract grain sales with an adequate price and delivery date, the likelihood of actually being able to deliver as per the contracted date is often low. The challenges of managing debt and payables under those type of situations can be debated for days. We won’t berate it now.

As we look back over the last few years, we can identify what led to the current cash shortages. There is no point chiding anyone for those past decisions. What is in the past cannot be changed; we must acknowledge it and learn from it. After all, if we don’t learn from history, we’re doomed to repeat it.

Here are 3 strategies for managing cash as developed from my years in commercial lending and working with farmers on financial management:

Be conservative with projecting cash inflow.

Cash outflow has been allowed to increase lock step with, and sometimes outpacing, increases in cash inflow. This despite everyone knowing that farm cash inflow can be as unpredictable as the weather. Now we see many operations that are facing cash inflows like 2008 on required cash outflows of 2016. Calling the situation “tight” is at times an understatement.

Consider your lowest profit year in the last 10 years, and use your cash inflow from that year to compare it against your required cash outflow for 2016. How does that make you feel?

Protect working capital.

Recently, I tweeted, “Asset rich and cash poor will not suffice through this next cycle.” Many farms have squandered their opportunity to fill their working capital war chest because of large assets acquisitions and taking on significantly more debt for those acquisitions. Now, many of those same farms are borrowing every penny needed to operate the farm through a growing season. Working capital will be the greatest source of opportunity in the coming years. Access to adequate working capital could be the most limiting factor.

I read a piece recently that interviewed Dr. David Kohl (who I’ve quoted in the past.) Dr. Kohl says that his belief is the 60:30:10 profit plan. Of your farm’s profits, he says that 60% should go to growing the farm and making it more efficient, 10% to dividends, and 30% to working capital. Considering the general lack of working capital on currently on the farms, I suggest that the rule, in the short term anyway, be more like 80/20 with 80% of profits going towards building working capital and 20% going towards growth and efficiency; dividends might just have to wait.

Actually create and maintain a running cash flow statement.

Going through the exercise of constructing a monthly cash flow statement is often an “A-Ha” moment. Being able to clearly identify where and when your cash is flowing helps you understand how and when to best use operating credit, plan grain sales, or structure payment dates. While it is not new news anymore, it is worth repeating: set your payment dates for when you’ll actually have cash!

This is also a beneficial step to improving the relationship you have with your lender. When you can look your lender in the eye and tell them exactly how much operating credit you need, when you’ll need it most, and when you’ll pay it back shows that your focus on management is meeting their expectations.

Direct Questions

What changes would you make to your 2016 plans if you knew your cash inflow would be similar to your worst year in the last 10?

How have you invested your profits? How will you invest future profits?

What does your 2016 monthly cash flow projection look like?

From the Home Quarter

The outlook for cash will reach critical importance in the near future. Working capital will be the fuel for your growth in the coming years. Equity is the backstop. Equity does not pay bills, cash does. When cash is gone and unlikely to return, tapping into equity can replenish working capital, thus the “backstop.” The chase for equity over the last several decades in an effort to be “asset rich and cash poor,” like it was a badge of honor or something, has created a generation of farmers who would prefer to be rid of debt to the detriment of working capital.  It might be possible to finance growth and expansion without cash, but it is not possible to operate it.

analyzing finances at the bin

Using Your Financial Information

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Last week, we described how compiling your financial information will be beneficial to you in being able to analyze your previous year’s results so as to equip yourself in making informed decisions in the current, and future, years. This week, we discuss how to use that info.

Critical Balance Sheet Metrics

  1. Your Current Assets should be greater than your Current Liabilities by an amount that at least matches your cost to put in next year’s crop.
    Ideally, the difference between current assets and current liabilities should at minimum match your entire costs to run your farm for one year.
  2. You want your Total Liabilities to be no more than your 125% of your equity after net worth adjustments have been made.
  3. ROE is an acronym for Return On Equity. It is your net income divided by your net equity. Are you happy with the returns you’ve earned in each of the last 5 years?

Critical Income Statement Metrics

  1. First and foremost, is your Income Statement accrued? You can tell if you find an adjustment, up or down, to your income that would be labelled “inventory adjustment.” If your income statement is not accrued, call me for a quick description on how to do it yourself. It’s easy.
    Accruing your income statement is the only way to truly measure your profitability from the crop produced in a specific year.
  2. Did you have a profit? EBITDA (Earnings Before Interest Taxes Depreciation & Amortization) is a very important figure to know. It represents your profitability from operations; it shows you can generate profits. The calculation is Net Income + Interest Paid + Taxes Paid + Depreciation Expensed.
  3. Now that you’ve got EBITDA calculated, divide it by the following figures: Current Portion of Long Term Debt (found on balance sheet) + ALL interest paid (found on income statement) + ALL lease payments made (found on income statement). This is an important indicator for your lenders. This figure indicates to them your capacity to meet your financing obligations.

Critical Cash Flow Statement Metrics

  1. Cash Flow from Operations divided by Gross Sales indicates how many dollars in cash your business generates from every dollar in sales. The higher the figure, the better.
  2. Cash Flow from Operations divided by your “Property, Plant & Equipment” indicates how well your business uses its hard assets to generate cash.
  3. Cash from Financing divided by Cash from Operations indicates how dependent your business is on financing. The higher the figure, the more dependent on external money.

Solvency Calculations

Liquidity Calculations
Liabilities / net worth current assets / current liabilities
EBITDA / loan payments, interest & leases current assets – current liabilities

 

Direct Questions

Does the thought of doing such calculations overwhelm you, scare you, or just plain bore you? If the urgency of knowing these numbers doesn’t strike urgency into you, are you willing to ask for help?

How would you describe the benefit to your decision making if these figures were readily available?

From the Home Quarter

The comment has been made time and time again: “It’s easy to make money in the good times.” With tighter margins of late, more attention than ever before is being paid to management and finances. These calculations above are only a few of the measurements that you can take to gauge your financial strength or weakness.

And if you need a hand figuring out what to do next, contact me any time.

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.

information

Managed Risk – Part 4: Liquidity

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We’ve all heard the saying “Cash is King.” In my opinion, “cash isn’t king, it’s the
ACE!” Whatever metaphor you prefer, the point is that cash levels and cash flow are both critically
important to your business. So, let’s get right to four points that affect your liquidity:

1. Your view of cash.
When I was still farming, I asked dad when he wanted to receive his rent payment, now (at the
time it was late November) or after January 1. He replied, “Well, I wouldn’t mind seeing a bump
in my bank account now, but I’ll wait until January for income tax purposes. Why?” When I
admitted that at that time we had no cash and would be dipping into our operating line of
credit, he said, “I thought you said your farm was profitable.” Our farm was profitable. He
couldn’t wrap his head around the fact that a profitable farm might not have cash always at the
ready, especially a small farm still in its youth. He equated profit with cash in the bank. After
arguing the point for 5 minutes, he just shook his head saying, “I guess that why I’m not farming
any more, I just can’t take that much risk.”

What he was getting at with his final comment was how we very quickly allocated our cash that
year. With harvest sales, we cleared up all accounts payable, pre-bought some fertilizer, and
paid down our supplier credit. The bins were still full, and with more grain sales scheduled for
the weeks and months ahead, our working capital was strong.

What is the difference between cash on hand and working capital? (HINT: if your answer is
“nothing,” then think again, a little deeper this time.)

2. Your use of cash.
Over the last few years, how many new pickup trucks were paid for out of working cash or put
on the operating line of credit? This is one example of a poor use of cash. A business that is flush
with cash can be a dangerous thing in the wrong hands, but don’t fret because the laundry list of
vendors all clamoring for your money will offer plenty of opportunity for you to part with it.
Do you justify some of these types of expenditures as part of a “tax plan?”

3. Your timing of cash.
One of the major challenges for manufacturing companies is the “cash conversion cycle.” This is
the time it takes to convert raw materials into cash. This cycle happens frequently in a
manufacturing firms operating period, often several times each month or quarter (depending on
what they are manufacturing.) Your challenge in the business of farming is that you only get one
cash conversion cycle per year. You invest in inputs early, manage through a long production
cycle, only getting one chance at producing the crop that will be sold for cash, and eventually
selling it sometimes as late as half way through your next production cycle. It is this long cash
conversion cycle that makes cash management vitally important on your farm.

How long is your farm’s cash conversion cycle? (HINT: it is measured in days.)

4. Managing your liquidity.
Working capital is a component of your liquidity. Measured as the difference between current
assets and current liabilities, your level of working capital is a direct indication of your business’
ability to fund its current operations. This, or course, is critically important to your lenders.
The desire to utilize easy credit and therefore finance everything from combine belts to
hydraulic oil may sound like a simple way to keep the wheels turning. If your farm is without
cash due to poor crops/pricing/etc. from the previous year, then available credit is a lifesaver to
help you keep operating. Just remember, such a scenario is a short term solution, and by no
means can it be considered a long term strategy. Sooner or later, your creditors will tire of
holding all the risk of funding your operations. Your working capital must be built and
maintained.

How much working capital is appropriate for your farm? (HINT: it’s probably more than you
think.)

Direct Questions

How do you view cash? Does it only have value when allocated (spent,) or is it an essential asset on the
balance sheet?

If you believe cash in the bank is an indication of profitability, can you not save your way to increased
profit?

How would you describe the financing cost to your business relative to the long cash conversion cycle
and the cost of credit?

From the Home Quarter

I had heard a seasoned old banker years ago say how “farmers don’t like to have money in the bank,
because as soon as it gets there, they spend it!” When there is cash in the bank, we feel profitable, and
often the decision is to allocate that cash to another asset. Will that other asset help repay liabilities?
For as long as I can recall, this industry has always dubbed itself “asset rich & cash poor;” the push
among players has been to build equity. And while the chase for equity is noble, equity does not pay the
bills, nor does it make loan payments, nor does it meet payroll. Cash does.

We must make cash management an utmost priority. If we are relying on financing for most/all of our
daily operations (operating credit,) what will happen if/when a lender does not renew those lines of
credit? Do you recall the ruckus out of the US each time they need to “raise the debt ceiling?”
Potentially, all government operations would get shut down. Same goes for your farm. If you have no
cash, and your credit lines get called, what are your options? I can tell you, they aren’t pretty.

It does not matter whether you believe “Cash is King,” or “Cash is the Ace.” If you have neither, you
might be forced to fold.

life

Managed Risk – Part 3: Credit

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You’ve read how I am a fan of Seth Godin’s daily blog. His entry on Thursday September 17 was titled
Serving Size. He writes about how it is “our instinct to fill the bowl” with “bowl” being a metaphor that
could apply to anything and everything from our homes to our egos. For now, let’s consider the “bowl”
to be thought of as “debt.”

If you’re like most farm businesses, you’ve been getting a bigger debt bowl over the last 5-7 years. In
fact, I would bet that if you looked back at your statements from 2005, you would wonder how you even
managed to operate with such little debt (relative to what you’re carrying today.) This is not unique, and
considering western Canadian agriculture (especially grains) has been in a boom for the last 7 years or
so, it is of little surprise that debt levels have also increased.

The question then begs, “How big can the bowls get?”

Lenders love to see strong cash flow and increasing equity. Record cash receipts and appreciating land
values have bolstered lenders’ appetite to lend into agriculture. With money being as cheap as it is (low
interest rates,) farms’ debt bowls have been easy to grow.

What’s been filling all those bowls? Primarily it has been rapidly appreciating land and an insatiable
thirst for more and newer equipment. You’ve read here in the past that there is a distinct difference
between “good debt” and “bad debt.” I challenge everyone to evaluate what is in their “bowls” and
identify the “bad debt.” What percentage of your total debt could be considered “bad?”

Generally speaking, bad debt is the unnecessary debt. Often poorly structured, it eats up cash flow like a
game of Hungry-Hungry Hippos chomps marbles, and it uses up the finite space in your bowl. Yes, there
will come a time when a bigger bowl cannot be had, and it is then that many will wish they had managed
their credit a little closer.

We talked about interest rates in last week’s article, and it spawned more reader feedback than I’ve
received in a while (I’ll credit that to harvest being a greater focus than commenting back to me.) Gerry
Bourgeois, Scotiabank’s Director of Agriculture Banking for Saskatchewan & Manitoba, offered an
interesting strategy in his reader feedback: “With interest rates at an all-time low, farmers with a lot of
debt on their balance sheet should be taking advantage of these current rates to consider locking in 5, 7,
or even 10 year money.” Acknowledging that rates are still going to go up, even if it will be later than
many had expected, Bourgeois says, “I view the current low rates as a compressed spring. Once they
start moving up, they will move up quickly.” He goes on to suggest “locking in rates and using derivatives
to hedge interest rate risk” as a sound strategy many farms could consider.

“Similar to how a farmer would use commodity derivatives in a trading account to hedge his commodity
pricing, we use financial derivatives to hedge interest rates on larger transactions,” Bourgeois says.
Using what are called Banker’s Acceptances, he describes how a “swap” works as a hedge against rate
increases, and alternatively can even goes so far as to structure a “cap” on potential future interest rate
increases, functioning like interest rate increase insurance. “Utilizing these market instruments can
provide greater flexibility in your hedges down the road,” he concludes.

To put more emphasis on managing your credit, here are some focal points to get you started:

  1. Understand how your lender views your business. Are you seen as risky? Are you considered
    highly leveraged? (IE. Can you get a bigger bowl, and if not, is it right full?)
  2. Recognize how your cash flow matches up with your debt obligations? More specifically can you
    meet your debt obligations should your cash flow decrease?
  3. Eliminate bad debt, and keep it out of your operation. Just because you can afford the payments
    today doesn’t mean you should buy, and it certainly doesn’t mean you can afford the payments
    next year either.
  4. Look back at the worst year you’ve had profit wise in the last 10 years. How much debt could
    you service if that was your profit for the next 3 years? Let this be your guide.
  5. If your bowl is full, what is your strategy in case of an emergency (Eg. tractor needs an engine)
    or an opportunity (Eg. prime land unexpectedly hits the market)

Direct Questions

What are you doing to protect yourself from market changes? (Eg. interest rate moves, lender’s
adjustment to credit policy, etc.)

How can you strengthen your overall debt structure?

What happens if your lender instructs you to use a smaller bowl?

From the Home Quarter

Every business needs access to credit to facilitate growth. It is the reckless depletion of many farms’
credit capacity that will further heighten a potential cash flow crisis stemming from shrinking gross
margins. While we cannot change the decisions of the past, we can learn from them. And there is no
time like the present to take steps to improve your debt situation if it’s not currently ideal. There is no
time like the present to strengthen your credit structure to protect what you’ve built considering the
current lending environment.

There are many circumstances where it is a smart decision to get a bigger bowl, but it is often smartest
to know when the bowl is big enough, or even when to get a smaller one

farm

Managed Risk Part 1: Harvest Sales

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In an email last week, a farmer friend and former colleague of mine admitted to having 100% of his 2015 crop sold before harvest. It is the first time this has ever happened on his farm. From my years working in ag finance and farm management consulting, I can confidently say that virtually all farms are not 100% sold on new crop in advance of harvest.

As with anything, there are benefits and drawbacks to being 100% sold early in the crop season. It’s easy to identify the drawbacks: production risk (broken into yield risk and quality risk), opportunity risk (if the market appreciates after you’re sold), etc. etc. We’re not going to dwell on these because it’s safe to say almost every farmer has already spent more than enough time hashing and rehashing all the reasons why they shouldn’t sell too early. There are far more drawbacks that have been touted over the years (real, perceived, or otherwise) than I care to scribe. You’ll notice I didn’t put weather risk on the list; it is because we cannot influence or control weather. Why stress over that which you cannot control?

How about some of the benefits:

  • Reduced delivery risk
  • Eliminated market risk
  • Reduced storage risk
  • Controlled cash flow risk

When admitting his crop was 100% sold already, my friend and I didn’t get into the details of what was in place so that he felt comfortable making such a decision. He did acknowledge that prior to harvest the prices were too good to pass up. While price is an important factor, price alone is not sufficient to pull this trigger. Here’s more on what you need if you want to be a more aggressive price maker, instead of a passive price taker.

  1. Excellent relationship with your buyers.
    When it comes to dealing with quality and grading, delivery times, or anything in between, a solid relationship with the buyer of your grain is crucial. Try using a sense of entitlement when next dealing with your buyers and see how far you get. This one is obvious; we won’t dedicate any more space describing what you already know.
  2. Know your costs, especially Unit Cost of Production. As one of my favorite young farmers likes to say, “You can’t go broke by selling for a profit.” Such true words require that you know what it cost to produce a bushel or a tonne so that the price you accept is actually profitable. This isn’t an easy task before harvest, but those farms that have elevated management functions can clearly illustrate UnitCOP with allowances for deviation in expected yield or quality. Refer back to point #1 when dealing with those deviations.
  3. Abundant Working Capital.
    Any drawback, real or perceived, to selling most of your crop ahead of harvest is mitigated by having abundant working capital.
    The biggest selling benefit from having abundant working capital is being able to sell when you WANT to instead of when you HAVE to. The ability to sell on your own timeline affords you the opportunity to deliver in your preferred month, and to seek out your preferred price. Abundant working capital also alleviates the fear of costs incurred from not meeting contract requirements when aggressively forward selling. The hesitation felt from the potential of having to “buy out” a contract if specs aren’t met can be eliminated if working capital is abundant.

It is not unreasonable to see more reluctance this year among durum growers to forward price as aggressively as in the past. The fusarium fiasco of 2014 hurt numerous farms financially and created an air of hesitation. But if working capital was a non-issue on every farm, durum growers would not be shy to forward price after the 2014 experience. While none want to set themselves up for unnecessary cost incurrence, the ability to handle the potential cost alleviates the concern of incurring it.

Direct Questions

How would you rate your relationship with your grain buyers? What can be done to improve it?
How would you describe your knowledge of your Unit Cost of Production, and net profit margin?
What is your current level of working capital and what does it need to be to provide you with full confidence to aggressively forward price?

From the Home Quarter

Please let it be clear that this message is not encouraging everyone to sell 100% of new crop production ahead of harvest. Such a strategy takes on risks that not every farm can mitigate. But if you are desirous in forward pricing more new crop than you have in past years, then let this message offer you some tips on what you need to have in place to make that happen.
You may have noticed that working capital is a central theme to many messages delivered here weekly. If you are able to focus on only one priority, let it be working capital.
Our proprietary Farm Profit Improvement Program™ begins with working capital evaluations and True Cost of Production analysis. Please call or email to learn how this process can bring value to your farm.

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Is Data Management Really Important?

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“Every company makes information management an afterthought.”

This was something a friend of mine said this weekend as we were chatting about everything from our
respective businesses, to politics and religion, to parenting. He qualified his statement using the vehicle
we were riding in as his example; “Do the (car) manufacturers build an information management system
into the dash of each car that they can charge more for? Of course not, because no one would pay for
it.” Essentially his message was that vehicle buying consumers are less interested in knowing and
measuring all of the vehicle’s varying functions and processes, they only want the basics. They just want
a vessel to get them where they’re going, one that looks good and is comfortable/fun to drive, and has
the power and/or efficiency they desire. End of story.

I challenged his theory as it would relate to other entities (especially large corporations,) and without
hesitation, he stayed his course. I really thought that larger corporations, those with hundreds of
millions or even billions in net worth, would have enviable information management systems and
processes. My friend said, “The focus is primarily growth & profits and how to accomplish it, with
information management being thrown together afterwards.”

I reflected on my own time in corporate Canada and the (sometimes) hodge-podge of reports I would
receive to (supposedly) help me better manage my branch or my client portfolio. Even though I didn’t
want to admit it, I knew my friend was right.

So, now you’re thinking that if big business doesn’t make its own information management a priority,
why should you? I’ll give you 2 words: working capital.

Strong working capital gives any business the cushion to make mistakes. It allows business to do things
less than ideal. This is not giving permission to be less than adequate, but it’s the reality of finance.
Lenders won’t run from a borrower that has done a less than ideal job of information management
when that borrower’s working capital is very strong.

“Very strong” working capital for your farm would cover 100% of your annual cash expenses. If your
farm’s working capital is not very strong, then the argument to not make information management a
priority is very weak. Very strong working capital is not permission to be lax on managing your data. No
entity in any industry should allow their business data to not be highly managed. The risk that this
creates is high, but the opportunity cost is higher yet.

Why are farm equipment companies, seed companies, fertilizer companies, chemical companies, etc. all
so interested in farm data? They recognize the opportunity cost of not being highly responsive to their
clients. You need to be interested in your farm data so you can be highly responsive to your business
opportunities. No one will manage your data but you.

Direct Questions

Are you allowing data management to be an afterthought? Do you have the working capital to support
this (lack of) action?

Have you considered the opportunities you could leverage if your data was highly managed? How many
opportunities have been lost over the years?

Do you recognize that saying “I don’t want those big multi-nationals to mine my data so I won’t compile
it” is a weak excuse?

From the Home Quarter

Large firms can get away with inadequate data management because they have the working capital to
cushion them from the results of less than ideal decisions. Small firms, such as your farm, likely do not.
(Small firms, by definition, are measured by market capitalization and number of employees, and usually
are those under $100million net worth and/or those with fewer than 100 paid employees.) Any
decisions on your farm that could be “less than ideal” will affect your working capital, positively or
negatively. The questions then become,

  • Was the positive impact to your working capital as good as it could have been (opportunity cost)?
  • Can your existing level of working capital handle a negative impact (risk)?

At the end of the day, highly managed data will support working capital and your ability to increase it.
Working capital will support your growth strategy and your wealth goals. The two are intertwined, and
in this current environment of high risk and tight margins, you cannot afford to be without either.

If you’d like help planning your data management process or strengthening your working capital, then call me or send an email.

horizon2

Austerity

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We’ve been hearing the word “austerity” in the media for quite a while now. Whether it be issues in the
EU, or right here in Canada (Quebec), it’s become a “buzz-word” as of late.

Merriam-Webster defines austerity as “a simple and plain quality; a situation in which there is not much
money and it is spent only on things that are necessary; austerities: things that are done to live in a
simple and plain way.” http://www.merriam-webster.com/dictionary/austerity

Based on that definition, I like what that word represents. Maybe that’s because I grew up on a small
mixed farm in Saskatchewan in the 80’s. There wasn’t a lot to be had that wasn’t “necessary.” Don’t get
me wrong, we never went without the necessities, but I wore $20 running shoes from Army & Navy, not
Nike Air. I guess I was raised under austerity.

There was an article published in Country Guide this spring titled “Have Higher Farm Incomes Changed
the Way You Think?” It opens by describing the near perfect correlation of rising farm income to rising
new farm equipment sales. The fourth paragraph reads; “So the question is, do those periods of high
incomes create a kind of euphoria or recklessness that induces farm managers to make longterm financial decisions that could seriously reduce profits in future years, especially if revenues
fall?”

I think we know the answer to that question. And, so what now?

Well, who is considering an austerity plan for their farm?

Remember, austerity is spending only on things that are necessary. It’s easy for us a humans to blur the
lines between “nice to have” and “need to have” because we allow emotion to interfere with our
decision making.

Needs

  1. Bushels.
    You need to maximize yield in the most efficient way possible to produce at the lowest Unit Cost
    of Production your farm can provide. An Agrologist can help and should prove his/her value
    every year.
  2. Cash Flow.
    You need positive cash flow to meet debt and lease obligations, pay for inputs, land rent, wages,
    etc, etc, etc. Grain marketing is often where the best gains can be had, or can be lost. Diligent
    marketing with quality information (or lack thereof) can make or break any farm.
  3. Above Average Management.
    As you read in Growing Farm Profits Weekly Issue #17, average management was sufficient in
    the boom years, but it won’t get you through the next business cycle. Even above average
    managers find confidence in having a business advisor offer independent, unbiased advice on
    current situations, strategic plans, and risk management.

The list of “nice to have” could fill more pages that you’d care to read, or than I’d care to write. The list
of NEEDS is not exhaustive either, but in the spirit of austerity, those are the big 3 that NEED focus
(pardon the pun.)

Direct Questions

Production alone will not keep every farm afloat through the next business cycle. Are you able to
elevate your management abilities (no matter what level you’re currently at) to offer your farm its best
chance to thrive (or at least survive?)

Somebody shared a quote on Twitter that I read today: “Successful people are like a turtle on a fence
post. They didn’t get there by themselves.” -Michael Pinball Clemons
Do you have an arsenal of trusted advisors working for you to ensure you do everything it takes to be
successful?

Will your austerity plan be cutting the right costs or just the easy ones?

From the Home Quarter

It’s been said “You can’t shrink your way to greatness.” When it comes to cost cutting in an effort to
preserve cash, there is a wrong way to do it. Similar to the thinking of “good debt and bad debt,” there
are costs that should be cut, and costs that must not be cut. Interestingly enough, my phone has been
ringing lately with the voice on the other end saying, “Things are looking tough, I can’t afford to make
any mistakes. I need your help now more than ever.”
That’s what I’m here for, glad you called.

If you want help with building an austerity plan or just guidance on daily strategic decisions, call me or send an email.