Farm Horizons, February 2017
Will you survive or thrive in 2017?
By Myron Oftedahl
There are a lot of articles being written about surviving this agriculture economy; they have a lot of merit, and, for the most part, are telling you the same thing.
So, here is my take on the subject.
Farms have suffered reduced working capital for the last three years, primarily due to lower grain prices.
Working capital is simply current assets minus current liabilities, so if you have more annual loan payments and operating loan payments than you have inventory, you are using working capital. The farm can survive, but keeping the bills current will become very challenging.
This brings me to the first challenge to survive or thrive. Know your numbers, enterprise budgets, cash flows, whole farm and enterprise analysis, tax returns, etc. You need to understand how one item impacts the whole. You need to know your actual and anticipated cost of production, so that you can market your crop or product profitably. In this current market, you need to be pricing both the grain in the bin and some of the anticipated new crop. You need to be prepared to make quick decisions concerning these marketings, and the easiest way is to have a marketing plan.
A marketing plan that is written removes the emotion, because you have taken the time to determine what your cost of producing that bushel is, and you have developed a plan using that information. Therefore, when you see the price goals that you have set, you can easily make a sell decision because you have already done the analysis.
The key is to know your cost of production and then set profitable sales goals.
Ed Usset jokes about grain bins being hope chests, wherein you put grain in the fall and hope that the price goes up. In fact, the price usually goes up during the year, but I still hear that someone needed to sell grain in September at a loss in order to make room for the new crop. That means that you were either unwilling to make a decision, or that you were more concerned with the tax liability than being profitable.
We need to move away from tax avoidance to profitability decisions. I have yet to see a farm go broke because they had to pay income tax.
We tend to focus on selling the crop as a way to be profitable, and it is important. However, it is not the only concern for profitability.
One of the big issues for crop production the past two years is that the revenue has been going down, while input costs have remained steady. Fuel is the one expense that went down, and now fertilizer costs are moving down. Land rents have been very slow to move down, primarily because there is enough demand for land. We, as farmers and landlords, need to realize that not all acres are equal. We need to be able to identify this and set land rents accordingly.
The internet has given us many more avenues to research items and to buy inputs cheaper. You may find your favorite chemical $1 or $2 cheaper online or out of state, but if you factor in transportation costs and increased liability for chemical storage, did you save anything? If you buy the majority of your inputs based strictly on a per-gallon price, do you expect the local retailers to provide the same service to you as the farms that purchased from the retailer?
I am all for saving a buck or two, but I also recognize that the service intangibles that I receive have a value. Businesses need to recognize this and tell people that if they didn’t buy it there, they don’t have advice for that product. I know this is sometimes a fine line between business responsibility and good stewardship, but we need to identify it. If you find a good deal for an input or a supply that you need, then go ahead.
Understand that your lenders are watching what you do. If you submit a cash flow that is acceptable to the lender and the next time your lender sees you, you are driving a new truck or pulling a new boat that was not in the projection, you need to understand that this raises big red flags and he/she will start to question what else you are doing that has not been communicated.
You need to have regular conversations with your lender, and once a year to renew the operating loan is not a regular conversation.
Make it a point in 2017 to stop and have a chat with your lender, and give him a quick update on what is going on at your farm. Have you finished planting? How is the crop looking? What is the milk tank average and SCC for the month? What is going well, and what has been a challenge? What are you thinking about implementing?
Your farm does not operate in a vacuum; you have competition. In a commodity market, the winner is the one who can produce it the cheapest and market it for the most. How do you compare with your competition? What are your strengths? Where are your weaknesses? What can you do to take advantage of those strengths, and what can you do to minimize the weaknesses?
For many of the farms that I work with, the ethanol shares have been very favorable, partly due to the fact that it is close. It is cheaper to deliver corn to Winthrop than it is to deliver corn to Savage. Can you produce corn, soybeans, milk, or pork cheaper than your competition?
One of those costs of production on any farm is the cost of family living. The biggest issue in my mind with the cost of family living for a farm family is that they don’t separate these costs from the farm expenses. The household electricity and other utilities are paid by the farm. Vehicle expenses are paid by the farm.
One of the biggest challenges to farm transition is to identify how much income the retiring generation needs for family living. The easiest way to manage this expense is to have separate accounts for the farm and for family living. Take a monthly draw from the farm, and transfer this to the family account. If you are truly operating your farm as a business, then you need to treat yourself as an employee by drawing a salary and then living within that salary.
Be reasonable with that salary. What can the farm support, and is there any off-farm income to help cover family living expenses? If you butcher a steer, the family account should pay the farm account for that steer and the processing. If you are going to help your kid with fuel and car expenses while they are in college, this is a family expense, not a farm expense.
I would urge you to go through your balance sheet and identify any assets that are not being used, or are under-used. Are you holding on to a piece of equipment because it was the first tractor that you purchased, or because you have so much equipment parked in front of it that it would take you all day to get it out of the machine shed?
I remember a conversation with a farmer many years ago about it being a good idea if he could use a rotary hoe on a field. The response was that he owned one, but didn’t have the time to move everything out of the way so that he could use it. At that point, the rotary hoe had zero value, because he wasn’t willing to move machinery so that it could be used.
Look at what filters, belts, etc. you have on hand before buying more. I am an advocate for having critical parts on hand, but do you need six filters for one tractor? Reduce parts inventories to what is needed to keep the critical machines running for your operation. Go through your parts and identify what machine they are for. You may have six different sets of belts on hand, but could you grab the correct one when needed?
In review, the difference between surviving 2017 or thriving amounts to doing a lot of small things correct. There is not a magic pill to swallow that will make the difference.
Know your numbers; this includes financial ratios and costs of production. Have a plan; both cash flow and marketing plan. Plans need to be written, we commit to something that is written better than if it is just a thought process. Separate business and family living expenses, and keep them reasonable. Be lean and mean with equipment assets; remove un-used or under-used equipment. Monitor hours, especially on critical machines; can you run that skid loader that you use every day 3,000, 5,000, or 7,000 hours before major expenses would be an issue? Use existing parts and supply inventories before purchasing more. Avoid unnecessary expenses; how many tools have you purchased because you may need it someday?
Set two or three goals for the year, write them down and post them somewhere that you will see them every day. A Harvard study shows that the 3 percent of Harvard graduates who had written goals at graduation earned more after 30 years than the other 97 percent combined. How would your farm operation fare if you outperformed 97 percent of your competition?