To achieve success in farming, you’ll need to bring more than strength, skill and a healthy dose of horse sense.
Growing crops on six inches of top soil and cultivating livestock have always been high-capital, low-margin business. Consider the most recent Ag Census from 2017, and the average Minnesota farm produced products worth $267,000 on the market, with a net farm income of $65,753.
While so many things in agriculture are simply beyond your control, from weather to markets to outbreaks, the one thing that can give your operation the best chance for success is sound farm business management. With best practices in organizing, planning, analysis, goal-setting and good record keeping, you’ll have the data to guide
decisions in just about any circumstance. There’s no guarantee these will eliminate stress, but at least you’ll know you’re making informed choices.
The following will cover four key areas in farm business management every farmer should focus on: financial planning, marketing, investing and scaling economies.
Given the changeability and unpredictable nature of agriculture, making day-to-day decisions frequently comes with a side of heartburn. But the best you can do is make a good plan. When your decisions are rooted in a deep knowledge of your financial position, you can make the big decisions with more confidence.
What is financial planning from a farm business management standpoint? This is where you put on your chief financial officer (CFO) hat and take a big-picture look at your finances.
On one hand, that means taking a look at your current and future costs versus your current and future income.
However, farm financial planning goes beyond number crunching, cash flow and updating the balance sheet. As a farmer working in commodities, you’re also examining the political and market forces that influence market prices, climate trends and other likely outcomes. In addition, you’re considering your long-term goals for your operation, and whether your plan moves you closer to those goals, or if something is holding you back.
Your analysis will give your best possible forecast, which can guide answers to some tough questions. Or at the very least, guide solutions to your thorniest questions. For example:
- Is the timing right to borrow or refinance?
- Will you need to restructure your debts to make your operation work?
- Where are your break-evens?
- Are your operation’s assets being fully utilized, or are they costing you?
- Would increasing or decreasing production put you in a better financial position?
- Is it time to dig into your production costs to find opportunities to save?
Financial planning is a big concept, but when it’s done well, it takes the guesswork out of daily, monthly and annual decisions, so you can see if the way forward is a financial advantage or a financial minefield.
If you talk to two different farmers, they probably differ in their marketing strategies. Heck, if you talk to two family members on the same operation, they may butt heads on which marketing approach is best. Actually, marketing can even get downright emotional, because not only is it stressful, there’s a lot riding on these decisions and everyone has a different tolerance for risk.
It’s all about building the skills and the strategy to improve your bottom line. It takes time, but here are some things to help you get on your way to becoming a grain marketing guru.
Write a pre-harvest marketing plan: According to a pre-harvest marking plan method presented by grain economist Ed Ussett at the University of Minnesota Extension, you’ll want to use a pricing tool to establish price targets for your crop. What you’ll end up with is a list of dates, number of bushels to price and the price target. This stage of grain marketing is strategic, and your goal is to find the best average price for your commodity crop.
Write a post-harvest plan: Here, you’re presented with a trio of choices, says Ussett: Sell the crop, store the crop, or store the crop and sell the carry. To make the best choice, you’ll be factoring carry, the basis, market prices, storage costs, and your risk tolerance.
Educate yourself: There are plenty of online resources and marketing advisory services, which can be useful in your decision making. It’s also useful to learn and share with other producers living near you. The University of Minnesota Extension Service hosts marketing groups around the state. Here, producers can discuss marketing strategies and ideas, the latest market trends, and how to make it all work for your commodity. Extension educators also lead sessions so you’ll have access to the latest research. Finally, everyone in the group puts together marketing plans for pre-harvest and post-harvest, so you can see how you performed compared to your peers. If you can’t find marketing groups in your area, you can start your own.
Investing always sounds like buying stocks. (Hopefully, you are socking away some money for retirement.) Investment as a farm business management concept is all about being intentional when it comes to setting aside a portion of your farm income to invest into the business. As farmers earn profits, they invest some of it into their farms, which is what makes growth possible. It’s just a focused, strategic way to grow, so you can increase your earnings.
What counts as an investment? There are three ways to go about it:
- Paying off debt.
- Acquiring assets for the farm to grow the business (and your income potential).
- Investing off the farm, for example, an outside business opportunity.
How can you invest into your farm operation? On your farm income statement, you’ll calculate your total family income so you can find out how much is available to invest and increase your equity.
- To your net farm income, add non-farm income.
- Deduct family expenses and income taxes.
- What remains is available for investment.
What about cash flow? Before you invest, always consider the effect on cash flow. Purchasing land is the ironclad example of investing in your farm. As Grandpa always said, you can’t go wrong with land, right? But don’t invest until you weigh the additional taxes and expenses so you can be sure it will help you achieve your goals.
And what increases your ability to invest? As you know, increasing your net worth year over year is one of your long-term financial goals as a producer. Net worth is a simple calculation of assets minus liabilities (expenses and debts). Investing is going to be a heavy lifter when it comes to making meaningful gains on your net worth. To make sure you have something to invest every year, you should be focused on these three things:
- Control inputs and expenses
- Increase income
- Minimize taxes
Economies of scale is a simple, classic concept. Raise production to get your per unit costs to the lowest possible level. The idea is to achieve maximum production the most efficiently.
Throughout the history of agriculture, there was a limit to what a farmer could produce, because there comes a point in growth where producing more ends up raising input costs. Consider, for example, the good old horse-and-plow days. Back then, there was a limit on how many acres a farmer could work and maintain top
efficiency, before the additional labor, travel and other costs would create that tipping point.
With each generation of mechanization, however, farmers gained the ability to farm more acres for less money. Increased efficiencies through machines and technology is always moving the needle on the economies of scale.
Grandpa’s economy of scale on the family farm isn’t going to match today’s, and it will continue to change. Being a farmer in the long haul means understanding this: Agriculture is not done growing.
What that means is as technology makes it possible to farm more acres for less money, operations have the potential to get bigger. Some economists predict a future where the go-it-alone family farm is a thing of the past. However, not everyone will be prepared or willing to make the jump from a solo venture with one combine to a corporate structure with a fleet of machines, land in multiple counties (or in multiple states), and teams of employees on the payroll to manage.
When the next phase arrives, will you be in a financial position to scale?
Mastering the tenets of farm business management can’t guarantee success, but it can increase the likelihood of it. Through financial planning, savvy marketing, regular investments and keeping an eye on the future of growth in the agriculture space, you’ll have the data and insight to make the best-informed decisions for your operation.
As you become a savvy farm business manager, there's a wealth of resources in your community you can turn to, including Minnwest Bank. As a preferred FSA and SBA lender in Minnesota and South Dakota, our experienced ag lenders can help you apply for the solution that fits your unique needs.