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trickledown effect of too much debt

The Trickle-Down Effect of Too Much Debt

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One would think we learned something from watching the US housing market collapse at the end of the previous decade. Yet, here we are, seven or so years later and many are making the same mistakes that were made by countless US homeowners.

Granted, the macro factors that helped to create the US housing crisis are not prevalent here in Canada. My favorite term from the US crisis was “NINJA” Mortgage: No Income? No Job? …APPROVED! Lending criteria in Canada isn’t quite that liberal.

What exacerbated the problem in the US was how homeowners were using their homes as a personal ABM, taking cash out whenever they wanted for whatever they wanted from the rapidly growing equity they had in their homes because the house values just kept increasing. They leveraged the “found” equity they had in their homes to feed their consumer appetite.

Here in Canada, and specifically farms on the Canadian Prairies, we’ve seen something similar. Rapidly appreciating farm land is being used to secure more borrowing, and often to secure the consolidation of other loans. The renaissance of farmland value appreciation, especially in Saskatchewan, added a dangerous amount of fuel to a fire of pent up demand. Land “equity” was used for the feverish acquisition of equipment, buildings, and more land.

In the US, while sub-prime mortgages kept payments low, everyone was happy to be ticking along with borrowing and spending to their heart’s content…until the sub-prime period ended and the piper needed to be paid. With a property fully leveraged and no ability to repay the debt, many homeowners resigned themselves to foreclosure. Those who may have had an ability to pay the debt saw the value of their fully leveraged property start to decline because of all the other foreclosures, so when they found themselves underwater, they too went the route of foreclosure.

No one is arguing that things are different here. True. Borrowing criteria is more stringent in Canada. What is similar, however, is the experience of a rapid appreciation in the value of real estate and the leverage of said appreciation to support more (other) debt.

I was talking with a 17,000ac farmer recently who was very aggressive in expansion over the last several years. He has increased the size and scale of his farm in every way: land, equipment, labor, and debt. He made no bones about continuing to leverage all assets, including the appreciating land and his depreciating equipment, to the fullest extent in an effort to facilitate further expansion. The scourge of his actions over these last few years was the incredible drain on his cash flow to service all this debt. This came to light for him when recently he needed land equity to source an operating line of credit so that he could meet his debt payments.

Direct Questions

Have most of the increases to equity on your balance sheet come from appreciation of asset values or have they come from building your retained earnings?

How has your Debt to Net Worth changed over the last few years?

Are you drawing on your operating line of credit to make loan payments?

From the Home Quarter

It amazes me how what was ingrained into our long term memory for so long was so quickly forgotten. The memories of the indescribable hardships of the 1980s and 1990s have seemingly been overtaken by the boom years of 2007-2013. The willingness to replace the history lessons of tight margins and poor cash flow with the euphoria of big profits and cash to burn has led to many farms now facing a debt and cash crisis similar to what was common in the final 20 years of the last century.

The trickle-down effect of debt stems from when debt levels increase as fast as, or faster than, the borrower’s long term cash flow and net income. While asset levels increase, sometimes very rapidly, tremendous growth in debt levels eat away at potential equity and use up available cash flow. While the land base has expanded and late model equipment efficiently farms all the acres, while the bins may be full and the employees are busy, it all trickles down to cash.

When the demands on your cash are a raging river, it is pretty hard to live on a trickle.

 

 

Spending Less

Spending less is more valuable than earning more….

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Let’s start with a handful of truths:

  1. You need to spend more to earn more, but it is incremental such as…
    • When you go beyond the exponential benefit (spending $1 extra to earn $2 more,)
    • When you move into the realm of linear benefit (Earning $1 for each $1 you spend,)
    • When you push on and find yourself in a negative benefit (each $1 spent earns less than $1 return)……we may have reached the beginning of the end.
  1. Earning more leads to spending more.
  2. In what is our “consumer society,” we are driven to spend more.

 

Ok, so let’s expand a bit for some clarity.

Spending more to earn more applies to your crop inputs.
Does investing in a $200/ac fertility plan earn you more than $200/ac above what you’d earn without any fertilizer? Of course it does. How much more…have you figured it out?
If spending $20/ac on fungicide can earn an extra $60/ac in revenue, it’s a no brainer. Can it? If you expect to yield 40bu/ac on a wheat crop, will that $20 fungicide earn you a $1.50/bu premium? What’s the spread between #2 and Feed? If it is $1.50/bu or less, why invest in the fungicide?

When we earn more, we spend more. It’s just the way it is. Does it have to be this way? No, of course not, but in our consumer society where we need instant gratification, usually achieved with retail therapy, our consumerism appetite is nearly insatiable. We’re all guilty of this to some extent…even me.

The title, “Spending less is more valuable that earning more” is a line I read in an Op/Ed piece and that line is attributed to Andrew Tobias from his book The Only Investment Guide You’ll Ever Need. I have not read Tobias’ book, so I cannot offer anything on his intention or his message. What I can do is share some of my perspectives on the realities of how we spend.

  • “I just got a raise, so let’s go out for supper. I’ve never had escargot before, but hey, I’m earning more now, so why not?”
  • “We just closed that deal and it will put me over the top for the bonus I’ve been waiting on. I’ve had my eye on that Ferrari for so long…paying off my line of credit can wait until next bonus!”
  • “Wow, we’ve had a banner year! We’ve never seen this kind of cash flow before! Interest rates are so low. I bet I could get a deal on a new <shop/tractor/combine/etc.>

From my days at the bank, I saw a client pay approximately 10-15% more than market price for land, and then 1 year later, pledge to buy a brand new combine with cash. At the time, their working capital was adequate, not especially strong, but it was adequate. They were prepared to use up all of their working capital to buy this new combine because they had a strong year (and felt that many strong years were to come.) I gave them good advice: do not use up your cash to acquire a depreciating capital asset. As a thankyou, they didn’t even give me the loan (they went to another lender.) The very next year, they got hammered with excess moisture and were a breath away from getting all their loans called. Imagine if they hadn’t taken good advice!

Early in my banking career, I heard a grizzled old banker say “Farmers hate having money in the bank; as soon as it’s there, they spend it!” Recently, I listened to a very progressive farmer admit to keeping a set balance in his operating account by shifting excess cash out to a savings account. His rationale: if I don’t see it I won’t spend it; I know it’s in another account, but I don’t track it like my operating account so it’s not available to spend on something I really didn’t need!”

Beautiful!

In our chase to “earn more” we can easily get caught in a cycle of working harder & longer, and investing (spending) more in our business in an effort to boost revenues. Yet the tradeoff of return versus investment must be considered. Investment isn’t just monetary.

Just the other day, I was talking with a client who is considering adding an enterprise to his farm. (For the sake of confidentiality, I won’t give more detail than that.) This new enterprise would very likely bring significant positive cash flow to his farm and family, with very manageable new debt required for equipment to perform the work. He is a strong relationship marketer from previous work outside of farming, so “business development” isn’t a risk for him. The question I asked, the question he couldn’t yet answer, was, “How much time are you prepared to take from your farm and your family for this venture?” His investment wildcard is “time.”

Direct Questions

We’ve discussed ROA and ROI in the past. How are you implementing a reasonable “return” for your investment in inputs, assets, and time?

How would you feel to have 1/10th of your net worth sitting in the bank as cash? That’s $1million in cash on a $10million net worth. Would that burn a hole in your pocket, or give you a calm and serene sense of security?

Where is your mindset when it comes to generating profit: is it from increasing revenue or decreasing expenses…or both?

From the Home Quarter

Andrew Tobias has received many accolades for his writing, and he was the one who wrote “Spending less is more valuable than earning more.” If that applies in a practical sense or not, we could argue all day by bringing up economies of scale, leverage, and tax rates. I am contending that it applies to a mindset of earning a profit and hanging on to it, building those retained earnings, establishing that “war chest,” and setting yourself and your business up for riding out the rough spots in the economic cycles.

Taking all your profit from the last go-round and reinvesting it all on the next one has a place.

It’s called a casino.

 

 

Renting Farmland

Are You Renting Farmland?

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

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

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

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

What?

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

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

Eww, ouch! That stings!

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

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

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

Direct Questions

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

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

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

From the Home Quarter

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

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

farming should be like baseball

Farm Management Could Take a Lesson From Baseball

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

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

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

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

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

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

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

Imagine:

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

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

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

Direct Questions

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

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

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

From the Home Quarter

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

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

asset rich cash poor

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

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

It was back in March that I tweeted the following:

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

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

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

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

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

Direct Questions

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

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

From the Home Quarter

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

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

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

Shaking Hands

The Farmer-Banker Dating Game

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When I went back to college in my mid-20’s, a mature student by definition, it was because I found a course and career path that would allow me to bridge my passion for agriculture & farming with my finance minded brain. My goal, as my friends and family will attest, was to be the kind of ag-banker that was a partner, not a foe, of the farmer.  My view at that time, which was a time that we were in the depths of a very real farm crisis at the end of the 1990’s, was that farmers “generally” had a poor view of bankers. I aimed to change that perception.

Now as a management advisor, I still aim to bridge that gap. I invest myself into building good relationships with bankers so as to have a list of qualified partners whom I can refer in to my clients for financing requirements. Here are the top 3 points to remember when considering a new bank relationship.

 1. Perfection is Not Required on the First Date

The initial meeting is a first date. Think about it: you’ve met someone you’re interested, you’ve had an interesting conversation that identifies some common interests, and you eagerly and excitedly agree to go on a date. On that first date, it’s a lot of “what do you do for fun?” and “what kind of music do you like?” If you’re really getting into it, you might discuss your date’s political views! You aren’t deciding on the first date if you will or will not marry this person; you’re just hoping to learn enough about him/her to decide if you want a second date.
The initial meeting with a new prospective banker is a first date. You’re getting to know each other. The banker wants to know how your farm is doing financially, how you manage & make decisions, and what you vision is of the future. You want to know how the banker manages his/her client relationships, how the bank would deal with a farm like yours, and how everyone would expect to work together should you take your relationship “to the next level.” On a first date, no one expects perfection. Each person on a first date easily overlooks the little nuances that may, or may not, become an issue later on. No one needs to be perfect on a first date with a banker.

 2. Be Aware of Where You Are At, Where You Have Been, and Where You Are Going

The greatest risk to derailing any chance of a second date is for you, as the borrower, to not have an adequate grasp on the effects to your business from past issues & business decisions. Bankers appreciate accountability when it comes to “what happened” in the past. Own your choices, both the good one and bad ones. Describe what you are doing to rectify your poor decisions from the past and what you are doing to ensure those same choices aren’t repeated. Have an idea (at least) of a vision for what you want your business to look like in 5 years, recognize what it will take to get there, and understand what you need to do in the near term to take positive steps towards that vision.

 3. A “Partnership” Mindset

While taking your relationship with your banker to the next level has been described by some as a “marriage, I agree in figurative terms only. Your relationship with your lender is a partnership, however, and proactive & productive efforts must be initiated by both parties.
While I believe that your banker relationship is akin to marriage figuratively, I do believe that it is a partnership literally. In almost every presentation I’ve made through the winter and spring, I have described the partnership as follows:

“If you have a Debt to Net Worth figure of 1:1, that means your debts are level with your net worth. At that point your creditors have equal skin in the game as yo do; your lender’s ‘investment’ in your business is par with yours. You have a 50/50 partner.”

There are many farms with Debt to Net Worth figures that are 1:1 or higher. Where do you stack up? Do you have a “partner” by the definition of equal investment in your farm? It is only decent and respectful for both parties to behave in the relationship like a partnership.

Direct Questions

What is your mindset with it comes to your relationship with your lender? Is it friend or foe? Necessary evil or business partner?

How prepared are you, as the CEO of your company, to discuss your current situation and share your vision of your farm?

Are you excited for a dance or two on a first date, or are you expecting your date to be on bended knee by the end of the interaction?

From The Home Quarter

This is penned in large from the message that my old boss from my banking days used to lean on: early interactions between bankers and borrowers are like courtships; everyone spends time getting to know the other(s) and jostling for position to make the best impression. It takes time to build a trusting relationship, and like any first date, if either party pushes too hard too soon for too much, a second date is unlikely.

bin row

Crop Price Rallies (will be) Few, (and) Short

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That is the headline in the recent edition of The Western Producer. Penned by Sean Pratt and primarily sharing the views of Mike Jubinville, the article contains the usual verbiage found in most articles that get classified under “commodity outlook.” Here are some of the biggest points made by Jubinville in the article:

  • The commodity super cycle is over.
  • We’re into a new era of a sluggish, more sideways rangy kind of market.
  • Canola is not overvalued and Jubinville feels that $10 is the new canola floor.
  • Wheat should bring $6-$7/bu this year.
  • $10 for new crop yellow peas is a money making price.

This last point gets me. If I had a dollar for every article that claimed a “money making price” on a commodity in such general terms, I’d be making more money! In all the thousands of farm financial statements I’ve reviewed over the years, I can say unequivocally that there are no two farms the same.

In saying that, it is abundantly clear that what is a profitable price on one farm may not be a profitable price on another. And just because $10 yellows may have been profitable last year does not for one second mean that $10 yellows will be profitable this year. Why? It depends entirely on the choices you have made in changes to your business, as well as on the differences in a little thing called YIELD.

Yield can make a once profitable price look very inadequate very fast. In fact, a 15% decrease in yield, from an expected 45 bu/ac to 38.25bu/ac, requires a 17.65% increase in price, from $10/bu to $11.76/bu to equate to the same gross revenue per acre. This factor is not linear: an 18% decline in yield requires a 21.95% bump in price to meet revenue expectations. Alternatively, an 18% bump in yield requires a price that is 15.25% lower than expected to meet the same revenue objectives.

The point is if yield is down, achieving the objective price may not be profitable. Or at the very least, it would be LESS profitable. But the bigger issue is this: How can it be stated what is or is not profitable without intimate knowledge of a farm’s costs?

If the farm’s costs and actual yield create a Unit Cost of Production of $10.20/bu, I’m sorry Mr. Jubinville, that “money-making” $10/bu price you mentioned is not profitable!

Direct Questions

How are you determining what is an appropriate and profitable selling price for your production?

What are you doing to ensure you are including ALL costs incurred to operate your farm?

If you find that your projected Unit Cost of Production is not profitable, what measures are you taking?

From the Home Quarter

Far too often, we can get caught up in making critical business decisions based on what we “think” is appropriate, on a hunch, or on pure emotion. Using Unit Cost of Production calculations to validate your farm’s profitability is an incredibly empowering exercise. I’ve been in a meeting with a client and witnessed the entire crop plan change during the meeting based on Unit Cost of Production information.

What is not measured cannot be managed, and measuring your profit is pretty darn important.

 

ic_leap

Experience: LEAP – – Leadership, Engagement, Authenticity, Passion

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Leap year only comes around every 4 years, so to some people, it’s kind of a big deal; to others, not so much. I will have spent the 2016 leap day by taking part in a unique event, Experience: LEAP.

Experience: LEAP is an initiative of the wonderful people behind Project: SHINE Inc. Their passion is for everyone to live the fullest life possible, to be their true self, and to experience life with passion and purpose. The key message is for everyone to learn that where you are is not where you have to stay. The message applies to us personally, but also has business implications.

In the case of this event, LEAP is an acronym as follows:

Leadership

Leaders are made, they are not born. While some people are born with the characteristics that are often found in great leaders, the fact is leadership skills are learned, and therefore, leaders are made. This has 2 different aspects that apply to your farm:

  1. You are the current leader of your operation.
  2. You need to identify and develop a leader to take your place for when you’re no longer leading the business.

We often learn from experience, or learn from others’ examples, but rarely do farm business owners ever get sat down and taught how to be an effective leader. Everyone in your business will perform in direct correlation to their response to the leadership of the organization. It is like the old saying, “Would you rather be in an army of lions led into battle by a sheep, or be in an army of sheep led into battle by a lion?” If you find yourself questioning the effectiveness of your employee(s), first gauge your effectiveness as a leader.

As a leader, you need clarity in the results you expect in your business, the strategy for achieving those results, and the tactics in execution of the plan. Naturally, sharing this information with your team is critically important in effective leadership.

Engagement

One cannot expect to build a profitable business or an effective team without being engaged. A person who is disconnected and unattached will achieve sub-par results, and find the same in their team. How does one become more engaged? What can be done to increase the engagement of a team? By and large, it begins with purpose. Clarifying the “why,” which means “why are we here; why do we do what we do; why are we the best people for the job?” Clarifying purpose by answering the “why” helps teams, and individuals, recognize that they are a part of something bigger and that they have a key role to play in the organization. By turning a basic employee, a laborer per se, into an engaged and contributing member of a highly functioning team will pay dividends to your business that may astound you.

Authenticity

To be authentic is to be real or genuine. This involves interactions with your staff, your business partners, your family, your vendors, but most importantly with yourself.
I find it curious that authenticity is required for true engagement, which is required for effective leadership. Passion affects everything.

Passion

Passion can be difficult to describe because it is a feeling like few others. Passion can consume you, drive you to heights never imagined, and lead to immeasurable levels of joy or even anxiety. Passion can often create infallible commitment, which, if not balanced with sound rationale in decision making has potential to lead to undesirable outcomes. Unbridled passion sounds poetic and profound, but it can be dangerous if not balanced with reason and objectivity.
Yet, life (or business) with no passion becomes an insufferable task to endure. Most farmers I meet are passionate about their farm, about the land, about growing things, about the family legacy they are living and plan to leave behind. “Life becomes work” if there is no passion. But don’t forget balance, because “work can become life” on the opposite end of that spectrum; neither is desirable.

Direct Questions

How are you gauging the effectiveness of your leadership? (HINT: this isn’t a “self-assessment.”)

What are you doing to match your engagement to that of which you expect from your team?

How would you describe your passion?

From the Home Quarter

Recently, I listened to a presentation where the crowd was polled: If you could sell all your land for 25% above market value today, and rent it back for life at half of current rental rates, how many would take that deal? No one raised their hand. The presenter then acknowledged that no one in the crowd was a farmer, but actually a land owner. Everyone laughed in subtle agreement.
The point is to define your passion, your “Why.” Clarity in what you do, why you do it, and how you do it is no longer something that only applies to large corporations who need that “feel-good mumbo-jumbo” as part of their strategy. Make no mistake, farms of the future will require processes that were once foreign, or only found in corporate cultures. The need for social license becomes greater each day. The need for strong and committed teams becomes greater each year. The need for passionate, authentic, engaged leadership becomes greater with each new generation in the family business.

farmer tailgate computer

Farm Profitability Indexing

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Farm Profitability Indexing

Late in 2015, I picked up on some interesting farm financial info during a presentation I attended as a part of CAFA. This information represents farms from a geographically vast cross section and revealed some interesting trends:

1. Gross Revenue per Acre has Trended Up

Gross Revenue bar chart

With 2007 being the base year with a value of 100, and also being the first year of the bull run in commodity prices, we can clearly see that while gross revenues are trending up, there is still great volatility in gross farm receipts. True, weather anomalies had a significant effect, but that’s farming, isn’t it?

2. Investment in Crop Inputs per Acre has Trended Up

Inputs bar chart

While gross revenue has seen volatility, and for three years including 2009-2011 gross revenue was at or near 2007 revenue levels, investment in inputs has only once seen a reduction year over year. In 2013, investment in inputs was 77.5% higher per acre than it was in 2007.

3. Gross Margin per Acre has Trended Up

Gross Margin bar chart

While gross margin is trending up, there was a significant decline in 2009 from the previous year that extended right through 2011. Even by 2012, gross margin had not returned to 2008 levels.

4. Operating and Fixed Costs per Acre are Trending Up

Oper and Fixed Costs bar chart

This figure would represent operating costs such as fuel, labor, and equipment costs, as well as fixed costs such as interest, land, and building costs.  Notice the steady increase that has never went down year over year, even through the low margin years of 2009-2011 operating & fixed costs continued to rise.

5. Net Income per Acre has Rebounded from Significant Reductions

Net Income bar chart

Net Income represents what is left over after operating your business, that profit which remains to cover administrative costs, make principal loan payments, and cover that other insignificant cash requirement: living costs (that was sarcasm if you couldn’t tell.)

In this illustration, we have calculated Net Income simply as Gross Margin LESS Operating & Fixed costs. Here we see that the low margin years of 2009-2011 actually extend right to 2012 with net income still below that of our base year 2007. This is the residual effect of increasing costs during a period of low margins (2009-2011) by continuing to have a negative effect on what would otherwise be a successful year in 2012.

Everything Dips but Expenses

This chart illustrates a dangerous trend: even when income goes down, operating & fixed expenses are allowed to continue to rise.

farm profitability line chart

By the end of 2011, net income had dropped to less than 30% of 2007 levels, yet operating and fixed costs were over 145% of 2007 levels. It took 2013 bringing about the largest crop in maybe forever to elevate net income back to 2007 levels.

Direct Questions

If Net Income represents the funds you have generated to cover living costs and make loan payments, how well does your worst net income from the last 10 years cover your living and loan payments in 2016?

What does the trend of your gross income, input costs, operating costs, and net income look like since 2007? Is it similar to what’s been presented here? What changes have you made to your operation based on your own information?

Gross margin should ideally be in lock step with operating and fixed costs. If you aren’t increasing your gross margin, why are you increasing your costs?

From the Home Quarter

This is a very telling experiment, but it is not the rule on all farms. The information presented here is an average across a list that spans all regions of the prairies, but heavily weighted on Saskatchewan. The experiment gets more interesting when you apply it to your own business. To lean on the 5% Rule first promoted by Danny Klinefelter, if in 2013 you could have been 5% better than the average in gross revenue, input costs, and operating & fixed costs as presented here, your net income would be 44% better than information presented, and index to 152.14% of the 2007 base year.

How does that sound?

 

equipment efficiency

Managing Operating Efficiency

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

A client of mine recently shared a sample of information that they collected from their equipment. The information shared with you is specifically from their sprayer:

Sprayer Utilization pie chart

 

A simple pie chart creates an “A-Ha Moment” that no one saw coming. I am sure you can all imagine the conversation around the table when this information was presented. What would your response be if this was your data?

As the discussion progressed, it became clear why the number of hours spent idling was what it was:

Admittedly, no one was tracking the number of idling hours that were attributable to any of those 4 points, but there was little argument that loading and rinsing contributed the largest share to the number of idle hours.

What can be done with this information? Since this sprayer is on a lease contract, the “cost per hour” is very easy to calculate. Now that we know the cost per hour of running this sprayer, we know how much all that idling costs. Now let’s go back to those 3 potential responses to first seeing this original data:

What this client of mine is now doing is evaluating the cost/benefit of putting a chem-injector system on their sprayer. Such an addition will:

To truly test this option, we would need accurate data over the period of at least 2-3 growing seasons measuring:

Naturally, very few, if any, farms record this data. Yet we can clearly see the effectiveness of having such useful information available to make the most informed decision possible. Without it, we are using emotion and our best guess. Obviously, our best guess can be way off, as is seen in just how much this sprayer spent idling in 2015.

Direct Questions

How are you managing and using your business data?

If you are not measuring it, and therefore cannot manage it, what are you using to make business decisions if accurate and useable data is not available?

How many decisions relating to improving efficiency can be made on your farm with better data?

From the Home Quarter

The report that contained this information (including the pie chart above) provides much greater detail to the goings on of that one machine than just usage by hour. Some of it, like the 8,970,000 yards this sprayer has traveled is not necessarily useful, but knowing that the 92.2hrs spent in transport used 910 gallons of fuel is.

While laughing and pointing around the table when comparing similar data from the combines, and identifying “who is the best combine operator” is interesting and fun, it is the action that comes out of the data that has the greatest impact. Positive action can and will impact your bottom line…but then so will inaction.