70% of North American farms will change hands by 2025. This is not just ownership, but who farms the land. This provides plenty of opportunities for American farmers. We need to get over the concept that farming is a lifestyle that deserves special provisions protections and romanticism. It is apparent that it is a business to the non farm sector, and unless the operators of farms act like business men and women, they will be consumed by those who do. Direct payments and counter cyclicals will be under attack and likely crop insurance will be offered up to replace the guarantee payments. The kitchen table and the board room table are two different places for a reason.
Farming has 3 golden times in the last 100 years (1) during the 1910's (when the US fed Europe as Europe shot each other into the stone ages), (2) during World War II (when every body wanted to be like Europe and shot everything back into the stone ages) and the period thereafter and (3) during the mid 1970's (again when our competitors abroad couldn't meet the demand). Drive through the country and look at when houses were built. Lots of 1915 builds still dot the country side, with plenty of post World War II expansions and 1970's ranch style houses. Coincidence, I think not.
Perhaps another set of good times happened from 2008-2012 Number crunchers indicate that for the period 2002-2012 years indicate that farmers have had the best overall profitability over the those three years
Good times are defined by the lack of good times that follow. If we are in a good time, it is important for agriculture business operators to take advantage and prepare for the bad that follows.
So how does a farmer operator behave like a business operator? Acknowledge the elements you need to be successful, assemble those elements and place them into action.
Acknowledge that you must consider management of revenues, farm input costs and your interest rate management. These will need to be balanced. Obsessing over one will hurt the other two. Getting a handle on costs of production will help you make sales decisions that are rationally based, not emotionally based on who has the best bragging rights at the Co-op.
Another item to watch is your repayment capacity. This is calculated by taking your net farm income adding non-farm income plus depreciation and interest expense on long-term debt and capital leases. From this total, subtract long-term debt and capital lease payments, net cash incurred for equipment purchases required annually and family living expenses. This math formula this tells you how liquid you are for this year and the upcoming year. If this ratio is less than 1, you will have liquidity problems. It should be greater than 1.5 to 1 to be comfortable and above 2 will give the liquidity to expand, etc. Knowing this will take a lot of drama out of going to see the banker.
Farm operators should consider three areas when they conduct business planning, investment of capital, management decisions and day to day director actions. The difference between buying a replacement tractor, selling on the board and deciding on fixing the combine today or grinding feed are in how you view each area. Identifying who makes each of these decisions is critical in long term multi generational family. Each of these roles interact this can be the time when the most conflict if roles are not clearly defined. The reason the military has so many officers in planning cells to support combat operations is because strategic planning is hard work but it pays dividends. To borrow from the military consider the following planning techniques.
SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis will help assess the current situation of the farm. Then, applying the analysis to the Enemy (competing operations and weather) Terrain (what ground is available), Troops and supply available (equipment and employees and inputs) and civilian considerations (your family) will help you determine what opportunities exist.
It is difficult to manage output, but inputs we can manage with some degree of certainly and you can't manage what you don't observe. Seeing what impacts output will pay off. For example you can't manage the weather, but you can manage how you let the weather impact your operation.
Be mercenary in your evaluation. Running a rabbit enterprise may be the way grandpa always ran the farm, but unless you are the supplier of rabbits feet lucky charms to Wal Mart and are turning a profit, you need to let it go. By doing this, you free up resources to expand those operations that are profitable. This can be a double benefit.
To grow your farm revenues, you have several opportunities to consider:
1. Increase sales - same customers; same product mix (more bushels/more head)
2. Existing products; new customers-Ethanol plants, direct sales
3. New products - same or new customers Niche Markets
4. Increase sales with better delivery / channel management. Owning the transportation as opposed to paying for it.
5. Expand geography owning farms and production sites in new markets.
6. Change industry structure via acquisition/alliances-do you need to own the hogs or just raise them for a per head rate.
7. Cross industry boundaries- buying elevators, marketing grain for others, buying inputs and reselling to others.