Key strategies for long-term success on your farm
Commodity markets have adjusted over the last 12 months, have you? Here are 10 strategies for long-term success on your farm.
At the recent Great Lakes Crop Summit held in Mt. Pleasant, Michigan, Purdue University agricultural economist Mike Boehlje spoke to a crowd of more than 700 farmers and agribusiness representatives about 10 key strategies for long-term success. Boehlje, a farmer himself, gave an optimistic yet realistic assessment of agriculture from a financial standpoint. He recognizes that while agriculture is a thriving industry in the United States, there are ups and downs and commodity markets specifically may have hit a bump in the road. Gone are the days of $6 per bushel corn. Input prices are up, so are cash rents and investment in farm equipment and capital improvements like tile drainage and irrigation. In a refreshingly original manner, he walked throughout the aisles asking farmers questions during his presentation to help make his points. Here is a summary of the 10 strategies he discussed from my perspective.
Create value for your customer
First, understand your customer. Ask them what you can do to enhance value to them. Differentiate the level of service you provide to them. Can you deliver a specific quality, provide storage and be able to deliver just in time when they need it. Can you provide your customers with any value-enhanced products?
Focus on a strategy
What strategy can work best for your farm? Operational excellence (low cost producer)? Customer intimacy (providing value to the customer)? Product or process innovation? Pick a strategy that you are good at and work on it. It will be different for every farm or operation.
Increase asset utilization (asset turnover)
We all like new paint, but $4 corn will not buy much new equipment. Lease rather than buy – this saves capital. Perhaps a joint venture or share machinery agreement can be used with neighbors and friends rather each buying your own. Outsource or hire custom farm operators for some tasks. Increase gross income without investing a dime. There are no other industries that would invest the amount of money in equipment and let it set for the number of hours per year as we do in agriculture. Share combine with a farmer in Indiana – so we don’t have conflicts on when we need to use the combine. Know your asset turnover ratio – improve it! That will grow your business.
Increase your margins - buy right
This is the first and most important factor in determining cost of production. This is much more important than trying to outguess the markets. You have much more control over what you pay for goods and services than you do trying to hit the high price in the market. “Market” your crop rather than price it. Provide any added customer benefits or value you can. Control costs and employ best management practices and technology.
Grow volume or sales (intensification)
Increase productivity. Try to get more volume with less investment. Perhaps a joint venture for size or volume may help you to get new market access. Major companies don’t quantify business growth by number of acres or number of sows – it is topline; how much gross sales or bottomline – how much profit did they achieve.
Manage money or capital
Protect working capital (current assets minus current liabilities). This is your ability to pay your bills and debt. Do you have enough cash flow? Carefully use debt – perhaps lengthen repayment periods. Try to get fixed interest rate loans. Evaluate lease versus buy options. You need about 25-30 percent of gross sales in cash – this protects against downturns and gives you opportunities to invest during tough times. Repayment capacity – farmers want to pay it back faster than they should. We want to be debt free. When times are good, can pay it off that fast, but when times are not good, will have trouble remaining solvent.
Use your time efficiently
Focus on management. Hire skilled employees and provide training and education for employees and treat them as employees, not hired hands. Hire them for their “head,” not their “hands.” Use scheduling and work flow planners and develop standard operating procedures (SOP).
Manage operating risk
Do what you are good at. Make sure you have proper insurance (both crop and liability).
Use consultants – how many farms have chief financial officers (CFO)? If you don’t have the time, hire someone that can provide these services. A CFO provides information needed to make purchasing decisions, loan repayment capacity, equipment purchases, and manages the financial health of farm. Network with successful farmers and agri-businesses. Develop your own management skills.
Think like a CEO
What matters most? People. Money. Relationships. Strategy. Make decisions based on these company assets, not personal preferences, needs or wants.
The Michigan State University Extension Farm Information Resource Management (FIRM) team can provide assistance and resources for farm management topics including Farm Bill, cost of production, budgeting, crop insurance and many other topics. To learn more, visit the FIRM website.