Seven traits of top producers in the ag industry
Depending on who in the agriculture industry you ask there are many different definitions of the term “top farm manager.” In the end, however, there are some characteristics that tend to show up more often than not.
As a financial officer, looking at the varying levels of success between farming operations of similar type and scale has always been a fascination of mine. In these low commodity price environments, some producers are able to weather the storm without too much anxiety, while still showing profits. In contrast, the next producer may face a higher degree of struggle. Many times there isn’t a clear cut, obvious difference in management. What I believe does make a difference, is the culmination of many little things.
So what are the common factors that add up to great farm management?
They are always prepared with updated financials and projections. Top managers consistently maintain and review their financial records and regularly meet with advisors, such as their lender, accountant, agronomist, tax preparer, marketing advisor, etc. to review crucial numbers and identify areas that may need adjusting. Welcoming constructive feedback from outside advisors provides ideas that the producers themselves may not have realized.
They invest in risk management strategies. For many, this may not be an easy thing to do, but mitigating some risks can help solidify overall management plans. Some of our clients allocate a percentage of their annual operating budget to risk management every year, regardless of what is happening in the markets. In order for risk management to be effective, being proactive is key. Have plans in place before an event occurs. This could include purchasing adequate levels of crop insurance, working to develop a solid marketing plan, hedging production, or even installing drainage or irrigation.
They control costs. This may sound simple, but there are large variations between operations when it comes to their operating expense ratio. It isn’t about spending the least, it’s about putting the right capital into the right place at the right time to maximize production. In a nutshell, this ratio quantifies how much was spent in operating expense for each dollar of income taken in.
The University of Minnesota’s FINBIN program offers benchmark data that demonstrates how this aspect of business management is the most obvious difference between the top third and bottom third of producers. Those who can effectively spend their operating dollars where it receives the best return, tend to come out on top. Factors that have a direct impact on the final outcome include: variety selection, fertilization programs, pest control, risk management, labor decisions, and paid rent.
They manage working capital. With depressed commodity markets, working capital is being more closely monitored than ever. Budgeting cash flow needs on a consistent basis is a must. Understanding your upcoming cash needs versus what liquid assets you have on hand to sell or what’s in the bank will allow you to have a better handle on upcoming obligations.
If there are potential shortfalls in their future, top producers contact their lender and other advisors to develop a plan ahead of time. Some managers may need to look at alternatives for the operation — or even outside of it — to allow for positive cash flow.
Cost of production
They understand their cost of production. If you do not know what your cost of production is, it will be difficult to develop a solid marketing plan. This should be an exercise that every producer works through at least once a year. There are many tools available to help a calculate cost of production.
They judiciously invest in technology. Over the years we have done a good job of evening out the playing field as far as fertility and seed placement is concerned. We can also do an accurate job of monitoring the results of this activity during the growing season and at harvest.
Don’t assume that an investment in new technology will automatically benefit your operation by improving profitability. Research is essential. Additionally, those who make the effort to measure the results of their efforts every year, and then analyze that data, are in a much better position to create a business plan to take forward to their lender once they determine a new technology will be beneficial.
They are professional. Professionalism is one of those intangibles that is hard to define but easy to witness and even easier to notice when it’s missing. Little things like returning a phone call or text on a timely basis, or taking the time to sign documents — even during the busy time — can go a long way toward another professional wanting to go out of their way to help you manage your business. Treating others with respect will in turn bring respect back to you.
I wouldn’t recommend that you tackle each of these factors at once, but rather, urge you to focus in on one or two at a time to help improve your operation. This isn’t something that will happen overnight, and not something you should face alone. Bring your trusted partners into the discussion, and strive to focus on the little things that, together, could make the biggest difference.