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July 2011 Archive for Ask a Margins Expert

RSS By: Chris Barron

Chris BarronHave a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.

 

Farm Rent Conversation

Jul 31, 2011

 

 Many unpredictable forces impact our agricultural businesses such as weather, markets, economy, and government. Volatility adds even another level of challenges. As we manage our businesses and sift through all of the numbers it's important to remember that open communication also carries a high value. As we develop financial plans and analyze specific decisions it's important to be able to communicate this information effectively to the appropriate people such as, family, partners, employees, and lenders.
 I would suggest that landlords must be included in this list as we develop financial plans and goals. Everyone in agriculture is becoming more sophisticated, landlords are no exception. Much of the farm land today is owned by sophisticated individuals, families, or investors.
Put together a number of questions in order to help you understand what is most important to them.
  1. What are the best methods of communication for your landlords?
  2. What information about the farm is important to them?
  3. Would they prefer a long-term relationship or are they interested in a year to year rental?
  4. Do they want fertility built up or just maintained?
  5. Are they interested in high cash rent or high value rent?
  6.  Do they prefer cash over aesthetics and fertility?
  7. How much detailed information do they expect annually?
  8. How many times per year would they like specific details versus just stopping in for a visit?
 We often assume what others are thinking; asking these questions in a conversation can give us a better handle on what our landlords truly value. Assumptions can be hazardous to the health of any relationship.
Once you have developed some understanding of the above questions you can now begin to work on the following list. Based on the answers to the questions, there may be more focus placed on some topics and less on others.
  1. Your specific margin goals? “An acceptable rate of return- long and short-term goals ”
  2. Rent value? “Current rental vs. market value, yields, markets, and inputs costs”
  3. Land improvement? “Tile, waterways, fence rows, building sites, conservation, etc.”
  4. Yields? “Realistic goals, yield mapping reports, and sharing opportunities”
  5.  Additional income? “Alternative land uses and additional income opportunities”
  6. Marketing? “Opportunities and results”
  7. Annual financial results? “Detailed comprehensive reports”
  8. Annual lease review? “Mutually agreed upon, annual information exchange”
 

Preparing this type of communication plan with landlords may seem complex. Understandably, asking some of these questions in a conversation with landlords may be equally as difficult. Getting started is the hardest part. Implementing some of these communication processes will put you on your way toward a more sustainable solution with your landlords and maintaining your rental property.

If you'd like to discuss some procedures for working with current landlords on rental agreements feel free to contact me.

 

Cash Rent Communication-Basics

Jul 25, 2011

 

Sometimes it's easier to avoid having conversations rather than to deal with the unknown. No one really knows what markets, the economy, the government, or yields will have in store for us in the next year! Extreme volatility is making cash rent discussions increasingly difficult. This uncertainty creates a compelling argument for sitting down with your landlords and discussing options for the coming years sooner rather than later. In the next blog I'll discuss specifics with regard to maintaining mutually beneficial rental arrangements. In this discussion however, I'd like to discuss the two primary & basic components which fundamentally make any business relationship viable, Communication and Trust.
Communication: In this instancecommunication is the transfer of information from one to another in order to understand and develop a mutual solution.Not only do you need to have a comprehensive understanding of your business but you also need to be able to explain your business to family, partners, employees, lenders, and yes-even landlords. The key isn't to explain everything, but rather, to explain everything that is appropriate. Open and honest communication is a cornerstone to any relationship. The more time you spend talking to someone the easier communication becomes over time. The more questions you ask to understand their needs, the more detailed the conversations can become. Obviously, the more detail you receive from conversations the more progress you will have toward building a higher-quality relationship.
Another approach is to explain your goals and the processes for achieving them. There are many dynamics in farming operations that can shift and change. The more a landlord understands about your operation the easier it is to come to agreements. For example, let's assume the need arises for a fungicide or insecticide application and your cost of production increases by $50 per acre. If you're already communicating your income and expenses, additional costs or other unique changes in your margin will be open for discussion. Conversely if you rarely discuss variables or changes that occur during the year, good luck getting any sympathy as you face an unforeseen challenge. I realize that some landlords are just interested in cash; however, producers with the best communication skills always have a distinct advantage. Investing time in conversations on a regular basis with landlords can pay huge dividends for both parties. Any solid and lasting business relationship is a two-way street.
Trust: Trust is the other fundamental component which is the glue that holds communication together. Without the tenant and landlord trust component there would be little chance of having more than a one year rental agreement. Trust is usually a black-and-white issue; however, there are levels of trust which can lead to numerous types of rental agreements. The more unsolicited information you can provide landlords the more you can develop their trust. For example, providing a comprehensive report which includes cost of production details, detailed marketing information, and detailed yield mapping can improve trust with most landlords. Sharing details with landlords helps to limit their assumptions. Facts are always the best ingredients for building trust. Generally your record keeping processes will also improve knowing that this information will be shared with the landlord, an additional side benefit for you. Some landlords may require less information than others but keep in mind that just because they aren't asking for it doesn't mean they aren't interested in it! Trust is built on a willingness to share information.
In the next post we will discuss specific questions and processes related to effective cash rent communication.
If you have questions with regard to effective communication processes or decision tools please send your questions.
 
 

Dealing with the Storm's After---Math

Jul 17, 2011

 The storm’s –After Math

In the last blog we discussed the windstorm that moved through a portion of the Corn Belt with straight-line winds that ranged from 60 to 110 mph. This weather event left a major path of destruction from buildings and grain bins to crops and homes. Thankfully, there were few physical injuries with this storm. Emotional injuries on the other hand, were plentiful. Now that people have had a week to begin to recover it's truly amazing how fast we can clean up and begin to rebuild. Another amazing example of rebuilding that I've observed is the corn crop itself. It's incredible how the corn plant is designed and focused on productivity!

Here are two pictures of the changes in our corn crop within just a 48 hour period of time.

This picture was taken the day of the storm. 75 mph winds

Summer 2011 Flat Corn 0

48 hours after the above picture of the same field.

 

 Summer 2011 Flat Corn  2 051

This particular field continues to improve by the day. What can we learn from this corn field or the corn plant itself? The corn plant is focused on continuous repair and productivity. The corn plant will never give up, it’s designed and engineered to produce yield. If the corn plant is doing everything it can to produce yield, maybe we should do the same. As the corn plant tries to maximize its production what can we do to maximize our profitability? There are still several things we can do to enhance yield in damaged areas as well as areas with no damage. Some examples include fungicide, additional nitrogen, or insect management, just to mention a few. Fungicide specifically in areas where corn was blown down or damaged may present the best opportunity for yield enhancement. Fungicides can also improve plant health. Better plant health can translate to stronger stalk quality in the fall, which can improve harvestable yields!

Keep in mind that a consistent and disciplined marketing plan is still a critical component to the profit margin equation. When corn prices are at these levels it's important to calculate the enhancement opportunities with the tools we have available.

Now that the storm has blown over it’s time to deal with the after –Math.   Always try to keep a proper perspective and remove emotions whenever possible. Continue to stay focused on calculating current opportunities as variables change. You may have been hoping for 200 bushel corn, however; at the current price of $6.50 per / bu. for corn at 154 bu. /ac. you still receive just over $1000 per / ac.           With the current price levels it's worth trying to do whatever you can to enhance yields in most cases.

Below is an example of a decision tool that I introduced in my blog several months ago. This is a simple tool designed to calculate margin enhancement opportunities. Assumptions were made using fungicide on (corn on corn) in Northeast Iowa, where we experienced moderate wind damage.                                                

 

Fungicide assumption for Corn on Corn with wind damage.

 

 

 

 

 

 

             Margin Enhancement Calculator

 

 

 

 

 

Product / Technology Price

$27.50

per/ac.

 

 

 

 

 

 

 

 

 

 

 

 

 

Grain Market Price

$6.50

per/bu.

 

 

 

 

 

Yield Improvement prediction

12.0

Bu./ac.

 

 

 

 

 

 

 

 

 

 

 

 

 

Income / ac. Enhancement

$50.50

per/ac.

 

 

 

 

 

Bu. needed to cover product cost

4.23

Bu./ac.

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Acres of application

500

 

 

 

 

 

 

Total Income  / Return $$$

$25,250.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fill in the Tan Boxes for results

 

 

 

 

 

 

Each individual situation is unique and needs to be reviewed with its own specific set of numbers. Using decision tools is a key ingredient in the process of improving your profitability.

Whenever challenges occur which threaten yield productivity, it's time to get to work on your after –Math.

If you're interested in receiving this spreadsheet, please send me a request and I'd be happy to forward it to you. If you're interested in more detailed production calculators feel free to contact me.

Cbarron@cb-farms.com

319-533-5703

Crop Disaster Plans

Jul 12, 2011

It seems like this has been the year of weather destruction. We've been enduring the heavy rainfall of early spring, severe flooding, and the extremes of heat and drought. Now it’s the time of year for weather volatility in the Midwest which includes severe storms with wind and hail. We all know our crops are at risk during the growing season from severe weather. It's relatively easy to assume that storms will hit someone else rather than our own operations. If we do get hit, even if we think we’re prepared, it's a major shock to our system. The shock affects us mentally, physically, emotionally, and financially. So what do we do? I've always liked the saying; prepare for the worst and hope for the best. This idea holds true as we consider our margin contingency and risk management plans.

When the unexpected happens, what type of response plans do we have in place? As I’ve discussed in earlier blogs; do we have adequate insurance coverage, the appropriate marketing plan, and a contingency cash flow plan for a short crop?
 
Unfortunately, there are some of us who have recently been hit by a weather disaster. Those of us who are currently experiencing challenges need to stay focused on things that we can control rather than the weather itself. It's important for us to avoid drastic decisions when emotions are high. Always consider the supplier partnerships that you have developed and lean on the experts. Their assistance is valuable when faced with weather challenges. Be sure to have conversations with your seed supplier, local retailers, and other experts who can help you understand your agronomic issues. Also, be sure to have conversations with your grain merchandisers and marketing advisors to discuss any changes or adjustments in your marketing plan. A discussion with your lender is another key contact for support and expertise to help you work through a possible financial challenge. The more experts you surround yourself with, the better opportunity you will have in getting positive results from any disaster.
 
Usually when something bad happens there are opportunities to learn. Weather challenges are no exception. For example, in 2007 we faced straight-line winds which basically leveled much of our crop. That year we took the opportunity to do studies on fungicide applications, insect management, harvest techniques, and numerous other side-by-side comparisons to determine best management practices when faced with down corn. We also worked closely with grain merchandisers to adjust delivery dates of grain. Another interesting process we discovered was a unique harvest technique which allowed us to harvest corn at an angle with virtually no grain loss at a relatively normal speed. Luckily we learned some management techniques in 2007 because unfortunately we were hit again with straight-line winds in excess of 70 mph at 6 a.m. on Monday, July 11.
 
Here are some pictures of our wind damaged fields.
Summer 2011 Flat Corn
 
Summer 2011 Flat Corn 0
 
While this is a frustrating situation, we have learned a number of things from the past and have great supplier relationships to help us endure this challenge.
 
Based on our experiences with weather challenges, we've put together this list of support systems to help us develop the best response plan for crop disasters. Every operation is unique and may have different needs; therefore, you may need additional support systems. If so, please forward me your thoughts and I would be happy to pass them along to others. When we're faced with challenges, it's important to help each other!
 

Weather destruction plan - support checklist

1.       Crop insurance agent
2.       Seed company - sales rep or agronomist
3.       Fertilizer and herbicide supplier (local retailer)
4.       Lender
5.       Financial Consultant
6.       Marketing Consultant
7.       Grain buyer
8.       Other farmers experiencing the same challenges
 
 
We were lucky in our area. Our crops were hit but the buildings were spared. There are many operations not far from our location which had significant building damages. Thankfully, there were no deaths or injuries. Buildings and crops can be replaced over time but people can never be replaced.
 
If you are lucky enough not to have been hit by a weather disaster this season, maybe now would be a good time to put together a contingency plan? Like the saying goes; prepare for the worst and hope for the best!
 

 

Expert Assistance

Jul 05, 2011

 

We all have unique farming operations with different opportunities. One of the primary keys to operating a successful business is determining how to prioritize our time, energy, and resources. I've had the opportunity to work with some successful business people in the past several years. One primary observation I've made is that the best business managers have a knack for prioritizing their time. They have the ability to recognize their own weaknesses. They are quick to replace themselves with people who are experts. They still make all of the final decisions for their business; however, they have better information with a much smaller time investment. Consider your operation; whether it's agronomy, equipment, marketing, or accounting. With the complexities of the world we live in today it's virtually impossible to be an expert in every area.
If you buy into the idea that the world is complex and it's difficult to be an expert in every area, there seems to be a solution that has worked for many businesses. This process is relatively simple but it takes discipline, communication, and follow through in order to achieve the best results. The structure involves the following process.
Develop an overall mission for your business. I have spoken of this topic in previous blogs. Basically, you need to know where you're going before you can get there.
Set a Specific Goal for each profit center within your business. Identify a specific yield level, price level, or production level. Basically structure a statement which defines the specific level of achievement.
Establish specific objectives to achieve your goals. In order to achieve any goal there needs to be a process which identifies and measures results.                                                                                                                 
1.       Determine the individuals responsible for decisions
2.       Develop the process
3.       Establish timelines and deadlines
4.       Identify  desired results
5.       Review results, analyze productivity, and efficiency
6.       Establish improvement plans and corrections procedures
 If you are personally good at developing plans and measuring results this would be a great area to invest additional time. Conversely, if you are somewhat unorganized or short on time, this may be an area where an external consultant could help you to improve your results.
Once you have established the above process, the structure could be replicated across each specific profit center of your business. The key to its success still comes down to the basic components of time, discipline, follow through, and (most importantly) the ability to recognize the need of assistance. For example, if you constantly struggle with discipline in marketing or are unable to put together an effective plan it may be time to hire a professional marketing analyst. Keep in mind, there are no silver bullets and every aspect of your business is complicated. Therefore, by sharing your work load and focusing on your individual strengths you can empower your business by the strengths of additional business partners. Increasing the size and knowledge of your business management team will allow you to structure your goals and achieve the results you desire.
If you have specific questions regarding consultants, or other business partners please send your questions. Determining what assistance may be most beneficial sometimes just takes a general conversation about your business which can put a spotlight on some specific needs.
 
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