Farming is getting more complicated by the day. I don’t say that to discourage you, but rather to encourage you to take charge of the ins and outs of your operation.
I’m sure there are times when farming seems like a never-ending maze. Just when you’re enjoying a stretch of higher commodity prices and good yields, margins get tighter and you smack into a dead end.
The recent downturn in grain prices shouldn’t have come as a surprise. If you bulletproofed your balance sheet during the good times, the opportunities will abound in the lean times.
Recently, we complied a list of best practices to help our clients get a handle on their level of risk. The best practices are divided into three major areas. Rate yourself by totaling the number of "yes" ratings, then determine if you fall in the green, yellow or red area.
Financial planning. The first major area to evaluate is managerial accounting. Developing an annual year-end balance sheet allows you to track your financial progress from year to year. Make sure your numbers reflect current-market value.
Next and equally important is developing an accrual income statement. This includes adjusting your cash income statement when inventory changes. This will give you the actual earnings for the year.
In addition, develop a projected income statement for the coming year. Then send your year-end balance sheet, accrual income statement and projected income statement to your lender. Sharing this information could actually earn you a better interest rate. Lenders need and appreciate these details.
The other two major best practices areas are planning and asset protection. With farms getting larger, having an electronic inventory control system can save both time and money. It takes a little investment to get started but provides peace of mind when you worry less about whether a load of corn gets "lost" in the shuffle.
Outside forces. Lastly, third-party risk is an area often taken for granted but one that we are paying closer attention to as our clients’ operations increase in size and sophistication.
Farmers need to be aware of the risk of grain delivery with a delayed payment, pre-paying for products that have not yet been delivered and supplier risk. The most practical way to mitigate these risks is to conduct normal due diligence and maintain adequate working capital to have the ability to absorb shocks from the economy or third-party risk. It is difficult to totally eliminate third-party risk.
Another area that requires continual work is community relations. My role at TEPAP (The Executive Program for Agricultural Producers) through Texas A&M University is to help farmers understand the what, why and how of public relation plans. A good public relations plan reduces third-party risk.
For example, consider my personal experience in obtaining permits to build two 7,200-head wean-to-finish hog facilities. When we built the first building, we had a meeting with the county board of supervisors for approval of the permit. This meeting was a real challenge with significant negative feedback from neighbors. Learning from this experience, we developed and implemented a public relation plan for the next five years.
The plan involved being a good neighbor and telling our story to community and educational groups, such as the local high school environmental science classes.
Five years later, we had a county board of supervisors’ meeting for the second facility permit.
One person was present, who was in support of the additional facility since he wanted some of the manure. This change was fostered by good public relations.
Large farm operations can also be targets for environmental and nuisance lawsuits. Your strategy should include all of the stakeholders in your community. In the long term, it will reduce third-party risk.
Take the assessment. Go ahead and rate yourself using the assessment on page 58. If you have 10 or more "yes" answers, you’re doing a great job. If you have five or less, you can put some of these items on your "to do" list.
It all comes down to the numbers, which is where Moe Russell comes in to help farmers analyze feasibility and manage risks. Contact Moe:
- March 2014