Industry leaders and experts help farmers navigate new terrain at Top Producer Seminar.
While more than 800 of the nation’s largest farmers, representing 30 states and more than 4 million acres, gathered at the 2014 Top Producer Seminar in Chicago, Ill., a bearish sentiment filtered through the crowd as speakers talked about the challenges and transitions ahead.
Setting and maintaining a strategy is the key takeaway from this year’s seminar, which led to the "Ahead of the Pack" theme. "As the market hits another wake of volatility, producers need new business skills to manage risk and improve their farms," says Jeanne Bernick, Top Producer editor.
The seminar also featured Top Producer of the Year Award winner and finalists. Congratulations to Lee Lubbers of Gregory, S.D., for being named the Top Producer of the Year and to Jay and Cara Myers of Colfax, N.D., and Joe Zumwalt of Warsaw, Ill., for being finalists.
Below is a little bit of flavor for what experts say is to come.
Human Resource Necessities
Tough times seem to be looming for the farm industry. Laura Cornille-Cannady, a farm business consultant who specializes in human resources, says farmers must maximize their assets, which includes cash, land, equipment and people. "In the U.S., if you have some dollars and cents, you can get the same kind of non-people assets as anyone else," she says. "Focus on people—they are a huge asset."
Cornille-Cannady shares these tips to help you fully maximize employee and team member talents.
Be on the same page. It might sound simple, but Cornille-Cannady says getting everyone on the same page is a key for success. It will also eliminate confusion and minimize conflict. "You must know what you want first," she says. "Then you define the goals, roles and rules."
Focus on results, not activities. Workers today are very visual. "Give them a clear picture," Cornille-Cannady says. "If words can’t describe it, show them and do it one time with them."
Avoid assumptions. "Don’t assume employees know," she says. "They likely don’t know what you want. Their experiences aren’t the same as yours."
Provide an organized task list. A shared task list is a great motivator. Cornille-Cannady suggests putting a whiteboard in the shop with all the tasks that need to be done. When someone completes a task, have them cross it out and put their initials by it. This will help tasks get done quicker and creates healthy competition.
Be specific. Tell employees what you want and what you don’t want to see. "Clearly define your expectations," she says. For example, telling employees to answer the office phone within three rings is much clearer than saying be responsive.
Understand why. Cornille-Cannady says overall, employees perform poorly for three reasons: lack of knowledge or understanding, lack of skills or abilities or lack of motivation. "You have to understand which one it is to make the fix," she says.
Compliment good behavior. "You get repeat performances by recognition, not rewards," she says. When you catch an employee doing something right, compliment them immediately. Cornille-Cannady says this can just be a quick word, but it will be taken to heart.
GAAP for Farmers
The 1980s farm debt crisis pointed out that the methods used to determine, measure and analyze the financial position and performance of farmers were either totally inadequate or seriously underutilized. As profits look more challenging to attain in 2014, financial institutions are starting to push for strong accounting principles and adoption of GAAP (Generally Accepted Accounting Practices).
"Banks are starting to force this," says Thomas Bayer, CPA, partner with Sikich LLP. "If you want to move upstream with your banking relationship, you are required to have GAAP financial statements. Once you hit a certain number needed for operating credit, those are the new rules of the game."
"Most farmers prepare a balance sheet and owner equity calculations based on market value rather than historical cost or other valuation methods," Bayer notes.
The Farm Financial Standards Council (FFSC) recommends farmers move from cash-based accounting to GAAP because: (a) lenders need to determine the reasonableness of collateral values, (b) the lack of records to track and accumulate historical costs, (c) the hybrid nature (personal and business) of many farm financial statements and (d) the dramatic increase in investment in capital assets during a period of time when the value of these assets was appreciating substantially—causing the true value of these assets to bear little resemblance to their historical cost, adjusted for depreciation.
"All of those issues will play into concerns of whether a lender says yes," Bayer says. "The lender knows you have a lot of equity, but they need to see financials on a consistent basis so they can compare you to others."
As farms get bigger, GAAP also helps farmers understand their own financial position. "You can’t do that unless you have this common reporting language you use from year to year," he says. "Also, it gives you credibility."
It builds credibility with stakeholders, bankers, vendors and input suppliers, customers who buy grain, landowners and investors.
"Most of all, it’s better information for the owners and the management team," Bayer says. A study by the University of Illinois comparing accrual-basis operating statements using GAAP to tax-reporting based information saw an average annual difference of 59%. This affects your ratio, Bayer says.
However, there are several issues that can arise when you convert to GAAP basis financial statements. An accurate operating statement for a period is dependent on accurate beginning balances for grain inventory, input inventory, any open purchase and sales contracts and equipment capitalization.
"We recommend going through the experience of preparing a balance sheet one year before GAAP basis financial statements will be required," Bayer says. He suggests talking to your accountant about moving to GAAP within the next three years.
For more information about GAAP, visit the FFSC website at www.ffsc.com.
Three Tips to Better Communicate With Landlords
Farming is nothing new to Iowa farmer Dave Nelson, who dreamed of dropping out of school in the 10th grade to help on his parents’ farm. But by graduating and first working at companies such as Caterpillar and Monsanto before returning, Nelson gained insights into good business practices for building brands and improving communication.
"We all have a brand," says Nelson, a fifth-generation farmer operating under Nelson Family Farms in Fort Dodge, Iowa. "Your brand is more or less your reputation."
Nelson also heads up Brokaw Supply Company, a fertilizer equipment business serving Iowa and Minnesota. He explains that farm branding is important because it shapes the attitude of landlords and others toward an operation.
For example, when you visit landlords, a clean truck makes a better impression than a dirty one.
Above all, he says, find X factors—qualities or attributes that set you apart from the competition. Here are key takeaways from Nelson’s presentation about growing your brand image:
Capitalize on practices. Do you perform strip tillage? Do you have conservation land? Do you own a tile plow or an excavator? Use those tools to provide custom work or other services that differentiate your business. Use photos to bring those practices to life in informational material.
Show off your family. Nelson’s family makes a point of not working on Sundays so they can go to church and spend time with one another. It’s not wrong to work on Sundays, he says—that example is simply an illustration of ways in which farmers can show landlords and others who they are. Keep in touch with out-of-state landlords by inviting them to visit your farm, and keep in touch through email and occasional newsletters. Conservation and technology are also important to the family.
Examine other companies. Brands such as Levi’s are a great example of branding. Among examples, 501’s are memorable because they had button flies instead of zippers, and the company produces a range of sizes. "You’re not changing your story, but you’re formatting your story in different ways to be appropriate to many different audiences who are watching you," Nelson says.
Be the Lead Dog
A farmer called on Christmas Eve to say he was planning a sale. "This isn’t fun anymore," he told Moe Russell, president, Russell Consulting Group. That conversation frames the future of farming well, Russell explains. While there will be reasons for some to exit the industry during the next five years, those who stay will have abundant opportunities.
"In the dog race of farming, if you’re not the lead dog, the view’s all the same," Russell says. Below are a few takeaways from his presentation.
Good times don’t last. Russell once heard of a 1940s farmer who paid for his farm in a year and had $7,000 left. He grew edible beans. "I don’t think that will ever happen again," Russell says. It marks an aberration that occurred post-World War II when the U.S. had a distinct competitive advantage over other crop-producing countries.
There’s more money to be made in farming than in any other industry. "However, you have to understand cycles and profit from that," Russell notes. Those who have bulletproofed their balance sheets and have strong working capital will be in a great position to catapult ahead of competitors in hard times. Cycles have occurred for 400 years and will continue as long as fear and greed persist.
Russell recommends a collection of short stories about people who have weathered difficult situations titled "The Adversity Paradox" by J. Barry Griswell. When looking at other industries and leaders in managing cycles, Caterpillar is a good company to study, Russell says.
Get an adviser to put you in the top third. In the area of commodity prices, if you’re not getting into the top third of the price range most years, Russell says, find an adviser with a good track record to achieve that goal. There are many advisers who can help producers do this.
Avoid Obamacare’s Hefty $100 Per Day Penalty
Tax experts initially thought farmers with fewer than 50 employees largely would be unaffected by Obamacare, says Paul Neiffer, The Farm CPA columnist. But now that the law is in effect, reality has proven to be more nuanced.
"If farmers provide health insurance to more than one employee, they have to be very careful," Neiffer explains. "If done incorrectly—let’s say they give health insurance to their spouse who’s employed but they don’t cover other employees, or there’s some type of discrimination—the penalty is very large."
In fact, the penalty is $100 per day per employee, meaning that if three or more employees are out of compliance for an entire year, the penalty would exceed $100,000, Neiffer says.
"I recommend that many of our clients maybe consider funding health insurance but to run it through as payroll so it’s not tax-free to the employee," Neiffer says. "We’re finding a lot of farmers employees’ wages are pretty low, so they’re able to go out on the exchange and purchase
subsidized health care."
Protect the Balance Sheet
The No. 1 job for crop producers in 2014 is to protect their capital position, which should be healthy due to an unprecedented run of near-record prices. "Defend your balance sheet," advises Dave Fogel, vice president with Advance Trading. "It’s important not to give it all back."
For Fogel, this means employing price protection strategies—the combination of options with cash sales—that protect against prices dipping sharply below the cost of production. Even locking in a 10¢-per-bushel loss now beats being exposed to additional price declines later, he says.
Fogel acknowledges that it’s difficult to execute marketing strategies, particularly with so much information, often from competing viewpoints, available nonstop in real time. He says producers are well served to pay less attention to price outlook information and more attention to strategy.
"Some of the same people now predicting $3 corn were those predicting $9 to $10 per bushel when prices were $8 two years ago," he says.
Don’t get caught up in overly optimistic outlooks or extremely pessimistic ones, he adds.
It’s possible corn prices could dip further, Fogel says, even though that’s not what he’s predicting. It’s a mistake to think corn and soybean prices can’t drop below the cost of production, he says.
With less than 20% of 2014 anticipated corn production priced—and some think it’s far less than that—and just half of 2013’s, many farmers are in the unenviable position of potentially facing two years of production with market prices less than breakeven, Fogel explains.
"Chicago commodity traders don’t care what your breakeven is," he says. Prices could head lower or higher, and nobody knows the events that will drive them because they haven’t occurred yet.
Fogel believes the best marketing tools to protect producer balance sheets against downside risk in 2014 are put options. Even though options have premiums—December corn puts are about 30¢, and November soybean puts are about 50¢—Fogel is not a fan of selling calls to offset part of the cost of buying a put. He says selling calls raises the specter of margin calls and makes the marketing strategy more complicated.
Unlike the excitement surrounding market news, market strategies that protect your balance sheet are quite the opposite. "Good marketing is really boring, but it works," he says.
While not a fan of selling calls, Fogel says they’re worth buying when producers sell grain in the cash market but want the opportunity to enhance their price on the upside.
When basis is strong, combining cash forward sales and buying call options can be a strategy that works, he says. Using puts and calls this way "puts you ahead of 90% of those marketing grain," he says.
One of the challenges farmers have had in forward pricing 2013 and 2014 crops is that in 2012, those who sold early saw prices escalate after they sold, Fogel shares. Unfortunately, this left many farmers unprotected against the drop in corn and soybean markets. In 30 years, there has never been a lower percentage of corn booked, he says.
Fogel says another hurdle farmers need to get over is the exaggerated attention to news of production problems in localized areas and whether USDA reports are accurate. Last summer, he says, many were so focused on reports of production problems in southeast Minnesota and northeast Iowa and whether USDA was accurately accounting for them that they lost sight of excellent conditions in the eastern Corn Belt.
"When you start fighting with USDA, you lose," Fogel says. Because of concern about Upper Midwest production, many failed to implement risk-reduction marketing strategies. "The market crashed while everyone was looking at Iowa," he says. "That cost producers a lot of money."
Instead of challenging the market, it’s a far better strategy to defend against moves that can go against you, Fogel says.