Farm operations are as unique as one person from another. What works for your neighbor might not work for you. Conversely, your neighbor might question your actions and business. Why is there no-till on one side of the fence and tillage on the other? Why does one producer have a big grain storage system complete with a dryer while the farmer down the road doesn’t have a single bin?
Although each approach is different, each person is trying to do what is right for his or her farm. There are four common big-picture objectives all businesses must address heading into 2015.
1. Assume CEO Responsibilities. Who is the expert in your operation? Many of us work with financial advisers, agronomists, marketing analysts and other specialists. These experts are valuable, yet their primary role is to provide information, guidance, data and new technology. Benchmark data, averages and examples from other operations aren’t good enough anymore. Margins are too tight to rely on outside information, so you must carefully identify professionals who truly understand your business and its mechanics. Most importantly, you must realize the need to be the final expert. That’s the responsibility you have as CEO of your farm.
2. Define Goals. As entrepreneurs, we tend to come up with many goals, yet we don’t necessarily know where to start. As a result, accomplishments fall short of expectations. The best results I’ve observed stem from goals that are short and simple. Consider this method: Set four goals for the year. You might come up with eight or 10, but prioritize the four most important objectives your operation needs to accomplish in 2015. Assign deadlines to those goals; determine which team members will be responsible for meeting them; understand factors that could derail progress; and assemble the supplies, tools and people necessary to succeed.
3. Project Growth. For most producers, growth is defined as an increase in acres, livestock or some other measure of production. Instead, try thinking first about profitability, which is the most effective way to build an operation. Assume your business projects 5% return on investment (ROI) next year. An additional 5 bu. to 7 bu. per acre at current prices could yield 2% additional ROI. That could equate to as much as $20,000 in net revenue improvement. Replicate that improvement over 10 years, and you could accumulate more than $260,000. Incremental gains can make a huge difference to the growth of your operation.
4. Manage Risk. For many grain farms, low commodity prices have dropped profit-margin potential into the red. Both fixed and variable costs will require intensive management for the foreseeable future. Land rents and equipment are two line items with the most potential for managing or lowering costs. The biggest risk we face is lowering costs too quickly at the expense of yield. Remember that increasing the yield also decreases the cost of production. Each input can be measured on its dollar value. Marketing and crop insurance are also critical to managing risk. Invest your time in learning as much as you can about available financial tools. Marketing corn at $3 per bushel to $4 per bushel will require a plan that is much more complex than marketing $6 corn.
In my next column, we’ll get back to margin management, focusing on profit opportunities that might present themselves this year. Keep in mind that if we’re looking for a specific tree in the forest, we must first make sure we’re in the right forest.