The Bottom Line: Team Up, Save Money

September 22, 2016 06:26 AM
 
The Bottom Line: Team Up, Save Money

There are many potential advantages of collaborative farm business models, all intended to capture economies of scale, reduce costs, improve asset utilization, access greater management and technical expertise, or obtain market access.

Probably the simplest form of collaboration is a strategic alliance where one or more parties work together for a shared purpose or advantage while remaining independent organizations. The agreement doesn’t have to be formal, but it can be. Most often I see shared planting and harvesting operations, where equipment and labor can be leveraged and better used.

Another common form of collaboration on the farm is a joint venture, which is an enterprise undertaken by parties that otherwise remain distinct entities. This type of business model requires more planning, record keeping and written procedures. Details should be written down to minimize misunderstandings and ensure all parties know what’s expected. Good fences make good neighbors.

More complete types of collaboration might involve mergers, which combine multiple entities into one, or acquisitions, which is the purchase of one or more entities by another.

Change should occur when we “see the light” rather than “feel the heat.” With today’s grain prices many are feeling the heat. As Franklin D. Roosevelt once said: “Competition has shown to be useful up to a certain point, not further. Cooperation, which we must strive for today, begins where competition leaves off.”

I’ve seen some collaborative efforts work great, and I have seen some fail. Most farm operations lack accounting systems that tell them they’re in trouble. They include what I call “rearview mirror” accounting, which is totally historical and after the fact. What is needed is “dashboard” accounting or real-time projected accrual-based accounting.

Based on my experiences, collaborative farming arrangements should follow these guidelines:

  • Partners need to have similar interests from the start and continue for the long haul or the business will fracture and fail.
  • Don’t cut on professional advice for marketing, finance, taxes, insurance and human resources.
  • Inspect what you expect. As the size of your operation grows, not everyone has the same values, work ethic or commitment.
  • Be aware of your image in the community. Make sure you spend time telling your story of sustainability. 

One of the most successful examples of collaboration is the FUN (Farmers United Network) group in eastern Iowa. Chris Barron, a Top Producer columnist and one of our clients, is a member of the group. Their model is simple: the eight farmers who work together come from all age groups, and they hire equipment and trucking from two organizations, owned by two of the eight. All eight keep their separate organizations. By the way, Chris says “eight is enough.”

Their machinery and labor cost per acre compared with our client benchmark is $45 less. That per-acre cost savings due to collaborative farming can mean the difference between profit and loss with current grain prices.

Collaborative farming can have advantages beyond dollars and cents. They can include:

  • Quality of life for personal time
  • Growth opportunities
  • Back up if someone is hurt
  • Transition planning for farmers ready to retire
  • Stability and critical mass
  • Marketing opportunities in negotiating with more bushels

One observation I’ve made in doing our benchmarking is the gap between high-cost, low-cost, high-profit and low-profit producers is getting farther apart by the day.

The bottom line: You have to be better than average to survive in the commodity production business. If you are far better than average there’s a tremendous amount of wealth to be created in farming. 

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