Financial intellect gives farmers a competitive advantage
Why some farmers are more profitable than others is a perennial question. The answer is of interest not only to farmers, but also to professionals working in the agricultural sector.
Data from the Southwest Minne-sota Farm Business Management Association comparing five-year averages of financials for operations with high net farm income and operations with lower net farm income shows that top producers are growing at a faster rate than all producers.
Rob Holcomb, a University of Minnesota economist who helped develop the data, notes that one difference between the groups is that the lower-income group indicated they received more inheritance than the top-income group, although the top group was more likely to have purchased the farm from relatives. Those in the top-income group also indicated they spend more time reading farm management educational material.
Other variables, such as the amount of time spent on marketing and on projecting income and expenses, were not significantly different between the two groups, Holcomb says.
Not surprisingly, the top-income group was more likely to use commodity futures and options, Holcomb notes.
The amount of time spent on record keeping wasn’t substantially different for the high- and low-
performing farms, the study showed. In addition, the amount of financial help the operator received throughout the life of the business was not relevant. Time spent attending educational meetings and the number of changes and updates performed by the farm manager in the past seven years were a slightly significant factor in comparing the high- and low-income groups.
Habits of Top Producers
Greg Wolf, a consultant with Kennedy and Coe ag consulting services, says the top producers
he works with all have similar financial habits, which include the following:
Top producers are known for hunting the best information, but information alone is of little value unless it becomes "actionable," or something farmers can act upon. This habit speaks more to the way top producers look at information, including weather, markets and last year’s P&L statement. "The key to this analytical mindset is to be analyzing all existing information for insights that will help make better management decisions," Wolf says. "I like the term ‘accounting that makes a difference,’ which is all about making better long-term management decisions based on our analysis of information."
Kennedy and Coe uses ratio analysis, trend analysis, DuPont analysis, shock analysis and risk analysis, among other tools, in working with its clients. As farming operations have grown in complexity, some indicators of profitability are no longer so. A commitment is required to seek the best financial information.
This habit involves identifying what makes the business of production agriculture special. Can you produce more efficiently than others through your size, ingenuity, location or resource base? And how can you capitalize on opportunities that play to your strengths? "Top producers are always thinking about this," Wolf says. "Understanding your competitive advantage leads toward particular business strategies and away from others."
Having a clear understanding of who you are and what makes your business special can help you more thoughtfully make decisions about alignment with others, whether through alliances, peer groups, advisory teams and even service providers. Understanding your business’ strengths and weaknesses better prepares you to think about learning and benefiting from the strengths of others in other areas. That opens the door to strategic partnering.
A solid business model with a strong competitive advantage still needs to be financed well to function well, Wolf notes. Often, that means debt financing, but it could even include equity financing relationships. "Lender relationships have been a challenge for most producers, at least at some juncture in life, but it can help to regard a lender as another strategic partnership and to remember that there are only two keys that a banker is looking at in your business: the financial package that you present and the management profile that he observes," Wolf says.
This habit is about always trying to learn more and improve the job you do. It is about learning new and better ways of doing things but without losing sight of your business strengths, many of which might be historical. "Work becomes dull without continuing to learn and grow and meet challenges successfully," Wolf notes.
Top producers are always seeking the best information. Beyond the weather and market data, they mine their financials to gain a clearer understanding of their position and performance. The indications of profitability that were once intuitive are no longer so. Top producers watch financials consistently.