I observe how farm management is evolving over time. It’s a relatively slow but constant process, affected at times by the strength of farming economy. In my opinion, the changes are for the better because the changes have resulted in improved farm business management.
Farm Management Canada and the Agri-food Management Institute recently published results from their Dollars and Sense report.
The study identified seven top practices that lead to farm financial success. You can find more information on the report, including printable copies, at www.fmc-gac.com.
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Two of the practices have direct correlation to recent discussions I’ve had with a couple of farm families. I think these discussions will be common at many farms this fall and winter.
One of the farmers who called me mentioned that, based on the current prices available for his products, his margin has fallen, on average, to $5 per tonne over his cost of production. This is quite a change from what he’s been able to achieve in the past few years.
His comment is tied to one of the top practices identified in the study: Know and monitor your cost of production and what it means for your profits.
Assuming that he’s included all costs, he will still be reporting a profit. And, as the saying goes, you can’t go broke making a profit. You can run out of cash though. This happens when your non-expense cash outlays (capital investment, principal repayment) are greater than the profit you’re generating to turn into cash to meet these commitments.
This isn’t usually an issue in the short term as the shortfall can likely be absorbed through normal operations.
In the longer term though, a farmer will have to align the cash flow coming from the narrow profit with his or her commitments.
Failing to get profit margins and cash outflow requirements aligned leads to problems that become increasingly difficult to manage.
Knowing your cost of production is important at all times. It is increasingly important to know where your profit margins are as margins shrink.
As soon as your costs of production exceed revenue generation, you are reporting a loss. Losses chew into equity. Again, in the shorter term, this usually isn’t an issue. Longer term losses though, obviously not so good.
Longer term or sustained losses lead to one of the most difficult discussions I ever have with farm families.
How far do you go with negative margins — and with eroding equity — before you make significant changes? There is no easy answer to this question.
There’s another management saying that is relevant to this discussion: you generally can’t cut expenses fast enough to compensate for falling revenue. This will be true for many farm families, depending on the severity of the revenue challenges they’re facing.
In this instance, it’s better management to know what the costs of production are so you can more quickly adjust your costs.
Another part of cost of production discussion is a function of a farmer’s production strategy.
There is a range to the strategies farmers use when it comes to yield. At one end, there are farmers who maximize inputs in an attempt to maximum yield. At the other end, there are farmers who focus more on optimizing profit margins than on maximum yields.
Farmers are both ends of the spectrum need to know their cost of production, and that must include all costs.
The second call I had was from a farmer who had reported losses for the past two years and was concerned about his ability and his need to generate profit for 2016.
That led to a discussion about cost of production. In this case though, while his input costs were accurate, he hadn’t included the detail in his overhead, or fixed costs. So, he was missing a significant piece of cost information.
The latter farmer’s comments are tied to another of the top practices identified in the study. Make business decisions using accurate financial data.
I know farmers who use both ends of the production strategy successfully. They know where their costs and margins are be-cause they use accurate financial data.
The improvement in farm business management practices is wide-ranging. Some areas have seen greater advancements than others. Agronomy has seen some quite strong changes. While financial management has improved well, there remains room for improvement.
Farmers absolutely need to have really good financial information. Especially when margins narrow.
