The 5% solution

Farming has experienced incredible changes in recent decades.

Farmers have lived through the 1980s farm financial crisis, the lean years that followed, the 2000s-2012 boom and the aftermath of the commodity boom.

But one thing hasn’t changed at all: Danny Klinefelter’s five percent rule.

“There’s something that gravitates towards this all the time,” Klinefelter said soon after officially retiring from his career at Texas A and M university as a professor and extension economist.

“The top 25 percent were about five percent better than the average. The bottom 25 percent were about five percent below average.”

Klinefelter is lauded among farm management specialists for his insights into the real-world economics of commercial farms. He has worked with and trained thousands of farmers in the United States, Canada, Australia and New Zealand with his relentless focus on incremental improvements in farm management.

His mantra is based on the compounding value of continuous small improvements, rather than the search for major changes.

Farmers will see a massive improvement in profitability if they can improve by five percent the average net price on sales, lower net costs by five percent and raise production per unit by the same amount.

“You need to make improvements across the board. You need to continuously improve,” he said.

The mathematics of net returns are sometimes hard for farmers to realize unless they stop and think about them, Klinefelter said. Small, incremental changes can add up to much more than most realize.

“From a management perspective, there’s a huge difference. You might say, ‘it’s five percent, five percent, five percent. That’s 15 percent.’ No it isn’t. It’s typically over 100 percent in terms of net. It’s additive. It’s multiplicative.”

Klinefelter’s insights arose from the U.S. farm financial crisis of 1982-87. He didn’t examine those who failed and left farming.

However, from looking at those who survived, he found some barely making it, while others were continuing to grow and actually making money most years.

“They were performing on their loans,” said Klinefelter, who was working in the farm lending system at the time.

He dug into the divergences between those who were doing the best and those who were doing the worst and found his three areas of marginal differences.

Those differences in performance have continued since, in good times and bad.

“It didn’t matter if it was in cotton, cattle or canola,” he said.

The top 25 percent don’t always have good years or profitable years, but their bad years aren’t as bad as others’ and their good years build up their positive momentum.

“They do it year after year, compounding. It’s exponential,” he said.

Klinefelter compares the top farmers with baseball players who hit .300. Compared to the .250 hitter, they only get one more hit for every 20 times at bat, but it’s all the difference in the world.

The weakest 25 percent are like people driving a car at 55 m.p.h. when everybody else on the highway is doing 70.

“Eventually you’ll fall behind.”

From his decades helping farmers hone their operations to stay ahead of the relentless and inexorable pressures on farm margins, Klinefelter has concluded that farmers need to focus on piling up little improvements and to being willing to embrace the headaches that come with every change in management.

“As soon as you solve one problem, you find another,” said Klinefelter. “But there’s nothing that can’t be improved.”

 

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