It’s easy to look around the agriculture industry and see changes in the landscape as suppliers, competitors and customers consolidate and grow.
However, growth in farming is often met with suspicion, partly because a farmer’s neighbours and friends are also competitors.
There’s also the question of whether rural depopulation and fewer families in the countryside is a good thing.
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However, no one is looking to walk back recent technological advances or the consolidations that they encourage.
Still, some operations have grown faster than others, and some have diversified into other enterprises.
The current speed and cost of farm consolidation might have farmers wondering if growth will be possible for their operation. In my experience, it requires solving the growth formula (capital + risk + execution) for an individual farm.
Capital
Financial capital could be cash or working capital that are available to be deployed. It could also mean equity and the credit available to be leveraged. Increasingly, it could also mean equity investors interested in growing alongside the farm.
Without capital, there cannot be growth. Lenders require security that they’ll be repaid, which is exactly why they refer to assets as security. It’s the backstop that will ensure they get repaid.
Off-farm employment is a good way to generate capital for a farm business. It allows a means of paying for living expenses and to re-invest farming profits to propel growth. Off-farm employment is sometimes a necessity during downturns in agriculture cycles.
Capital can also come in the form of contributed equity. Land down payments, for example, can be avoided if sufficient equity exists in the operation. Contributed equity can also come in the form of family members co-signing a loan application.
Human capital will also be required to grow the farm. Increasingly, this means working in the field and in the office.
Risk
With risk comes reward. Without taking the plunge and accepting some uncertainty, growth cannot occur.
Banks are in the business of assessing, grading and rewarding risk. A bank’s risk rating works similar to a basis at the grain elevator. An individual risk rating is the interest rate premium paid over a benchmark rate.
A lender is like a business partner.
Banks are in the business of generating returns for their money at an acceptable level of risk. If the relationship goes well, both businesses will benefit.
A harsh truth is a lender will end a relationship before they lose money. Farm owners should have the same mindset with their business enterprises.
AgriShield is an online farm risk assessment and management tool in which risks are identified, graded and prioritized.
Most operators are familiar with managing production, financial and marketing risk. AgriShield includes these risk families along with business strategy, business environment and people.
Execution
Sometimes drought and commodity markets are a reason for financial losses, but they can’t be an excuse. If everyone receives the same rainfall and sells into the same commodity markets, the lowest-cost producer will come out ahead.
What steps are you taking to lower your cost of production? This is increasingly difficult and increasingly important with the price inflation of recent years.
Entrepreneurs need to have a mindset or willingness to go through a wall for their business. This is what execution looks and feels like.
There will be setbacks, sometimes daily, but you push on. Execution is setting a goal and achieving it. Execution is also knowing others will say, “I could have done that.” Yet you know few have the skills, drive or finish required to see it through.
In Patrick Lencioni’s book, The 6 Types of Working Genius, execution is referred to as “tenacity.”
Every organization needs to have someone with tenacity or nothing will get finished. The geniuses identified in Lencioni’s book include wonder, invention, discerning, galvanizing, enablement and tenacity. If your farm team is interested in doing personality assessments this winter, I recommend Lencioni’s book.
But first…
Rather than expansion, your operation may need to dig itself out of a financial hole. Doing so will require the same formula of capital + risk + execution.
Conquering this mountain will be a growth moment and a cause for celebration.
Whatever your farm’s current situation, remember this: change is inevitable, but future growth is optional.
Craig Macfie, CPA, PAg, provides fractional CFO services to growing farms and agribusinesses. Find out more at www.springcfo.com.
