Change … growth … expansion … these words might either inspire you or create a knot at the pit of your stomach.
According to a study conducted by Purdue University, commercial corn and soybean producers expect significant growth in their operations over the next five years. The average grower expects to increase the size of his or her operation roughly 30% by 2008.
In these times of transition, how do you manage change, balance growth and increase your profitability?
“Choosing the right growth strategy is critical. The key areas growers need to assess are their capabilities and their interest in managing a larger operation,” says Mike Boehlje, an ag economist at Purdue University.
Boehlje says farmers should ask: “What is the best way for me to grow my business? Do I grow it by expanding the resources I manage in the traditional way we define growth or do I grow through intensification — creating more value with current resources?”
Growers should work to get better before they get bigger, the economist says. “One of the first things you should do is figure out what you're good at and do more of it. Before you worry about growing your business make sure it's operating as efficiently as it can. For many operations there is still some room to improve.”
Karmen Mehmen and her husband, Stanley, have been farming near Plainfield, IA, for 28 years. They have experienced a great deal of change in their operation in the last five years, but very little has to do with adding more acres.
The Mehmens are commercial corn and soybean producers who custom farm, sell seed, have a trucking business, a small registered Shorthorn and Simmental herd and a feeder-to-finish hog operation.
“We've learned that you can be a worker, a manager of workers or a manager of managers. We're at the ‘manager of workers’ stage,” says Mehmen. “We were maxed out on labor so we made the decision to hire someone full time.
“This was a major change for us. We had only hired part-time help in the past and we weren't used to giving anyone access to our records,” she adds. “However, our employee, Pat, knows what we're doing and why we're doing it. He makes recommendations and Stanley can lean on him. That's important to us.”
A key way to increase efficiency, Boehlje says, is intensification. “If you have excess machinery capacity you might intensify by custom farming rather than paying high cash rents and growing by trying to operate more acres by yourself,” he says. “Figure out how to improve your current resource use before thinking about how to expand. Make sure your asset utilization is to its highest level rather than assuming the way to grow is to add more assets.”
Boehlje says one of the most fundamental challenges growers face is making sure they understand the managerial skills needed to expand their businesses.
“Obtaining the financial resources for growth is important, but it's equally important to have the skills to run a larger operation,” he says. “Historically, the skills to be a successful farmer have been operational — focused on getting the work done, which is still very important. But those skills are table stakes today — what give you the right to be in business. The skills that are increasingly important to grow a business are those associated with a general manager or CEO of a company.”
Purdue offers two business-planning tools via the Web to help develop these skills. For information, go to the Strategic Planning for Commercial Producers site, www.ag econ.purdue.edu/extension/sbpcp and the Agricultural Innovation and Commercialization Center business planner site, www.agecon.purdue.edu/planner.
“Knowledge has become the premier input,” says Allen Lash, president of AgriSolutions, a financial management firm in Brighton, IL. He recommends financial management systems that enable you to monitor every aspect of your business.
This includes measuring assets and comparing aspects of operations to others as a management tool. Lash makes comparisons from a portion of AgriSolutions clients.
“Historical performance analysis helps producers understand where their operations stand in relation to trends in agriculture,” he says. “We assess growers' needs and work with them to develop, implement and manage change that makes the most sense.”
Lash says growers' competitive advantages are managerial competence, revenue management, asset management and cost control.
Through AgriSolutions, growers use managerial accounting to determine if one aspect of the business is dragging down profit overall.
He maintains that financial standards will change agriculture by:
Measuring performance/profitability with precision,
Measuring financial results of production changes,
Improving communication of financial results and
- Education, including the consistent use of management terms.
Lash says each producer's goal should be to understand his or her operation's cost and profit centers and how those compare to others, both annually and over many years. In addition, producers should compare their operations to others so they can make knowledgeable business decisions.
“Everyone's a hard worker. Every-body believes they are efficient. But knowledge will set us apart and that's what Allen and AgriSolutions have given us,” says Karmen Mehmen. “They've given us tools and courage, and that's propelled us forward since 2000.”
The Mehmens have learned to surround themselves with experts in different areas. “We don't have to know everything about everything,” she says. “Other businesses have boards of directors, but we've developed our own board — our financial consultant, our marketing consultant, a bookkeeping consultant and a crop consultant.”
Managerial accounting is a valuable tool for the operation. “We kept records, but until now, if something felt wrong we never knew where to look in our operation to fix the problem,” Mehmen says. “Now we can pinpoint those areas.”
Asset management is another area she finds valuable. “We look at every asset and determine if it's an income producing asset or a non-income producing asset. It changes our decision making,” Mehmen says. “People like to buy land, but it has to be for another reason than to make money because land is a very low income-producing asset. This is a hard process, but it makes us focus on what's going to make us better.”
The Mehmens are in the process of making their operation stronger so it can grow if their children decide to farm with them. Two are employed in ag business and one is a student at Iowa State University. If none of their children decide to join the business, the couple is determined to help give a young person a start in farming. Planning now will put them in the position to do so in the future.
David Gillen of White Lake, SD, has been farming for 26 years. He updates his financial analysis and business plan annually. He was part of a group that compared data from more than 100 farms in central South Dakota for years and now uses Lash's expertise at AgriSolutions.
“Comparing my operation to others helps me pick out the shortfalls,” says Gillen, who no-tills most of his corn, wheat and soybeans, and has a pheasant hunting operation. “If you look at your cost of production for five years and if you're in the bottom third every year, you'd probably better change something.”
He adds that comparisons offer a place to start looking for areas to improve. “You may or may not want to make changes, but at least you're aware of what's happening,” he comments.
Gillen believes that, in the future, a business degree will be more important than a plant or animal science degree. “We think of farming as very unpredictable, but there are a lot of things we can control,” he says. “You can't control how much rain you get or what happens with the markets, but you can determine if your assets provide a large enough return. If they don't, you need to figure out why.”
Through financial analysis, Gillen realized that he needed to sell his hog operation. He says the decision is much easier to make when you see the facts in black and white and take the emotion out of it. The same was true when he sold his cattle.
“It takes a lot of assets to keep a cow and we realized the return per dollar invested was greater for our operation with grain farming than with cattle,” he says. “We used the records to help make the decision, but it was still hard because they were my babies.” In the long run, getting out of the cattle business allowed him to spend more time with his family. Eliminating cattle grazing on his land also benefited his pheasant operation.
On the other hand, hiring a crop consultant has been important to the profitability of the operation. “Changes happen in the field so rapidly, if I had to monitor it all, I'd miss things,” says Gillen. “I rely on regular reports that tell me how my fields are doing. If I have a question, I can devote more attention to a particular field. I also rely on my consultant for recommendations, which are valuable because I don't feel like I'm constantly making decisions based on trial and error.
“I'm a little more excited about what we're doing each year,” he adds. “I'm happy to be farming at this time in history. There are so many opportunities related to technology that I'm very optimistic about the future.”