Good risk management involves knowing what to change, what new technology to use and when to implement it.
“Why should I try the latest products or technology when what I'm doing today is working just fine?” That's a question many farmers ask us.
For example, every day you're inundated with advertising about a new machine or great yield or performance advantage with a particular product. So what's the best way to determine which new product or technology will result in an improvement in your bottom line?
We'll give you ideas about how to evaluate the latest products and technologies. The decision process involves up to five steps:
- Needs analysis
- Cost analysis for new product
- Alternatives for each
- Net present value analysis
- Final decision
The first step to determine if the product brings value to your operation is to complete a needs analysis. This can be as simple as, “my pen is out of ink; I need to buy a refill.” Or it can be as complex as determining the need for a combine or what biotechnology innovation to use. Obviously, the combine and technology examples are much more complex.
If your existing combine is just worn out, go directly to step #2. If not, analyze whether you really need a new combine or not.
Calculate what your cost per acre is to run the combine you have. Include all the costs: interest, depreciation, maintenance, repairs, fuel, etc. Divide these costs by the number of acres you combine. This gives the cost per acre to run the existing combine.
In addition to hard dollars and cents, look at factors such as convenience, efficiency, expansion plans, opportunities for custom work, etc.
Efficiency experts claim you should be able to harvest in 27-30 days. When considering efficiency, make sure you've identified the problem and are not just trying to solve it with new equipment.
A Minnesota client recently eliminated the need for a new combine by adding another grain cart and some part-time help to run it. This made his current combine adequate.
Whenever possible, put hard numbers into the decision. These can include cost per acre, acres per hour, acres per man hour, or idle time per hour.
Be sure to consider all factors impacting these numbers. Write them down and the decisions become clear, and easier to make.
It takes a different approach to analyze the need for new technology on your farm.
The first step is to consider: the source of the new product or information. Is the source reliable? Is the company offering the technology reputable? If there are any concerns when you answer these two questions, go to local sources who are known to be reliable for further references or more information.
Once you've assured yourself the source is reliable, you must determine if what's being offered will result in an economic opportunity.
Key questions include:
- What problem does it solve?
- What cost savings will result?
- What is the economic benefit?
- What efficiencies will I enjoy?
- Will this be more convenient than what I do today?
- What additional risks will I assume?
- What other changes will I need to make if I use this product or technology?
Do your best to put a dollar value on all the costs and opportunities associated with any new product or technology.
Careful consideration of your needs is the first step to making good business decisions. In future articles we'll discuss tools you can use to make the best decisions for your farming operation.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free 877-333-6135.