1. High Performance Planning
Similar to the 1980s, I believe we may be entering another cycle of consolidation in production agriculture. Today’s environment of both increasing crop revenue and increasing input prices mirrors that challenging decade where the fittest farmers survived and thrived.
If you plan to be a top performer in the coming decade, plan now for how you will sustain your operation during periods when prices fall and input costs remain high or continue to rise. For example, we have a number of clients that enlisted judicious written planning—including employee motivation and accountability—which grew their business when others were failing.
When looking at the big picture, the free market continues to create a balance between income and expenses. But short-term success depends on your ability to manage the variances.
2. High Performance People
Our consulting experience with larger farms proves that good managers can acquire all the land they need, all the equipment they need, and all the money they need. Their challenge for further growth is often people management.
To get things done right, the best managers get the right people in the right place at the right time with the right skills. For example, one client of ours successfully manages 55 employees in their large dairy, swine and 12,000-acre farm business—and they have very low turnover.
Their keys to success? Treat employees like family with time off for kid’s activities, pay an hourly wage to benefit those who work longer hours, have a written employee manual that spells out performance and discipline when needed, and keep a list of possible future employees.
3. Managing Your Risks
Remember in 1973 when $86 per ton anhydrous shot up to $237 by 1975? Fast forward to current times when we’ve seen the same input go from $390 two years ago to $1,000 per ton today. It’s simply supply and demand.
As input costs continue to escalate, the best producers know their costs and employ sound managerial accounting on a daily basis. In the years ahead, I believe producers should move toward more of their costs being variable rather than fixed. That way they can manage margins better and react to a changing environment more quickly.
For example, we have advised certain clients to lease machinery rather than purchase it—based on overall financial situation and leverage ratios. One client needed a third combine due to added acres—so they leased a third combine from a grower in a different part of the country whose machine was idle do to having a different growing season than our client.
4. Develop Relationships
As input prices continue to soar, both growers and retailers are challenged by added risk—and manufacturers are pushing more risk down the supply chain. In many circumstances, it is unlikely that ag retailers can withstand all the resulting risk, so they in turn push as much risk as they can down to the farmer.
What should you do? Look for ways to partner with your suppliers. There is significant benefit for suppliers to have knowledge of your needs so they can accurately forecast levels of necessary supply. You can benefit by finding common ground with your key suppliers to ensure you get the products need, when you need them.
For example, plan your fertilizer needs now for 2009 and work a deal with your supplier. Last year we had one retailer tell us that their anhydrous manufacturer demanded both the order and payment many months ahead of application season. In this situation, a supplier-producer partnership to determine amount of product needed benefits both parties.
5. Enjoy the Ride
For ten years I have told clients that they could create more wealth during the coming decade than was created in the past 25 years. That turned out to be true then, and it continues to be true for the coming decade—although more is certainly at stake.
Since founding Russell Consulting Group, our focus has always been on helping clients make farming more profitable and more fun. Our experience suggests that identifying risks that cause stress in your life is the first step making your efforts more enjoyable.
For example, don’t beat yourself up if you sold grain too soon. Secondly, bulletproof your balance sheet now during these current good times. Over the past ten years the average farmer in the U.S. has increased his net worth at a rate of 4% to 7% annually. And some of our clients have improved their net worth four-fold in the last ten years. That’s a 16.6% annualized gain. Enjoy the ride right now and prepare for the future.
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