One of my new assignments has been working with the Farm Business Management Program instructors of Minnesota on a Web cast series for producers. It has been fun seeing how lenders, producers, agribusiness people and instructors join together and answer some of my discussion questions.
Recently I asked them to share successful and unsuccessful war stories concerning business growth and expansion. The following are some of the bad and ugly stories I received. Next week we will focus on the good stories.
Dairy Expansion Gone Wrong
A dairy farm expanded for the two kids. The kids came back to the farm directly from high school with no outside training or experience. The kids were not ready for the risk and the management responsibilities. Their parents put up all their own equity for growth, and lost most of it, ending in an auction.
The moral of this story is that growing the business for the next generation when the next generation has no abilities or desire for the business is a mistake. Initial excitement and the honeymoon period of a business can wear off very quickly if sound, objective goal setting and planning is not conducted. Too often, parents are living out their dreams through their children. You see it in sports, business and many other aspects of life.
Lack of Planning for the Unexpected
Another unsuccessful expansion was caused by failure to build in money for unknown capital costs after the quotes were in and the approval of the loan was made. Once the structure was built, there was no money to fill the structure with income-producing livestock.
The moral of this story is to build in at least 25% extra in your capital budgets for cost overruns. Overruns can easily occur when the price of building materials and equipment increases, or when there are mid-construction changes to plans. This happens almost every time, particularly in recent years with inflationary capital items such as steel and concrete.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.