During the commodity price increase this spring and summer, I observed the euphoria of many farmers' growth expectations, plans and ambitions.
With the substantial price decline since June in corn and soybeans, perhaps some of that has worn off. I have observed some significant commitments in acres farmed and machinery purchases planned and made during that time that some already are reconsidering — and should be.
I think it's time we look at some business basics about growth, profit and risk to see if they apply to your business.
First, growth should be a result of doing things right, rather than an objective. If growth itself becomes an objective, you often take your eye off the important issues of basic business success.
Business success is about efficiency and effectiveness. That begins with continually examining our processes and results on an enterprise basis to determine what has resulted in the most bang for the buck. It might be improved labor efficiency with bigger and different equipment or new technology. But, knowing what you want to accomplish before you embark on the change significantly increases your chance of success.
For example, a client recently cut his $34/acre labor bill almost in half by going to larger equipment with newer technology. Additionally, he made his life a whole lot easier and with fewer headaches since he only needs some part-time help rather than two full-time em ployees. He had a plan and worked his plan to make farming easier, more fun and more profitable.
For years we've calculated and benchmarked our clients' machinery and labor cost per acre. Then we combine the two since you can accomplish your goal with more labor and less equipment or more sophisticated equipment and less labor. However, at the end of the day it's the combination of the two that hits your bottom line.
A $140+/ACRE variance in the combined machinery and labor cost per acre makes $20 or $30/acre difference in cash rent pale in comparison to the costs you can control.
To keep your head straight, I suggest answering this basic question: What can we do better in our farming operation than anyone else, and still fit our passion and help us meet our goals?
Growing to say you are farming more acres may not improve your bottom line and may significantly increase your risk-to-reward scenario. I've often indicated risk to reward can be likened to a teeter-totter — growing where the potential risk more than offsets the potential reward may put your entire net worth in jeopardy.
If growth should be a result of doing things right, rather than an objective, how do you know when you meet your objectives?
It requires a balance of reaching your numbers in areas like yield, return on assets, asset turnover and return on equity, machinery and labor cost per acre. In addition, it's not all about meeting financial numbers. It means linking production numbers to financial measurements.
It may involve different seed genetics, variable-rate applications, grid sampling, population refinements — all pointing toward efficiency and effectiveness. What often happens then is that somebody is watching you and likes what you're doing. Then guess what…you end up growing in size because you're doing the right things right.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 34 states and Canada. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.