This is the time when things slow down a little on the farm and you can think about and measure profitability, then plan for the next crop year.
For the record, you're in the best business in the world — one with great opportunities. Today, production agriculture is going through big changes — and many producers won't continue for a number of reasons.
One is that a number of producers will retire. Another is that many will exit because of a lack of profitability. Adversity plays a role, too. For example, weather has especially taken its toll in many parts of the country, such as the High Plains.
But with every difficulty there's opportunity, and change usually presents opportunities for those who adapt.
To be successful, I've found that producers need to carry out three manager-type jobs.
The plant and production manager. Most are good at this job and getting better. This has a comfort zone for most farmers and is, unfortunately, where they spend most of their time.
The marketing manager. This job is a lot more difficult. However, we see farmers getting better at marketing, especially when they focus on making decisions based on gross dollars per acre that include all expenses, depreciation and profit.
The financial manager. I recommend using two financial gauges in this area: return on assets (ROA) and return on equity (ROE). In the last two issues we've shared spreadsheets that figured ROE on new seed technology and South American vs. Iowa production.
View these gauges much as you would the gauges in your combine or tractor. They have normal operating ranges, caution ranges and ranges showing that you have to stop and fix something.
The appropriate financial gauge range varies by where you are in your farming career, the amount of debt you carry and your goals. We've observed that decision making becomes easier for our clients when they consider anticipated impacts on ROA and ROE before making key decisions.
You can do these three jobs yourself, share them with partners or hire them done — but all three tasks are critical to continued success.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 15 states. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.
Using ROA And ROE
Return on assets (ROA) and return on equity (ROE) are tools you can use for goal setting and managing your operation.
This is generally the time of year when you and your lender complete a new balance sheet. After doing that, take your net worth increase and add back all interest paid. Then divide this figure by your total assets. This will give you ROA. Adding back interest puts you on a level playing field with a neighbor who may not borrow money. This is more of an operating or production measure.
ROE is figured by taking your net worth increase and dividing that figure by your total net worth. ROE is a financial measure that can indicate how you make use of other peoples' money to generate a better return on your money.
We work with operations that are leveraged, so ROE, many times, is higher than ROA. This works if you're profitable and manage the risk. If your ROE is less than your ROA, you're not generating a return above the cost of your borrowed money. Your finances need your attention.