To make the critical move toward competent business management of a family farm is no easy task.
“Farms are just like any small business; they fail if not run properly,” says family farm manager Jacob Wagers, when discussing the need to take family farms to the next level. “So many fail when they make a generational change.”
That shift came unexpectedly when he and his brothers lost their father in a 2005 automobile accident. Fortunately, he left behind a strong business with years of data and a wife who was highly involved but allowed the boys to run the farm.
While the farm is still in transition, it’s making strides in efficiency. Each brother’s formal job description is built into the farm’s organizational chart. With their mother, they are voting members on the farm’s board of directors. An off-the-farm advisory board is in the works, as are position-based contracts, continuation plans in the event of a brother’s death and formal hiring plans for farm heirs.
It’s all part of the Wagers’ efforts to shift focus from day-to-day operations to build a long-term organizational strategy.
Quantitative data is key to producers’ success, says Kevin Dhuyvetter, specialist in farm management and professor of agricultural economics at Kansas State University.
In west-central Minnesota, Brett Duncan uses data to drive farm-management decisions. After working as an engineer for an agricultural equipment manufacturer, Duncan took over in 2005 for his dad.
In the transition, Duncan and his father developed a strategy, separating the businesses, day-to-day management, cash flow and ownership for more sophisticated financial analyses. “I use budgets and cash flow to plan decisions through the year, and adjust them to match what actually happens,” he says. In addition to cost-of-production estimates and yield estimates, Duncan uses basic business ratios to track how the business is doing.
Data has also helped Duncan build confidence in his bankers and negotiate flex rents with landlords, who are already familiar with the ground, yields and comparable rents in the area. He calculates flex rents using public information adjusted for specific field types.
Easily modified budgets help Duncan quickly tell whether or not an additional crop treatment will be cost-effective.
A variety of tools ease managing financial and farm data: QuickBooks for daily bookkeeping and profit and loss statements, and the University of Minnesota’s FINPACK farm-management software. While the farm’s crop plan was once a simple spreadsheet, Wagers now goes into far more depth to estimate grain production and storage capacity, cost of production, grain marketing and other useful measures.
He bases decisions on whether to take on new ground and cash rent on how much it costs to grow a given crop.
“We’re always looking forward,” Wagers says. He uses historical business overhead data to estimate 80% of production costs.
With a few calls to suppliers and references to previous years’ QuickBooks data, Wagers enters the estimated price per-unit of inputs in a simple Excel spreadsheet. If the price changes, he can easily change the input to reflect the new cost of production. These calculations help him make decisions on locking prices in fall or winter.
While technological tools are important to analyze data, farm managers shouldn’t dismiss the importance of other business skills such as communication.
“Successful operations of the future likely will have many employees, landowners and business partners, so producers need to be able to work well with others,” Dhuyvetter says. “Historically, most farmers have worked hard all day while almost minimizing their interaction with others. Few farmers would classify themselves as a ‘people person.’”
Communication is particularly important in building relationships with lenders. Farmers must become much more business-minded.
“Instead of going in to simply ask for funding, present the farming operation as a business opportunity for the bank to make money on by investing in it,” Dhuyvetter says. That means sharing information and showing the expected rate of return.
Duncan provides his bank his basic business financials, such as balance sheets, crop budgets, projections and business plans, and yearly goals. He prints out reports from QuickBooks and Excel for the bank to input into FINPACK.
The same applies to communicating with landowners. “Be willing to discuss results from other types of arrangements like cash and crop-share,” he says. “Treat your landowner as a stockholder. You have a fiscal responsibility to provide them with information.”
Communication is critical when working with multiple business partners, yet that is often lacking among family members, Dhuyvetter says. “It’s easy to assume that because we’re family, we don’t need to talk about things, yet we understand outside partners need information all the time,” he says. “We have to make sure everybody is on the same page and that finances and management strategies are transparent.”
Forming a board of directors has helped fill communication gaps. The Wagers hold weekly “manpower” meetings. They post tasks, along with the person responsible and the date due. “It’s an accountability check to have it up in everybody’s line of sight.”
Dhuyvetter believes that family farms should treat all stakeholders like true business partners, regardless of whether they’re family or live on the farm. For many producers, transparency requires a paradigm shift.
“The more your business partners know what is going on and what they can expect, the easier they will be to work with. Family values still matter, of course, but they matter in all lines of work,” Dhuyvetter says. “Sure, there are things about a family farm that are different than corporate America. But we should not use that as an excuse for not treating the operation like a business.”
For example, Dhuyvetter is often asked about leasing arrangements for land owned by on- and off-farm family members. “A number of folks seem to think that because it is family land, they should get to lease it for less than what they would pay a non-family member,” he says. “While off-farm siblings might be willing to do that, it should never be an expectation.”
Other family dynamics can also create challenges in running the business. While Wagers says he and his brothers trust and take directions from each other, they’re implementing job descriptions and position-based contracts to prevent potential disputes over responsibilities and ownership.
“If you’re all equal owners but don’t separate ownership from the role you play as an employee, it can become problematic pretty quickly,” he says. “Responsibilities aren’t often given out equally. We need a system of who’s in charge.”
“There’s a whole new dynamic,” Jacob says. “Everybody used to work really hard because it had to be done. But there’s more to do than can be done. Unless we get really effective about the way we do it, we’re not going to keep up, especially with the key management areas.”
For tasks the brothers can’t address, a flex labor force including high school students and retirees helps fill the gap.
Wagers also stresses the importance of planning for changes in ownership. The board of directors is researching options for a buy-in for adding new partners, as well as a buyout plan if a member exits the business.
They also have written a succession plan. For instance, a spouse would receive 75% of the deceased’s salary the first year following his death, 50% the second year and so on. They’re also researching other estate-planning strategies.
In addition, the board is defining how to evaluate a new employee such as a niece or nephew. To ensure new hires make sense, the board plans to assess the need for additional employees, necessary skills and how the person’s character fits the business. They hope to use the advisory board for unbiased input, similar to corporate interview panelists. They’re also planning ahead to prevent nepotism, such as requiring an introductory phase where the new hire does not work directly under his or her parent.
Though he has far fewer people involved, Duncan also has learned the importance of building a strong team. Knowing his resources helps him keep the farm operating efficiently.
“You can’t do everything by yourself and still make good management decisions,” he says. “Sometimes you need help, whether from a family member, employee, crop advisor, accountant or lawyer. It takes some of the day-to-day pressure off and allows you to make good decisions.”
While most farmers understand the need to operate with a business mindset, taking it to the next level won’t happen overnight or with a class.
“We’re asking folks to change their thinking, and it’s not easily done. This is a process that might take a long time, but starting to think more like a true business is a positive move,” Dhuyvetter says.