Financing for 2020 is going to be rougher than years past.

There is not much good economic news to talk about these days.  For most of 2019, the Fed has been worried about inflation and now, all of a sudden, we are talking about the coming recession.  In agriculture, the news is even more gloomy, our markets are in confusion, to say the least.  Knowing where we stand within the agriculture economy is never easy, and this year, between the inept crop reporting by the USDA and Trump’s trade war with China, we are more in the dark than ever. 

Having struggled through tough markets over the last few years, many farm operations are barely surviving, and the forecast is not improving.

Ag lenders went into 2019 without much optimism for improvement in general farm economies.  In the spring many operations were warned that without significant financial recovery this season, there would be no continuation of the financing relationship.  So here we go again.

During the Great Depression bankers developed a terrible reputation in the agricultural world.  These feelings were renewed again during the economic struggles in the 1980’s.  Bank’s were seen as a necessary evil, and bankers were the enemy.  Unfortunately, banks are still a necessary evil and they are going to be harder to work with as the economy continues its current path.

I have seen too many farms put themselves in serious danger because they felt their bank was motivated to put them out of business and take their land.  This concern motivated defensive moves designed to protect their land and operation, but in reality, those choices put them in more vulnerable positions.  Instead of working with the lender to find a solution, both sides allowed the relationship to become adversarial.

First and foremost, if you do not feel you can trust your loan officer or bank, find a new one or at least talk to an expert outside of that bank.

If your operation has been struggling financially, start now to make a plan.  I know fall is a busy time and there are other critical tasks that have to be done in a timely fashion, but the longer you wait the more limited your options become.  If you start now to consider where you stand and what your options are, you give yourself the advantage of time.  You can make a plan then revise it, and revise it again, so by the time you begin talking about a loan renewal with your lender, you have a good solid, well thought out plan, and understand your options.

Having options is key and they are much easier to learn by talking to others.  Talk to folks who have been through financial difficulties on the farm, talk to your accountant, find an ex-banker who will walk through your situation with you.  At this point in your evolution, the more information you can gather better off you will be when you put the final touches on your plan for 2020 and beyond.

Please feel free to email me if you have questions.  Thank you for reading my rant and if you have a comment, please post it so we can all learn something.

tpyle@qosi.net

The Real Point of Updating Your Financials

One day last week I was asked about the importance of constructing a new set of financial statements each year.  As I thought about this question I kept coming back to a lesson I learned from a great loan officer. 

Back in the early nineties, I worked at Farm Credit Services and we had a loan officer who was very particular about his customers’ financials.  He asked a lot of questions and made his customers find answers.  One day I was talking to a friend who was also one of this loan officer’s customers, and this friend was complaining about the grilling he got year in and year out as they worked through the loan process.  I laughed and told my friend that the loan officer probably knew more about his operation than he did.

That winter that friend started coming into the office to talk to his loan officer more often.  Years later he told me that my simple comment had made him consider why the loan officer asked all those questions, so he started questioning himself.  Over the years he learned the value of two things; 1) accurate financial statements and; 2) a well-informed sounding board.  He told me that as he learned how to read and analyze his financials, managing his farm became less stressful and more effective because he could see how decisions would impact his operation and his financial well-being.

A balance sheet is a simple statement that shows what you own and what you owe at a given point in time.  You can update it in a matter of minutes by simply doing a quick mental inventory.  What did I buy this year?  What did I get rid of?  Simple.  Right?

An updated balance sheet is only as good as the effort you expend to accurately and completely update it.  I’ve had customers who spend weeks viewing and evaluating all their assets each year and I’ve had others who just took a 10% depreciation annually.  Obviously, the more accurate your update the more accurate your analysis can be.

The real value of a balance sheet comes in how you use it.  It isn’t just a snapshot of where you stand with assets and liabilities, it is an end and a beginning.  Each year as you construct your balance sheet and compare it to previous balance sheets you can see if you made progress or fell back, which then should lead you to question what worked or what didn’t work, which should lead you to better management decisions.

It is a beginning in that you can use it to determine how a decision can impact your financial position.  For example, if you are considering purchasing and developing a parcel from the neighbor you can develop a pro forma balance sheet.  You would add the value of the ground to your assets and the cost of purchasing and developing to the liabilities and you can see the immediate change to your net worth.

There is a wealth of information in a simple balance sheet, all there to help you succeed.  This last fall I received a call from a local farmer who could not understand why he was always cash poor but had a strong net worth.  We sat down and dug into his balance sheet and found several assets that were not paying their way, they were draining his cash every month.  He had assumed that since they were “worth” more than he paid for them, they were a good investment.

It is well worth your time and effort to construct complete and accurate financial statements every year.  As you generate, read, and analyze your financials you will find you are making better, informed decisions and you will find greater success as a result.

Manage the Farm like a Business

If you were to poll farmers, orchardists, dairymen and ranchers across the country asking why they chose agriculture as a profession, few, if any, would say “I am in it for the money.”  The reason people live and work in the agricultural industry is because they love what they do. 

The long hours of hard work and the inherent risks are just too much for most people, but farmers love the challenge.  Lou Holtz once said, “Winners embrace hard work.  They love the discipline of it, the trade-off they’re making to win.  Losers, on the other hand, see it as punishment.  And that is the difference.”  This is how ag people see themselves, tough and disciplined. 

On top of the physical demands, there are the challenges of being good stewards of the land.  We strive to produce at the highest levels possible while at the same time being the greatest conservationists in the world.  Keeping abreast of all the new technology and research, and how to incorporate them into our own operations is time- and thought-consuming.  Every single day of the production season there are hundreds of vitally important decisions that have to be made.  The focus necessarily has to be to produce the most we can from every acre.

The down-side to all these demands on a farmer’s time is they force his focus onto his work and away from the running of his business.  It is human nature to gravitate toward what we enjoy, so any time he faces competing emergencies in the office and in the field, he will always go to the field.  I wish I had a dime for every time a farmer told me “If I don’t produce a crop, I don’t survive.”  This is an absolute truism, but the same is also true of marketing, if you don’t market your crop well, you won’t survive.  In order for an agricultural business to succeed in today’s economy, there has to be active, purposeful management of cost containment, risk mitigation, finances, continuous improvement, and on and on.  How is all of that possible?

There are various technology tools that can support our decision making and management.  Specialists are available to us who are experts in everything from accounting to soil sciences, yet even with all this help, the management of an ag business can be overwhelming.  

The business of agriculture has many elements, and each requires active management.  When we focus all our effort and attention on production we are limit time devoted to the other areas vital to our long-term success.  When we see working on those other things as punishment, we won’t give them the attention needed to properly manage those elements of the business, and it will eventually cost us. 

We may embrace hard work but as my dad used to say, “sometimes the answer isn’t working harder, it is working smarter.”  With so much going on all the time and having to find solutions to urgent issues on a daily basis, finding time and motivation to manage the business side of things can be difficult, but it can be done.  Creating order out of chaos is almost impossible, but creating order before the chaos starts is doable.

There is an order to management that when followed provides the structure for a manager to successfully run his business.  Organization and disciple are both essential elements but the order in which we establish them is critical.  An organized plan of operation must come first.  When done correctly it will provide the framework by which all management decisions will be made, which will also provide the manager with the tools to help him be disciplined in handling the daily unexpected demands on his time and attention.

Set up a plan and stick to the plan.  That sounds pretty simple, but any plan will only work if the manager is disciplined enough to stay the course when the fires start to burn.

Tiger Woods talks about how his father taught him to golf from green to tee.  He started with the end goal, putting the ball in the hole.  Planning should always start with the goal.  Steven Covey taught “begin with the end in mind” in his landmark book “7 Habits of Highly Effective People.”  We have to know what we want to accomplish before we can develop an effective plan to get there.

Taking a critical look at how we are currently doing in terms of productivity, efficiency and financially are all important elements of creating an achievable plan, but that is a topic for another discussion.

Hiding In Plain Sight

I recently did some work for a chemical supplier who wanted to increase their share of a local specialty crop market.  The management team had watched this market grow over a period of time and seen significant acreage increases year after year.  They agreed that they needed to get into the market before it was too late. 

They concluded the best option was to find an experienced agronomist who could bring both market intelligence and a book of business with him.  A top-quality candidate was located and hired.  They gave him a pickup, a phone, and a laptop, then sent him into the countryside to bring in the business.

A marginal increase in business was seen but after two years the hired gun took his skills, and clients, to another supplier who was willing to pay more.

Management again decided to follow the same formula.  They found another candidate and exactly the same scenario played out.  After 5 years attempting to make inroads into the specialty market, they were no better off.

A year after losing the second agronomist they were considering a new tact.  They now were looking to buy a smaller regional supplier who had already built a significant presence in the specialty market.

I took a quick look at this company’s sales over the previous couple of years.  I looked at volumes of chemicals sold and customers with repeat purchases.  What I found was surprising.

The two agronomists each provided a marginal bump in sales and when they left there was a small decrease in sales.  Neither of the agronomists hired to bring in new business brought many “new” customers to the supplier. 

With very few exceptions, every sale attributed to those agronomists were made to customers who already had accounts and a history with the supplier.  The only thing new was that these customers had a person assigned to support them and manage the relationship.  While these customers did purchase more during the period when their assigned agronomists were employed by the supplier, and there was a decrease after the agronomist left, they remained customers and continued to purchase products.

While management and the board were digging deep trying to find a way to enter the market, they did not see that they already had a firm foothold.  Hiding in plain sight was the fact that they sold to virtually every specialty crop producer within their footprint.  Individually none of these customers were large buyers, so they did not garner much attention, but collectively they generated over $1,000,000 in revenues annually for the supplier, with or without the agronomists.

The analysis also showed that while customers had consistent contact with the supplier their volume of purchases increased.  Additionally, these increases grew incrementally each year that the customer relationship was actively managed.  To sales professionals, this concept is understood.

While this group was exploring external approaches to the market, they were missing the best solution, which was already within their grasp.  They already have the relationships, they simply need to do a better job of recognizing and managing them.

We are often like this supplier, looking harder and deeper for answers while missing those hiding in plain sight.

“If you know the enemy and know yourself, you need not fear the result of a hundred battles.  If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.  If you know neither the enemy nor yourself, you will succumb in every battle.”  Sun Tzu, The Art of War.

How well do you know yourself?  Are you missing things that are hiding in plain sight?

Data analysis

We live in an increasingly data-driven world.  Every time we get online, information is logged detailing what sites we visit and how long we stay there.  This collected data is analyzed to find trends that give marketers valuable indications of our purchase intentions.  The next time we log on we are greeted with advertisements tailored to our personal shopping and surfing habits. 

In agriculture, we have traditionally kept a significant amount of data.  Generations of farmers have kept notes on tiny spiral notepads, journals, sticky notes or tape recorders.  Today we have apps on our phones and tablets to help record our actions and results.  Unfortunately, most of the effort keeping these records has been a waste of time.

Why has it been a waste of time? Because we don’t review these records, and if we do look at them, we are mostly looking to corroborate what we think we already know.  We may have a wealth of information right in front of us but we tend to see only what we expect to see, especially when it comes to our own businesses.  Psychologists call this the confirmation bias, and it can be deadly to our progress, and possibly our livelihood.

We commonly get to the end of our year, look at our results, and quickly determine what went right and what went wrong.  When we suffer a loss, we commonly attribute it to an odd weather pattern or some other easily identifiable issue, rather than trying to find the real cause by studying the data we spent so much time and effort collecting.  Understanding what actually triggered gains or losses requires an examination of all the information we can gather, taking special care to not get caught in our own confirmation bias.

Unlike those internet marketers, who tempt us with appealing ads for the goods they know we want, we do not take advantage of the valuable data we generate.  They find opportunities in knowing our behaviors, while we risk limiting ourselves because we don’t connect our results to our own actions.  I know a farmer who loves to say, “A dog bites me once, shame on the dog.  The same dog bites me twice, shame on me.”  Too many of us are farming year after year with that dog taking bites out of our profitability without us ever noticing simply because we don’t look.

If the Freakonomics books written by Steven Leavitt and Stephen J. Dubner, taught us anything, it is that things are not always what they seem.  The successes and/or failures of your farm operations may not be due to the things you have always assigned credit or blame.  The only way to find out for sure is to take a hard, honest look at your business, assess what you do and analyze the results.  The key element is that you have to be willing to see and accept what you don’t expect.

If you have questions or would like to talk about how you can incorporate analytics into your business review/planning process, please contact me.

tpyle@qosi.net

509 760-0015