The attitudes, knowledge, skill and profit gap among producers is getting farther apart by the day. I list attitude first because I've learned it's one of the most distinguishing characteristics between highly successful farmers and the rest of farmers in production agriculture.
Those who have the attitude that they control their own destiny rather than their destiny being controlled by the weather, the markets, the government or their neighbors are by far more successful.
The variance in the profit gap among producers is supported by the data compiled from our customer base compared to averages. In 2003 our customers had an 8.9% average return on assets and 15.1% average return on equity. Selected state Farm Business Association data showed a 4.7% average return on assets and a 3.9% average return on equity.
The chart shows the results, starting with the same $500,000 net worth and growing it at different rates for the same 10-year period.
The producers in the high-profit category had goals and capitalized on opportunities in marketing, machinery and labor costs. They used best agronomic practices.
I believe the data for 2004 will show an even greater gap is developing between the two groups.
Many of these high-profit farmers are taking less risk and having more fun because they view themselves as general managers. They surround themselves with trusted advisers who take care of those things they don't like to do or aren't good at. Even if you're the only person in the operation, you can embrace this concept.
Selected farmers in this high-profit group are among those bidding up cash rent rates. They know the farm and its inherent production capabilities, they know their costs and they have a marketing goal that includes all costs — including living, depreciation and a profit.
Unfortunately there are other farmers who also bid up cash rent rates and are at the other end of the profit curve.
See the sidebar for more on this subject.
Wealth Creation Potential
|Slow Growth||Fast Growth|
|• $500,000 net worth||• $500,000 net worth|
|• 3.9% growth each year for 10 years||• 15.1% growth each year for 10 years|
|• Equals $733,000||• Equals $2,040,000|
|SOURCE: RUSSELL CONSULTING|
Cash Rent Competition
While at the Indiana Farm Show in February I had dinner with one of our clients. He's one of the sharpest young farmers I know. I asked him to describe his greatest challenge in production agriculture today.
Without hesitation he said his biggest challenge is trying to compete with increasing cash rent bids in his area. By the way, his area is not unique. Terry Jones, my partner, and all of our associates hear about that same challenge.
That makes sense because production agriculture is a free-enterprise business in a free country. If it was that much more profitable in South Dakota than in Ohio you'd soon find that out and have a farming operation there. We're finding that also holds true in a global environment.
However, even in global production agriculture there is a normal bell curve distribution. If you are on the right side of that curve there's tremendous opportunity.
Back to my client example. He put his numbers together and took it to one of his competitors and showed him his analysis of what the subject farm was worth in terms of cash rent. His competitor had little idea of the actual costs, returns and risk.
That led my client to conclude that some of what is occurring is due to excellent management, but some is also due to ego, old money, stupidity or a combination of several or all. That will create opportunity.
As Warren Buffet once said, “In the commodity business, your dumbest competitor is your competition.”
If competing in production agriculture were easy, everyone would farm.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 20 states. For more risk management tips, check his Web site (www.russellconsultinggroupp.net) or call toll-free 877-333-6135.