One of my assignments has been working with the Farm Business Management Program instructors of Minnesota on a Web cast series for producers. I asked them to share successful and unsuccessful war stories about business growth and expansion. Here are their lessons learned, passed along to you.
EXPANSIONS GONE WRONG
A dairy farm expanded for the operator's two kids who came back to the farm directly from high school with no outside training or experience. The kids were not ready for the risk and the management responsibilities. Their parents put up all their own equity for growth, and lost most of it, ending in an auction.
The moral of this story is that growing the business for the next generation when the next generation has no abilities or desire for the business is a mistake. Initial excitement and the honeymoon period can wear off very quickly if sound, objective goal setting and planning is not conducted. Too often, parents are living out their dreams through their children. You see it in sports, business and many other aspects of life.
Another unsuccessful expansion was caused by failure to build in money for unknown capital costs after the quotes were in and the approval of the loan was made. Once the structure was built, there was no money to fill the structure with income-producing livestock.
The moral of this story is to build in at least 25% extra in your capital budgets for cost overruns. Overruns can easily occur when the price of building materials and equipment increases, or when there are mid-construction changes to plans. This happens almost every time, particularly in recent years with inflationary capital items such as steel and concrete.
A major livestock expansion was completed incrementally using predetermined assumptions before children returned to the business. The producers maintained open communications with the community and neighbors.
The moral of the story is that most successful expansions occur incrementally, over time, so the business does not outgrow its financials and management. It takes time to groom the children's management skills and detail expectations, responsibilities and accountability. In today's commercial agriculture, keeping the community informed of plans, both good and bad, is like the old Fram oil filter commercial that said, “You can either pay now or pay later!”
FINANCIAL DUE DILIGENCE
Some other unsuccessful situations involved failure of follow-through on commitments. A group of producers who prepaid for supplies from a financially weak agribusiness encountered problems when it was time for the supplies to be delivered. Another producer had a problem involving failure to honor grain contracts with changing values.
The moral of these stories is that one must conduct financial due diligence on any major financial business arrangement, whether it is prepayment or contracts for services or goods. In the next 24 months, this will be ever more critical in tight economic times.
SUCCESSFUL MARKETING STRATEGY
One producer sold a majority of his corn for $5/bu. on the way up. He had seller's remorse when corn peaked at a higher price; however, with a breakeven price of $3.25/bu., he is laughing all the way to the bank.
The moral of this story is that good diversified-marketing and risk-management strategies can pay dividends, particularly if it guarantees a price significantly above the cost of production. Also, $5 corn looks quite good with 20/20 hindsight.
Dave Kohl, PhD., Corn & Soybean Digest trends editor, is professor emeritus at Virginia Tech. He's published four books and over 500 articles on financial and business topics. You can reach him at [email protected].