Last month Russell Consulting Group held its seventh annual summer seminar in Moline, IL. More than 150 of the best farmers from 12 states attended.
Since many of our clients have had substantial net-worth gains over the last seven years, we felt it was time to concentrate on a new set of issues. Transition and tax planning topped our list.
Many of our clients have sons or daughters farming with them and these issues are critical to saving the wealth they have created. It's also important for making a smooth transition to assure adequate retirement income for the first generation and the most opportunity for the second generation.
Another topic was diversifying opportunities that would position farming operations to be less dependent on government subsidies in the years ahead. With diversification comes a new set of issues, such as what investments to make and how to analyze their potential.
Steve Baker, founder of Rural Development Associates of Central City, MN, made an excellent presentation on the due diligence producers should exercise when looking at value-added investments in food and fiber industries.
Baker points out there are many good companies to invest in and there are many that have serious weaknesses in either their market, geographic location, cost structure or business dynamics of the industry.
It was an eye-opening presentation and valuable, especially in this environment where we see “blind enthusiasm” with some farmers chasing selected value-added investments and not properly analyzing all the risks and rewards.
More importantly, Baker points out that there are several criteria farmers should consider before making an investment in a value-added ag business. They are:
Is the investment aligned with your personal goals?
What are the needs of your spouse and family?
What are the liquidity requirements of the investment?
What is your safety and risk appetite?
What is your willingness and knowledge to monitor the investment?
What is your balance sheet capacity and how does that match with your farm needs?
These are excellent strategic issues to think through that are really internal and personal issues.
After these questions are addressed, then you can go through the external analysis and due diligence process Baker recommends. If you're thinking about investing in an ag value-added business, I'd recommend visiting with him. His e-mail is: [email protected].
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.russellconsultinggroup.net) or call toll-free 877-333-6135.
The Power Of Diversification
One of the major reasons we recommend farmers look at diversifying their operation by adding a livestock component or investing in a value-added business is the wealth growth potential of diversification.
For example, if you invested $100,000 for 10 years and it returned 7% per year, you'd have $196,715 at the end of 10 years.
However, note below the money accumulated if you invested the same $100,000 in five different investments of $20,000 each, which resulted in various rates of return of:
- 20% for the first investment
- 15% for the second investment
- 7% for the third investment
The chart below shows the total amount of money you'd have.
Then assume for the fourth $20,000 you invested in an investment that returned you nothing over the entire 10-year period, but you at least saved the original $20,000.
And lastly, with the fifth $20,000, assume you invested in an enterprise that had no returns and you actually lost the $20,000.
Note on the chart the total amount of money accumulated would be 34% larger than the $196,715.
This illustrates the power of diversification. The key is finding the right investment to accumulate even greater results.
|•||$20,000 @ 20% for 10 years||=||$123,834|
|•||$20,000 @ 15% for 10 years||=||$80,914|
|•||$20,000 @ 7% for 10 years||=||$39,343|
|•||$20,000 @ 0% for 10 years||=||$20,000|
|•||$20,000 lose it all||=||$0|
|34% more than 7% annual return ($196,968)|