The recent drought in half a century was a reminder that market moves in all directions make it prudent to arm your business to ride through any price scenario. Efficient use of data has bullet-proofed Nick Frey’s farm business. "Data make you a better farm manager," says the fifth-generation farmer with WCI Family Farms in Linden, Ind. Frey attributes his knack for using data effectively to his Purdue farm management degree.
"When you are the best manager you can be, you can quickly and accurately know where your business is and prepare for the future. I’m still learning what that means.” Effective use of farm financial information enables him to be confident that he has “a competitive bid; we can be sure of our input rates, and we can understand the marginal impact of a capital purchase."
Frey is the only one of his generation to come back to the family's corn and soybean farm so far. Nick farms with his dad John and his mom Lori. Nick handles the information transfer from the farm's operations to the office, where proper records are kept and plans are built.
He relies on CropTracker to help monitor grain yields and inventory in real time. “I was having trouble keeping up with all of that incoming data; I let technology fill in the gaps. It keeps decision-making more agile; I do less paperwork and spend less time on the calculator."
Technology helps Frey efficiently manage logistics for the current year, and maintain information so he can reconcile expenses, keep accounting current and know inventory positions at all times.
"I have more time for strategy, business planning and improvements where I need to get better," he says. "Accurate and trustworthy information from my data make it easier to complete tedious and time-consuming tasks. I can manage our 50-50 and custom-farming clients more confidently. For example, reporting is much easier because I can query a database versus sorting through a pile of tickets and then build my own report."
Frey describes his process for problem-solving: First, he identifies any problems and then finds solutions, knowing that no one software program fits all needs. Next, he focuses on collecting accurate and consistent data. "Otherwise, nothing matters and you are wasting your time," he says. "Lastly, have discipline. Follow through, analyze and make use of your data."
Strategic direction is what Michael Boehlje, Purdue ag economist, preaches, as well. He encourages farmers interested in growing their businesses to consider a two-phase approach.
"First, you need to think about growth beyond adding resources. Buying equipment and buildings or adding land is not the only way to grow," he says. "We suggest farmers grow gross sales and then grow bottom-line profit potential. Focus on being the best in class for one enterprise or activity on the farm."
Boehlje explains that means identifying a specialization and intensifying efforts to increase efficiency, productivity or some other aspect of the business not requiring additional land, labor or capital. "Once you maximize efficient size and lower your point on the cost curve, you are ready to expand in that space and look to buy or rent more land to grow production," he says.
Four possible strategies can be considered during phase two. The first is to replicate. Once you establish the minimum efficient size for your enterprise, replicate it, Boehlje says. "This has worked successfully in the dairy and pork industries where farmers determine the minimum number of animals – the optimal size pod – and add another plant or farm," he says.
A second strategy is to network or create joint ventures. Just like a co-op, farmers can link with other colleagues to purchase products or source inputs for more purchasing power or maybe sharing machinery. On the sales side, consider negotiating contracts together.
The third strategy is to vertically integrate. "Move upstream or downstream. Become your own seed or crop input dealer, or go into the processing or transport side of the business," he says. "Be aware that margins are typically tight in most businesses, and don't assume you will necessarily make a lot of money."
Finally, Boehlje advises farmers to consider diversifying into a business outside of agriculture driven by forces different than those driving agriculture. Related ag industries may give you synergies, but not reduce risk.
"Getting better before you get bigger can work in any business environment, not just a volatile one,” Boehlje says. “Recognize that expansion is more than deciding to buy assets. Have managerial skill sets you need in place, because expansion can be a frequent failure environment. Be opportunistic in the context of a strategy, but don't pour concrete before you have a plan."
Better business checklist
Barry Ward, Ohio State University production business management lead, says farmers must monitor individual enterprise profitability, develop and monitor risk management plans, and always be on the lookout for opportunities. Here are some tips following a volatile year:
- Be proactive to secure financing. Don't assume that one lender will meet your credit needs. Create a backup plan by cultivating local multiple lender relationships in preparation of additional needs. Some may need to increase operating lines of credit.
- Be prepared for more paperwork. Tighter lending standards may require more financial information.
- Manage costs. Look at all options, including growing non-biotech crops. You may have opportunities for cheaper inputs and higher returns if a local market exists.
- Consider buying inputs in bulk or through a buying group. Purchase fertilizer tank storage and/or retrofit existing buildings for dry fertilizer storage for flexibility to buy direct from wholesalers and at off-peak periods. The same may apply to propane and diesel.
- Evaluate flexible cash leases that may allow you to manage escalating fixed cash rents. Flex leases may keep your base rent lower, and also allow the landowner the chance to participate in revenue upswings.
- Track financial data. Be sure your balance sheet is up to date and you have a reasonable cash-flow projection over the next 12-18 months.