Why farms fail even in good times. 25 January 2021

In good times we start to reverse our thinking about financial management and the best practices we followed in tough times.

The 2020 year is over (good or bad as it was), but let’s say for the sake of argument; the good times are still rolling. After some years of ‘head above water’ mode, that’s got to feel good.

The problem with good times? The brain tends to relax. That sense of urgency drifts away. People start thinking cost management is a quaint business concept.

Think about those glory days when bankers yearned for farmers to need them. Most didn’t. “What’s your biggest threat?” I asked a Farm Credit guy in 2013. “Cash,” he responded. “Farmers have a lot of it now.”

And some of them started spending it. Wildly. Fancy new equipment, boats etc. “Big boy toys”.

Economists have preached the gospel of good management for years, and listed a host of ways farms can fail, even in the best of times.

There are a few items on the list you can’t really control. Like owner death or disability; or natural disasters.

Everything else? Mostly amount to operator error. Things like speculation in the markets. Making decisions with inadequate information. Insufficient business monitoring throughout the year. Business dysfunctionality due to unprofessional governance practices. Borrowing for things that can’t pay for themselves. A poor marketing plan. Tunnel vision on production methods (“dad did it that way”).  Poor time and money management. Failure to control family living expenses (see “Big boy toys,” above.) Making decisions based on tax minimization. Poor personnel management.

How many of these are recognizable in your business?

We don’t know what 2021 has in store for agriculture. But based on last year we do know anything can happen. You have to be ready for every possibility. You have to mitigate the potential disasters, but you have to be ready to capitalize on the profit opportunities, too.

And when margins widen, it’s easy to take your eye off the ball.

When times are good, we start reversing our thinking about financial management and the best practices we followed in tough times. We start buying capital depreciable assets we don’t need to avoid paying taxes. That’s unwise because all you’re doing is deferring tax and wasting money on something you may not need.

Good times may cause you to stop relying on some of your best advisers, including your lender. We stop getting updates and get less pressure from bankers to prepare good, quality, forward-thinking budgets.

“People start to think, prices are good, and next year will be fine, we don’t need to worry. So the importance of quality financial planning really goes down.”

Loosen the purse strings

Is there a correlation between high farm product prices and family living expenses? When margins get fat, farmers tend to stop building business culture; they stop working on the little things that make their operation great, like governance processes and Standard Operating Procedures.

When things are tough they tend to buckle down, work harder at efficiencies, and really focus on quality strategic planning. When times get tough, people become better managers; when times are easy, they lose focus.

Can you avoid that? Of course. It just takes discipline.

You have an opportunity, right now, to work ON your business instead of in your business. With the lockdown we weren’t going to many meetings or on vacations. Use this pandemic time to advance the culture of the business.

“These are not fun things to do, but if you want to advance the professional culture of your business you have to do it. This environment is giving us a window to do it.

What’s your farming vision for 2021?

Spend time now to make future plans.

The New Year is here, and the summer planning season for farming is in full swing and it’s time to look forward and make plans for 2021.

Good plans start with a broader vision for the future of the farm. Without a vision for the future, no one – including the leader – really knows where the farm is headed. And if you don’t know where you’re going, you probably aren’t going to be able to make the right plans to get anywhere.

Business vision

As the leader of the farm, it’s your job to set the vision for where the farm is going. You don’t have to be a rare visionary to have a clear vision for your operation. You just have to be willing to spend some time thinking about the future and about what you really want for your operation.

Depending on where you are in your farming career, part of your vision for the farm’s future may include specific people who will lead the farm in the future. Investing in them as leaders through education and specific leadership experience will be a big part of where your farm will be in the future – even when you’re no longer part of it anymore.

Vision 2021

Here are a few things to consider as you think about your vision for the farm’s future in 2021 and beyond.

• Zoom way out. First, think far out into the future– maybe ten or twenty years. Imagine what your operation is going to be like then. What businesses and side businesses will be involved? Who will be involved? What are their roles? What does the operation physically look like? Take some time to consider the way you’d really like it to be. Based on that, you might write down a more formal vision – just a sentence or two – to help everyone on the farm keep that future in mind.
• Come back a bit. Now come back closer to the near future – perhaps a year to five years from now. What are the big goals that will need to happen in the near term in order for your future vision to happen? This is where you break it down into goals and plans that you and others on your farm can take concrete action on in the next couple years. Your goals might include bringing others formally into leadership or undertaking a large capital project, such as new buildings, cowsheds etc. It all depends on where you envision your farm heading.
• Get a sense for the numbers. Another key aspect, once you have goals and plans set on the table, is to take a close look at the numbers. Look at each plan and quantify the costs associated with it. Then it’s time to create or review the farm’s budgets and projections for 2021, as well as to get dynamic marketing plans in place for 2021 and beyond. 

Watch for opportunity in these three areas in 2021

Being ready is more than half the battle when it comes to these aspects.

As farms continue to shift toward wrapping up the 2020 year and looking toward 2021, I believe it’s a good time for leaders to begin thinking about opportunities that could potentially come in the New Year.

While it’s true that it’s impossible to predict exactly what those opportunities will be, it’s a smart idea to think and plan ahead in some of the areas where they might arise. That way, when a real-life opportunity presents itself, you’ll be more ready to evaluate it quickly and act when necessary.

Know your goals

The first step – before considering any of these potential opportunities is, knowing what your priorities and goals are for your operation in 2021and beyond. This means taking time to evaluate your farm’s current financial statements and meet with your lenders to get a snapshot of your financial status.

Then you can do some realistic planning for major capital projects as goals for 2021 and in the upcoming five years or so. What equipment will need to be replaced? Are there buildings in need of repairs or expansion? Will you need to add any on-farm storage in the coming years? Those are a few things to consider.

Three areas to watch

With goals for upcoming capital projects in mind, you can think about these three areas for potential opportunities as we move into 2021.

1. Land. This is always an area of potential opportunity for farms that want to grow, but it could become more feasible for some as operations review 2020 financials. Buying or leasing more land is something to be aware of as we move into 2021 if farm growth is part of your goals. You’ll need to be able to quickly determine whether a purchase price or lease bid is feasible for your operation. Having the right financial information about your farm business at the right time can make the difference between being able to seize a land opportunity – or miss out on the right piece of land altogether.
2. Your business. When it comes to your farm operation, there can be opportunities – other than growth in terms of acres – to grow the business. It takes a willingness to learn and be on the lookout for things like unmet needs or problems that others are encountering – and being creative about how to create a way to solve those problems. If you are looking for alternative ways to grow your operation and add revenue, consider how you can offer solutions to other farms or consumers.
3. Markets. The markets seem to be entering a whole new era of price volatility – and volatility can mean opportunity, if you have a plan and are ready to act. But constantly watching the market and trying to digest all the information that’s out there can be tough when you need to be spending most of your time paying attention to leading your operation.

What will the farm of the future require?

Leaders can work to develop the right skills now.

In most types of business, it can be helpful to think about what’s coming up in the future – things like upcoming trends, technology and other areas that can or might impact that industry. Most farm leaders probably think about and sometimes imagine or try to guess what’s going to be coming along next for farming.

We can think about the general direction that most farm businesses have gone in over the past twenty years or so. Overall, most of those same trends are probably going to continue or even intensify. There can also be new things that may come in to “disrupt” the agriculture industry – which are more difficult to predict.

Skill builders

Here’s another thing to think about: Because it’s impossible to predict exactly what new things will impact farming the most in the future, it might actually be more helpful and practical to consider the types of skills and expertise that will be required of farmers to best respond to those changes.

Since the farmer is the one steering the ship, so to speak, much of the farm’s ability to navigate new territory and trends that come along are in accordance with the level of skill the farmer brings to the table. As a leader, you can first assess where you’re at in terms of these skills and then choose to intentionally further develop the skills that will make the biggest difference for your unique operation as it moves into the future.

Future focus

Here are a few of the skill areas I believe will make the biggest difference for farmers in the future.

1. People management skills. As farms grow and expand – whether through more acres, side businesses or other ventures – more and more of the farmer’s job involves working through other people. More work to do means a greater number of people involved in the operation. This requires working on a whole different area of leadership skills, which some farmers may not have previously had a great deal of experience in. Working with people to “get stuff done” is usually a pretty complex job since human beings are unique and complex. Building people management skills will serve the farmers well both now and especially in the future as farms continue to grow.
2. Communication skills. When farmers move into a leadership position in their operation, the need for top-notch communication skills also becomes more crucial. Working to improve communication skills helps across every area of the business – anytime you’re working with other people to get things done, you’re using those skills – including with your family members. There are multiple ways to work on your skills in this area. Start by first working to understand your own communication style. Then, you can work to better adapt your style to others for more success.
3. Financial and marketing skills. More complexity within the farm business requires the farmer to sharpen and hone excellent financial management and marketing skills. Farm lenders want to work with savvy farmers. They need you to be “speaking their language,” ready to explain your plans in the terms they know and use. To be competitive, all farmers need to assess their current level of understanding of both financial terms and marketing tools.