I have been teased by several readers that there appears to be no evidence that I operated a combine on my farm road trip. Here is a photo of me operating a brand new John Deere Combine on the Hohenberger farmer in Illinois. Now, there is probably no evidence that I performed all combine operations perfectly, but here is evidence I was “driving” the combine.
It is nice to be back home, but I already miss the combine.
Yesterday I spent the day near Independence, Iowa with Chris Barron of Carson and Barrron Farms, Inc. Chris and his team of farmers farm about 7,000 acres along with a custom farming and seed sales business.
I will write a later blog on what his team is doing.
We spent most of the day moving grain around. These days farmers can spend more time on the movement of grain during harvest than actually harvesting the grain.
I finally got to ride on the combine for a couple of hours before I left for Illinois. The field I was in appeared to be yielding in the 180 range which was considered good since a couple months ago the expectations were in the 140 range.
As usual I had a great day and look forward to today. I will keep you posted.
Danny Klinefelter from Texas A & M was the second speaker of the day and his discussion on Peer Advisory Groups and Continuous Management Improvements. The studies from about 1,100 top producers around the US over the last several years attending the TEPAP conference show that only about 50% were using cash flow budgets and tracking profit and cost center. Only about 25% were tracking key ratios and using a policy for dividing earnings and withdrawing capital. After getting exposure to the use of these tools, after five years the percentage using these tools had increased substantially.
Douglas Adams, the author of The Breakthrough Company stated “Human beings, who are almost unique in the ability to learn from the experiences of other, but are also unique in their disinclination to do so”. The use of a Peer Group is designed to spark this ability to learn from others in your industry.
The Rule of 72 no longer just applies to compounding of interest, but the compounding of knowledge. Therefore, if you increase your knowledge at 6% per year, your total knowledge will double in 12 years. If you can increase it at 24%, you can double in 3 years. The use of a Peer Group can increase this compounding dramatically.
Peer Groups are in the range of 5-12 producers, but the optimum range is probably 8-10. Make sure the group is full of “Eagles”, not “Turkeys”. Try to not to have groupthink. You want many differences of opinion in the Peer Group. Many have monthly, quarterly or annual meetings. You may want to be a member of two Peer Groups. One based on operations and may involve competitors in your area and the other would be on the more sensitive areas of finance and succession planning, etc. that would be comprised of producers outside of your immediate area.
Danny’s goal is for 500 or more Farm Peer Groups to be in existance within the next five years. Remember, nobody is smarter than everybody.
Some of the advantages of a Peer Group are:
Even if you are top producer, you will find areas that others are Top Top producers and you can learn how to improve your operation to become the Top Top producer.
I spent all of last week attending the TEPAP conference in Austin, Texas. This intensive 7 day conference is put on by Professor Danny Klinefelter of Texas A & M University. Each day’s session would normally have two different topics covered by some of the best presenters in the farm business.
I would highly recommend that any farm operation attend TEPAP in the future. Even if you have a smaller operation, the information that you will receive should pay for itself many times over. Each of the presentations give you many choices on how to improve your farm’s operation and more importantly, the friendships that you will develop with other farmers from around the country can be even more important.
The only drawback from the conference is eating too much of the good food provided.
Again, I would highly recommend this conference for any farmer or farm related operation.
After six great days of presentation, we have finally come to the last day of the TEPAP conference. This is only a morning session and our presentation on public relations plans was giving by Moe Russell of the Russell Consulting Group.
Moe shared that we had 3 sets of good time in the last 100 years (1) during the 1910′s, (2) during World War II and the period thereafter and (3) during the mid 1970′s. He believes that we might be headed for our fourth set of good times. However, in each case after these good times, a period of bad times followed.
Public relation plans can add to your bottom line. These plans should be proactive, not reactive. A good public relation plan deals with:
When something bad happens, you probably have only 60 seconds to respond correctly to the situation.
Farmers need to know that they need to get green, grow green and stay green. This trend will only to accelerate.
Reactive plans may be needed in case something goes wrong such as a chemical spill, fire, tornado, equipment accidents, etc. You need to know how you will react.
When dealing with the press, remember to be:
Michael Mazzocco, Director at Verdant AgriBusiness Consultants, presented the afternoon session of day 6 of the TEPAP conference. This session was on Market Growth Strategies for farmers.
To grow your farm revenues, you have seven degrees of freedom:
You can focus on only one of these or decide to incorporate a couple into your farm structure.
If a farm decides to grow, then there are three horizons of growth:
Always be willing to shed your business of those operations that are running below your rate of capital. By doing this, you free up resources to expand those operations that exceed your cost of capital. This can be a double benefit.
All this week I am at the The Executive Program for Agricultural Producers (TEPAP) in Austin, Texas. This is an all week intensive program put on by the Texas A & M University and hosted by Danny Klinefelter. I am very excited to attend the program and will try to post at least one blog post each day on what I have learned or felt our farmers should be aware of.
Sunday, (today) was the first day and Dick Wittman of Wittman Consulting did a great job of providing an overview of why farmers “must” use accrual farm accounting to have an accurate view of their profitability and other pertinent financial ratios. There were a couple of bankers attending the program and I was talking to one later in the day and I asked him how many farmers are using accrual accounting. His guess was about 1% of his clients were. I then asked if using accrual accounting was important and he indicated it was very important.
Another thing that Dick stated that I thought was informative was that most of our farm bankers are already taking your cash basis income tax returns or financial statements and converting them to an accrual basis. If you have been with the same banker for many years, the banker will generally have these statements for each year and they will readily give this information to you. This could save you many hours of research and give you a good start on setting up your accrual statements.
Management succession consultant Dr. Donald Jonovic (you probably have read many of his articles or books already) provided a very humorous presentation on the interaction of farm families and the issues associated with farm succession.
One important nugget was to understand that their are three major components to a farm business:
Each of these roles interact with the others to some degree and when they do interact, this can be the time when the most conflict may occur. All of these components may involve all of the parents and children associated with farm, but it is important to keep the communication on these subjects timely and separate. The meetings may happen on the same day, but the agendas and discussions must be separate from the other. Also, what happens in the past stays in the past. What is important is to focus on the current and what you can do to make the future better.
Another nugget of information that I got out of the speech by Dr. Boehlje of Purdue University on Wednesday is that accordingto their studies at the school, the volatility associated with agriculture has gone up by 400% in the last few years.
This means that the price swings in ag commodities is now 4 times greater than it used to be. I can still remember when I used to trade ag commodities on the futures exchange (many years ago) that a price move in corn of 3 to 5 cents was a huge move. Now, 10 to 20 cents is almost the norm.
Dr. Boehlje also indicated that the volatility is not just in the sales price, but also the price that farmers pay for inputs such as fertilizer, seed and diesel. Just in the last two years, we have seen fertilizer prices zoom up to about $1,000 per ton, back down to about $300 per ton and probably now around $700 per ton.
How does all of this volatility affect our farmers. Dr. Boehlje indicates that great farmers view these times as a great opportunity to expand their operation and make it more efficient. It requires them to take maximum advantage of marketing skills, financial reporting, and banking relationships. It allows them to lock in great prices and also lock in their input costs. Even if input costs go up by 50% or more, the increase in prices allow them to lock in a contribution margin larger than they can get now. However, this requires them to know what their actual cost of operations are down to the bushel and acre level and they have a great relationship with their bankers.
The key question is where do you fall in this spectrum? Do you view this volatility as an opportunity or does is worry you. I hope you are in the former’s viewpoint.
Dr. Michael Boehlje, a farm economics professor at Purdue University spoke at out opening day of the National Ag conference of the American Institute of Certified Public Accountants (I know that is a mouthful). He gave a 4 plus hour presentation on the agricultural economy both currently and insights into the future.
One of the insights that he had was that current interest rates are at almost an all-time low. The normal yield curve currently has a dip in rates between the three to seven year maturity before it steepens out to the normal curve. He indicated that this presents a great current opportunity to lock in great rates in that three to seven year period.
He also indicated that it is much tougher to lock in low rates as compared to about a year ago due to the futures markets already pricing in higher rates beginning next year. For example, he presented a chart showing the projected 3 month LIBOR rate (which a lot of banks use to set interest rates). That rate is currently about .2%, however, the futures market is projecting this rate would be as follows:
This means that banks are not willing to lock in rates beyond a three to five period at a rate much lower than the expected LIBOR rate plus their normal spread of 200 to 300 basis points.
We received the following questing regarding our post on the allocation of land purchase to vineyard AVA:
When you purchase 150 acres of farm land, you are, as in this case, actually purchasing many components that need cost allocated to. In this case, the farmer is buying:
To allocate this properly, you need to determine the reasonable fair market values of all of these items and then allocate the purchase price accordingly. Fair market value for roads, tile line, fences should be based on what a reasonable third party would pay for the improvements, not the original cost. For example, if it costs $700 per acre to put in the tile system and it is about 5 years old, you may want to assume a reasonable buyer would pay about $300-$500 per acre, not the $700 per acre of cost.
After determining all of these fair market values, you need to then allocate the purchase price based upon the percentage of fair market value for each item to the total fair market value times the actual purchase price.
Lets assume the following fair market values for each item:
If you add all of these values together, you obtain a total fair market value of $740,000. If we take each component and allocate purchase price based upon their related % to the total fair market value, we would get allocated purchase price as follows:
If you add all of these values up, you get the purchase price of $705,000. Since the tile, roads and fencing can be depreciated over 15 years, you have taken about $100,000 of the total purchase price and created a tax deduction versus treating all of the purchase as land. In this case, that percentage would be about 15%, but every farm purchase will have their own unique situation.
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