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Analyze Before You Downsize

With a 20 per cent decrease in land

comes a 20 per cent rise in fixed costs. When you raise the fixed costs, you raise the breakeven yield and the

breakeven price. Basically you’re just piling risk on top of risk.

Spring frost and a rough harvest in 2009 have pushed the coping skills of many producers to the limit. Out of pure frustration, a lot of farmers are questioning whether taking on more land was the right decision. If you’re thinking, “Here I sit with wet grain and no cash flow. Maybe I should downsize,” my suggestion is to first figure out how you got into this position. The devil may be in the details.

Be extraordinarily careful before you jettison a chunk of land. People tend to blame their problems on lousy weather, but that’s only part of it. First evaluate your seeding systems and how you are using your seeding technology. Maybe you changed drills and don’t have the same packing capacity. Consider whether each element in your system is doing the job. If you had trouble at harvest, remember: Your seed drill sets your harvest pattern.

Last spring, if you didn’t have the right seeding tool, or didn’t set it correctly, or didn’t pack your seed well enough, you probably suffered serious consequences. A spring frost won’t damage your crop as much if it’s well seeded and packed because the frost won’t go as deep in the ground. Nine years out of 10 you can probably get away with softer packing, but last season it often made the make-or-break difference in crop survival.

When harvest turns out to be a bear, rethink every aspect of your cropping system before you decide to lose land. How well do you manage your trash? How well are you working with your soil type? These, along with your experience and knowledge as a farmer, affect the outcome. You may be saying to yourself, “Hmmm, if the crop hadn’t frozen and with the great September we had, we would have harvested most of it.” That’s magical thinking. Don’t jump to conclusions and blame the size of your land base.

ACRES DOWN, COSTS UP

When you lose 500 or 1,000 acres, your fixed costs go up. You’ve already spent a lot of money on the associated equipment infrastructure, so dropping acres means you’re not going to get value out of your equipment investment. Downsizing a farm operation generally increases fixed costs, which takes a bite out of profitability.

PMG advises farmers to take a hard look at where their fixed costs are going to end up if they downsize. With a 20 per cent decrease in land comes a 20 per cent rise in fixed costs. When you raise the fixed costs, you raise the breakeven yield and the breakeven price. Basically you’re just piling risk on top of risk. After a bad year, the last thing you want to do is make things more difficult for the 2010 season.

This was a crazy spring and fall, but don’t let emotion affect your business decisions. That’s a lot less likely to happen if you do a careful analysis of your situation. Create a model of what your business would look like without a big chunk of land. Include your family members, employees and any other partners. Maybe you’ll decide to change your rental arrangements to better reflect sharing the risk. There isn’t just one solution. You know your farm; use your judgment.

In fact, your judgment can serve you well. After the frost last spring, some farmers wrestled with the question of whether to reseed their canola. We know of one farmer who was advised to reseed, but the farmer said, “No, I don’t think so.” He thought the merestomatic tissue — the cells in the plant where growth takes place — was still alive in the plant, and decided against reseeding. He harvested almost 50 bushels an acre. If he had reseeded, the late crop would have yielded about 25. The farmer used his knowledge to judge the situation before he assumed a risk, and it paid off. Same goes for downsizing.

This year, some of the hardest-hit farmers are tempted to drop land before they understand the ramifications. Downsizing comes with a cost. The best plan of action is to do a cost-benefit analysis to gauge the repercussions on your operation and ultimately your bottom line.

My advice: Go fishing in your books to dig up your costs then do some projections. The truth is I’ve never encountered a circumstance where downsizing looked like the right decision.

Gary Pike is president of PMG. PMG provides management, marketing, business-planning advice and coaching to members who represent 1.5 million acres in Western Canada. To find out more about PMG and how to become a member, visit www.agcoach.caor call toll free 1-877-410-7595.

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