In March, I spent four days traveling from Grande Prairie to Lethbridge as part of the Leading Edge Farm Management series sponsored by the Alberta Canola Producers Commission and I had the good fortune to be in the company of some very accomplished individuals.
Dr. Danny Klinefelter from Texas A+M University who, I would say, is the leading expert on agriculture financial management practices in North America talked about the five per cent rule.
Dean Gallimore, who is referred to by some as the “world’s greatest accountant,” has a vast and amazing knowledge of farm finance and accounting information. My head still hurts from trying to absorb everything he shared during his talks.
Merle Good and Joel Bokenfohr did a tag team “farm financial health checkup” presentation where they gave producers some tools and ideas to help them better monitor and manage their farms financial situation. (For more information and great ag management tools and resources visit the Farm Manager website.)
I gave a presentation on production and marketing risks that producers face and presented some ideas and strategies to help them better manage those risks. These included a review of Crop Insurance and Global Ag Risk Solutions’ production revenue insurance programs.
Out of all of this information, the main message was that today’s farmers need to be better than just good business managers to be successful and remain viable. Attention to detail, looking after the little things, managing your risks and liabilities and planning ahead for the future are all critical components to keeping your farm business strong.
I want to share some information from Dr. Klinefelter’s presentation, which was about improving your performance on your farm by just five per cent and what that can mean for your bottom line profitability.
Let’s look at an example with some numbers to help bring this into context. These numbers may or may not reflect your farm’s costs but they will serve to show the net end result — better profits through detail management.
Say, for example, your total costs of production (inputs, land, machinery, labour, etc.) to seed a barley crop this year are approximately $350/acre. You expect a 100 bushel crop at $4/bu., or $400/acre, gross revenue, leaving you with a net profit of $50/acre. Here is where the five per cent rule comes into play.
If you could reduce your input costs by five per cent ($17.50/ac.) and your yield and price remain the same you would increase your net revenues to $67.50/ac., an increase of 35 per cent. The critical factor here is not to cut back on crop inputs so as to reduce your yield potential, but to find cost savings through other avenues such as pre-purchasing.
If you were to increase your sale price by five per cent (up to $4.20/bu.) that would earn you an additional $20/ac. of net revenues, a 40 per cent increase over your original $50/acre.
Next, if you could increase your yield by five per cent, that would mean an additional five bu./ac. x $4/bu., for an additional $20/ac. of extra net revenues, which again is a 40 per cent increase over your original $50/acre.
The real math magic happens when you are able to combine two or more of these three different components.
If you could reduce costs by five per cent ($17.50/ac.) and increase your price by five per cent (increasing profits by $20/ac.) you would net an extra $37.50/ac., bringing your net profit to $87.50, an overall increase of 75 per cent.
If you were to increase yield by five per cent and price by five per cent you would end you would end up with a 105 bu./ac. yield at $4.20/bu. for a gross revenue of $441/ac. minus costs of $350/ac., leaving you with a net revenue of $91/ac., which is an 82 per cent increase over your original net revenues.
The last scenario combines all three aspects — reducing costs by five per cent and increasing yield and price by five per cent. Your end result would be an overall increase of $58.50/ac. bringing your total net revenue to $108.50/ac., which is an increase of 117 per cent.
The message I took home from Dr. Klinefleter’s presentation: look after the details of your business and the business will look after you.
I will continue to preach “know your numbers,” and “build a marketing plan and strategy, review it and stick to it!” These are key factors in helping you to achieve the five per cent rule on your farm.
Pay attention and, yes, sweat the small stuff. Five per cent doesn’t seem like much but the facts speak for themselves and the numbers don’t lie.
In business as in farming, good managers will survive tough times, but great managers will thrive! Let’s all aspire to make that move from good to great managers of our agri-businesses.