Minnesota farmer Paul Zimmerman extended a firm handshake and greeting on behalf of his daughter to Dr. David Kohl, professor emeritus from Virginia Tech. Zimmerman’s daughter is a likely successor to their farm. She started her mentorship with Dr. Kohl’s insights in Mankato, Minn. years ago when she wrote notes as a high schooler in the audience. Kohl noticed her with fanfare then. Her dad reports that she now works for Cargill and will soon be getting her ag MBA at Cornell where Kohl did his master’s degree and PhD. Dr. Kohl was clearly delighted to hear this news saying, “This just made my day!”
I share this story because Dr. Kohl has been a great encouragement to me over the years when we shared the ag event stage. As a professional speaker it is very rewarding to hear how your message has impacted farm lives for the better. We all need encouragement; those on stage, those in the audience and in the field.
Here’s Dr. Kohl’s notes on positioning for success in the economic reset. Even though he was addressing a U.S. audience, we can all learn to be better farmers.
- Focus on what you can control and manage. This is critical in business. Dr. Kohl’s Homestead Creamery made $68K this year because people kept their glass milk bottles. His milk business has a plan for folks who cherish the glass bottles, when the naysayers said this habit would ruin the business.
- Really good managers are making a cost readjustment wherever they can. Kohl told the story of a young farmer who relinquished marginal land, cut family living costs, and added thousands to his bottom line. What lines on the balance sheet do you need to reset?
- Work on making your soil healthier. Healthy soil supports better plants and livestock growth which is healthy food for healthier people. I overheard one young farmer singing the praises of minimum tillage and the big difference it was making on his farm.
- Honour the ag entrepreneurs who are returning. Called boomerangers, they have skill sets from their engineering jobs to create systems and standard operating procedures on their farms and related side businesses. This is why farm coaches recommend that your college grad successors work for another business and manager to get new insights and system ideas for your farm. Kohl sees lots of opportunities for diversification within agriculture and outside agriculture. One farm woman at the session had a very successful haircutting franchise that was surpassing the farm’s income!
- The tweeners (those too big to be small and too small to be big farmers) are exiting farming. This becomes an opportunity for growth. Kohl says 10 to 15 per cent of tweeners exit with equity, 10 to 15 per cent do a partial or total liquidation, and 10 to 15 per cent have negative cash flow and negative net worth.
- Seven-dollar corn is not coming back. Warren Buffet said, “When the tide goes out, you find out who was naked.” Farmers made money in the higher commodity price years, but now they are not making a profit, and guys are having a hard time convincing landlords to lower the land rent. Kohl depends on the FINBIN database to see where the net farm income trends are moving. Make five per cent changes to increase income and decrease expenses across many lines. This is Danny Klinefelter’s five per cent rule that top farmers use to generate a better net income.
- Modest living expenses. This one warms my home economist heart. Often in transition planning there are shock waves when the founders want $120K annual draw from the farm, and the next generation can only afford $39K as a draw to the founders. I see this many times where folks are clueless as to what their true family living costs are. Email me at [email protected] for compensation worksheets developed by Dick Witt-man to determine farm perks. If your family living is in the US$40K to US$70K range (C$50K to C$87K) you are modest. If you are over $90K to $140K/year, you are enjoying the KT (killer toys) and not using that extra $60K to $80K for cash flow on the farm. We use Quickbooks to track our family living costs. You can change what you measure. Do you follow the habit of “the more you make the more you spend?” Kohl likes to see monthly family living budgets with an allowance for adding 25 per cent.
- Paying attention to your financials regularly is critical. Hopefully you use the accrual accounting method, know your cost of production for each enterprise, have year-to-year comparisons, benchmark with your peers, and keep important data safe (e.g. a fireproof safe). Kohl relayed the story of a farmer whose records burned in the house. Today we have the cloud to store data and backups. What are you doing to keep your financial information safe? Our accounting firm, MNP, gives us a benchmark chart annually to show us our financial report card.
- How much is enough? The bottom 30 per cent of producers have an undisciplined pursuit of more. I’ve seen young farmers do this when they buy campers, fancy trucks, and other items that they truly cannot afford. High-maintenance living is causing financial stress. One hog farmer told me he could live on $50K annually in the good times, and pull back to $18,000. He did not tell me if he was living in his parents’ basement!
- Follow the HUT principle. Hear what the issues are that need to be addressed. Understand the context of those issues and seek creative solutions. Take action. Many folks have financial plans on the shelf right next to their estate plans, unsigned wills and forgotten transition plans. FOCUS and execute. You can only eat a great steak one bite at a time, so take baby steps, but get moving! Sign up for our online course Get Farm Transition Unstuck at www.elainefroese.com/getunstuck.
- Change your attitudes about paying tax. Go from focusing on minimizing tax to the dance of managing your income tax. Kohl says you likely will never go broke with managing taxes.
- Where is your legacy? Kohl says “21 per cent of the farms and ranches in the U.S. do not have a next generation… i.e. a successor.” Farming is not fun for folks who have lost their legacy. What steps can you take today to create certainty for your farm’s future?