Recently, I was sent a newsletter from a local grain buyer titled “Seven Ways to Streamline Your Farm Marketing.” The author highlighted several tips to overhaul your thinking when it comes to grain marketing. The goal was to ease the overwhelm that many feel when it comes to marketing their grain.

As an advisor, I agreed with all of the tips. As a coach, it struck me how much the list paralleled transition planning work — an area where many feel overwhelmed as well. For each marketing tip listed, I came up with a similar piece of advice for transition planning.

The first: “focus on profit, not price.” In other words, price is only one piece of the puzzle when it comes to profit. Your focus should be on the whole picture — on achieving a specific profit margin, not just a specific price. As an advisor, I think that’s good advice. As a coach, I also think it’s good advice. Consider a family farm owner who focuses primarily on getting the business to the next generation but doesn’t give much attention to creating a healthy business culture. It’s a good primary focus but shouldn’t be the only area that gets attention. A healthy business culture will create next-generation family members who want to be involved instead of getting burned out and leaving. Shifting some focus toward the culture on your farm will pay dividends down the road.

The second tip: “commit to planning.” The author explained how using your historical yields and tracking your costs will help answer key questions regarding profit margin, how much to sell, when to sell and at what price. As an advisor, I like this tip. We all know expecting our plans to be followed exactly is foolish but that doesn’t mean making plans is. As a coach I’d say the same thing. Make a plan for the future of your farm business. Where do you want to be in a few years? Ten years? What are your family members planning for their futures? How are you planning to transition ownership of your business to the next generation?

And just like making a marketing plan, succession plans can go out the window at any moment. But that doesn’t matter, because the real value of committing to a plan is that it creates conversation and gets everyone on the same page. So many farm families never talk about their plans, then when the unexpected happens chaos ensues and family farms die.

Forward progress

Tip number three was to “establish a reasonable desired profit.” Every farmer would love to sell their canola at $28/bu. and walk away with a $650/acre profit. While that price was available just a few years ago — and $28 for canola is probably once in a lifetime — it wouldn’t be reasonable to plan a budget with a selling price that high.

The parallel advice for succession planning would be to make a reasonable amount of progress each year. Succession doesn’t have to happen overnight but it does need to happen. It’s difficult, tedious work that is often complex and awkward — but if you don’t schedule that meeting, nobody will. Issues that could be solved in a few conversations can drag on for years because they get booted to the bottom of the priority list. Set some realistic goals and make forward progress.

The fourth tip on the list was to “sell meaningful amounts.” In other words, you must sell all your inventory to make a profit. That’s a no-brainer, isn’t it? Keeping grain in the bin forever won’t generate any money.

My corresponding advice for this one is to make your business more meaningful. What are your core values and how can you align your actions with those values? Cultivate deep and authentic relationships and find purpose in something larger than yourself. Practice living in the moment while acknowledging and appreciating the good things in your life.

Number five: “expose yourself to the market.” The author explains how there are resources or tools available that can help you reach your profit margin goals — resources such as hedging, target contracts and futures-only or basis-only contracts. Another resource would be a grain marketing advisor like myself, wink wink.

You also need to “expose yourself to the market” when working through a succession plan. Accountants, lawyers, investment/financial advisors and communication/conflict coaches are commonly part of the team of professionals that assist farm families. You are not alone; ask for help when you need it.

The sixth tip on the list was to “understand crop insurance.” Farming is a risky venture and knowing how crop insurance works can reduce your risk and protect your revenue. Most of you use crop insurance — you don’t have to farm for long before counting on it to cover poor weather.

Insurance is also important for your succession plan. Sometimes that can look like a life insurance tool that is used to transfer equity to a non-farming sibling. Sometimes insurance can be in the form of inter-spousal agreements or unanimous shareholder agreements that work to protect the longevity of your farm business. Another form of insurance is to write down all your verbal agreements and have them notarized by a lawyer.

The final advice given on the list was to “avoid the hecklers.” The author describes how listening to myths or fables about marketing can distract you from the plan you made earlier. As an advisor, I hear the coffee shop fables where a producer brags about how much they sold their wheat for. While there may be some truth to these stories, they don’t tell the whole story and often omit the ugly truths.

Myths surround succession planning work as well — for example, “there is a right way and a wrong way to do it” or “other people have it all figured out” or “it’s too hard and can’t be done.” Myths like this can keep you from moving forward with your own succession. It’s important to ignore these false messages and focus on your own situation. Avoid the naysayers, listen to your mentors.

A good marketing plan is not unlike a healthy succession process. There are ways to streamline both of them to lessen the overwhelm you may feel about them. Remember, you are not alone in this work.

The post Seven ways to streamline your farm transition appeared first on Grainews.

Courtney Pullen’s book Intentional Wealth: How Families Build Legacies of Stewardship and Financial Health speaks to effective family systems.

Strong families that know their values can create a mission statement for their farm; they know their “why.” Their vision for the future is the “what.” Knowing why you are operating your farm, and what your goal is, help you create a solid foundation or, in Pullen’s words, an “anchor.”

How you create action comes from your system of making decisions or “family governance.”

How do you make decisions together as a family?

Some decisions as to how the family operates may come from a “family council” approach. A council to run a family is different than a governance or family business meeting model to run your farm operations and do strategic thinking. How farm business decisions are made comes from the structure and processes of the farm family business.

Here are some of Pullen’s tips for designing a system of governance:

• Start with what you have.
• Keep it appropriately simple.
• Focus on strengths.
• Foster leadership within the family.
• Emphasize ongoing communication through regular meetings.
• Establish a formal structure with a governance model that works for you.

The best time to start working on more structure and better decision-making for your farm team is now. For example: what is your policy for loans or gift to family members? Pullen says, “You might want a 48-hour cooling off period. Folks may need to consult the founders. The first-generation couple would have to consult with each other before giving an answer. If the amount is over $10,000, they would also consult their financial advisor. The second-generation members would follow the same process and consult with parents.”

I remember coaching a family that was quietly writing large cheques to an adult child in a large city because the child was not financially savvy. This lack of financial transparency was not healthy for the family or the farm business.

More questions to ask

What is the overall vision for family participation? Pullen uses an example where only family members have voting rights in decision-making. Spouses may get to sit in on the meetings for information. Other families use a consensus model. I believe every member of the family and their spouses or partners have skills and talents to offer to the growth and health of the farm business. Are you making assumptions as to who should be “left out” from the farm business meetings? You may be denying that a new approach or radical decision may be effective for your business goals. Ask each person to declare what level of involvement they would like to contribute to the decision-making process. Some folks, such as non-farm spouses, just want to be kept in the loop of information and don’t want to have a vote in the decision-making of the operation.

Who gets to be an owner? There are highly skilled women in agriculture who would like the answer to this question from their fathers, typically, who don’t see them as “being able” to manage and not fail! Fear of failure is a huge unspoken fear of the founding generation.

How do the new owners pay for their interest? And how do they exit? This is the policy giving clarity to debt servicing and business structure with shares which helps the next generation set up debt financing. I once had a young farmer go to a lender, where he was surprised to find $750,000 he could use to work toward paying his father out. The young farmer had no idea what power he had until he made the step to research lender options.

What are the criteria to work in the business? How are roles determined? You have read my articles on roles in the past, and the importance of having clear job descriptions. Ask me for Wittman’s job description list. As a founder your role is changing as you age in place on the farm, yet you are “stepping back without stepping away!”

How is compensation determined?

What is the process for hiring family members?

How do you foster leadership with personal development plans?

Who decides how performance is evaluated?

Above board

Dick Wittman, a renowned farm management consultant, talks often about the professionalization of the farm business. His farm uses a ‘board of directors’ model. Pullen cites an example where family members are voted into the board of directors by a large family. Underneath the board of directors there are a family foundation board and an investment company board, each having a mix of family and non-family advisors. Your farm’s CEO may listen and learn from the family and have ultimate decision-making while still being in close communication with the family office. Your board of advisors may help implement policy and be a great training ground for younger family members to learn more about business and leadership.

A model and system for making great decisions on the farm will likely be unique to your farm family culture and preferences, but the key is to have a structure and process that everyone buys into for making effective decisions.

I mentioned podcasts, and I think you would enjoy Farm4Profit’s interview with Kristjan Hiebert and Evan Shout (episode 414) and their own podcast, The Truth about Ag. Some farmers don’t appreciate large-growth farms, but there are nuggets on decision-making and development of employees that may flame some new ideas for you. Hiebert and Shout are both former professional accountants, so numbers and financial data are their game; they love to make data-based decisions for the farm. Even if you don’t like their large-scale approach, you might like the ideas of QR codes in machines to enhance learning and training of farm workers.

What’s one thing you can do this fall to have a better decision-making system on your farm?

The post Build a simple, effective farm framework for decision-making appeared first on Grainews.

“When coupled with high inflation, interest rates and a price on carbon for essential farming activities for which farmers have no viable alternatives, Canadian producers are facing tremendous pressure on their farm financials and mental health.”

In addition to increasing input costs, commodity prices for grains and oilseeds have dropped over the last couple of years. Below you’ll see two graphs showing Alberta cash prices for hard red spring (HRS) wheat and canola over the last five years. The data are from the statistics section at Alberta Agriculture and Irrigation.

So, we have a double whammy facing the grains sector: rising costs and falling commodity prices. This means grain farmers must be very astute business managers in 2024, since the implications for their financial and mental well-being are huge. One factor is that careful management of cash flows is required to have money available to pay for inputs, debt servicing and living expenses at the required times during the year. This is especially important in the face of rising costs and decreasing returns, as well as increased debt servicing costs resulting from higher interest rates. I wrote an article about that in the April 2, 2024 edition of Grainews.

To illustrate the situation for 2024, I’ve attached a scenario for a hypothetical 5,000-acre farm (see Tables 1 and 2 below). Following the present reduced market prices, I have dropped the expected 2024 gross income to $500 per acre, from $686 in 2022. The only other changes were the interest rates on the loans. Variable costs are assumed to be similar to what they were in 2022. For 2022 the interest rates used are as follows: three per cent on the current debt, and four per cent for the intermediate and long-term debt. For 2024, the interest rates used are seven per cent for all the debt — current, intermediate and long-term.

The bottom line shows that the 2022 scenario had an estimated $455,500 surplus and the 2024 scenario has a $483,000 deficit. So that could be quite a shock to your finances this year and maybe next.

Here are some qualifying factors — and some steps you could take to alleviate this financial dilemma:

• If you have an operating farm, it’s unlikely all your loans will come up for renewal this year, so you won’t be facing a seven per cent interest rate for all your loans. You will likely be somewhere between the two scenarios. If you are on annual payments, the real crunch will come at this time next year, when loan payments at the higher interest rate start.
• The federal government has announced the interest-free portion of the cash advance program for 2024 is now up to $250,000 which may be available if you qualify under certain conditions. Also, farmers may be eligible for cash advances for another $750,000 (on top of the $250,000 interest-free portion) at preferred rates, which will likely be considerably less than seven per cent.
• Some suppliers are offering loans for crop inputs at preferential rates till February 2025. This could also help reduce your current interest charges.
• Depending on your financial situation and credit rating, you may be able to negotiate a better interest rate than those posted by the lenders. Usually, their first offer is not their best offer.

I have done several projections for farmers for 2024 at the present high interest rates for new purchases and in all cases the farmers have decided to not make those new purchases. So, I really want to caution new or expanding farmers to carefully do projections before they enter into new purchases. Do detailed projections for your existing debt servicing ability — with the current input costs and lower commodity prices — and then add your anticipated new purchase on top of that. Are you still in a comfortable place financially? If not, please delay your new purchase until interest rates come down.

I use a farm financial spreadsheet called the Agricultural Business Analyzer (ABA) that does all the calculations mentioned above and many more. It is a really good tool to use to analyze your present situation and new purchases before you buy. ABA is a free download from the Farm Management Canada website.

If you would like some help with doing financial projections, please contact me.

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I submit what “cash is king” really means is to have money available to pay ongoing farm expenses such as crop inputs, wages, loan payments et cetera as they become due, and also to pay yourself and your farm family/team a monthly income that (at least) covers living expenses. I’ll only focus on actual cash flow in this article; I’ll have a brief comment about accrual adjustments at the end.

Where do you start to get a handle on cash flow requirements? A good place to start is to chart farm expenses by line items over the past three to five years. The table here shows a chart from 2023 that I recently prepared based on a real farm. Once you know your average historical expense for each line item, you can make some realistic predictions for the upcoming year.

Of course you have to adjust for increases in costs, changes in acres farmed, different crop rotations et cetera; then you have to do the same for the farm’s fixed costs, loan payments and personal living expenses. This example includes $120,000 for family living expenses, which is for two families.

You will notice in several cells there is no data. That’s quite common and you will likely have the same problem. I suggest you don’t worry about the missing details; work with what you have and make the best projections based on that.

On the income side, we can look at the historical income and calculate an average over the last three to five years. Since those are actuals, they should be a good guide for the upcoming year, but you should make detailed income projections for each crop you plan to grow. Then, multiply the acres of each crop by the estimated yield and market price to get the estimated dollar value. Once you have that, add the dollar values for each crop and calculate the total expected crop income.

Once you have total expected crop income and input expenses, you can calculate net cash income. From that, you deduct fixed costs, as listed in the table, and loan payments. On the income side are items to add as well: other farm income (such as gas and oil leases, program payments, patronage dividends, investment income) and off-farm income (if any). So, we finally come to the overall expected net income number, based on cash, for your projected year.

At the beginning I mentioned accrual adjustments — changes in the values of inventory from the beginning of your fiscal year to the end of it. In the case of the farm in the table, the farmer had $1,031,060 of crops in bins at the beginning of the year and was anticipated to have $1,503,262 at the end of the year. That’s an increase of $472,202, added to the net income for the year. It’s not cash, but it’s “money in the bins” which could be turned into cash. Bankers want projections based on accrual accounting since it gives them a more detailed picture of your financial situation, especially if you are decreasing inventories to maintain cash flow.

The next step would be to do a month-by-month breakdown for your projected income and expense items, so you can see your expected net position at the end of each month. I’ll leave that for another article, since that is a comprehensive topic on its own.

I have a spreadsheet program that does all the above and a lot more, called ABA (Agricultural Business Analyzer). It’s a really comprehensive farm financial analysis tool bankers really like; it’s good for your own information and for your lenders as well.

I also have access to a simple cash flow spreadsheet that does the basic month-end calculations mentioned above. You can use it once you know the total for each line item, then break them down into the monthly columns for income and expenses.

The important point is that you plan for the spring and summer, when you will most likely be in a deficit position and will have to make arrangements for that shortfall ahead of time; it’s likely to be higher in 2024, due to higher input costs and higher interest rates. Lenders do not like to be approached month after month for more credit. It’s a signal to them of inadequate financial planning.

Feel free to contact me for more information and I’ll explain how you can get free access to ABA or the simple cash-flow analyzer from Farm Management Canada.

The post ‘Cash is king:’ what does that really mean? appeared first on Grainews.