Economist advises farmers follow a handful basic steps
By MATEUSZ PERKOWSKI
Regardless of farm size or crop type, the most successful growers have a lot in common, according to agricultural economist Danny Klinefelter.
Savvy producers typically share business practices that allow them to capitalize on fluctuations in the agricultural market, he said. "It's not enterprise-specific, which is what I thought was interesting."
Drawing upon his experience running an executive education program for farmers at Texas A&M University, Klinefelter has distilled some of the main principles that unite effective growers. Following are some pointers he recently relayed to Capital Press:
Focus on margins
Many farmers are preoccupied with hitting a home run: selling their crop at the top of the market.
"History would show they don't do that very often," Klinefelter said.
Instead, farmers should lock in on opportunities to make money through risk management strategies, like futures contracts.
The same philosophy should apply to inputs like fertilizer, which has swung drastically in price during recent years.
Expect the worst
While many farmers develop basic projections for their finances, they seldom evaluate enough scenarios.
Preparing for an outcome that seems "most likely" won't help farmers when the status quo suddenly changes, as it often does.
When farmers anticipate what can go wrong and how they would react to that eventuality, they're less likely to make emotional decisions that turn out to be mistakes later on.
Similarly, farmers should think about what to do with their money if they do encounter unexpectedly high profits. That way, they avoid making rash investments.
Pay close attention
Too many farmers try to alleviate symptoms rather than take the time to analyze what's wrong.
"People are always reacting to the latest crisis rather than figuring out what to focus their attention on," Klinefelter said.
One way to avoid this behavior is to regularly check the company's actual performance against its budget projections, then figure out why there's a disparity.
Such monitoring is critical in improving a company's timing -- a factor that typically separates a successful farmer from one who is "a day late and a dollar short," Klinefelter said.
Vigilance is needed to either seize opportunities or cut losses, and well-timed decisions quickly add up to overall success.
Effective farmers typically achieve results that are only slightly above average, but they do it consistently.
"The compounding effect of that is incredible," Klinefelter said.
On the flip side, financial derailment is rarely a truly unforeseeable event for most farms. It's typically the result of numerous bad decisions, with one finally breaking the camel's back.
"Most failures have been an accumulation," he said.
Taxes are an annual ritual, but they shouldn't be the prism through which a farmer sees his yearly finances.
Growers should track their finances based on what they're actually earning and paying.
If farmers simply look at the money that has changed hands during the calendar year, it can provide a distorted view of their financial picture.
That's because growers can defer payments to suppliers and burn through inventory reserves, which can conceal festering problems.
When a farmer recognizes an expense when it's incurred and income when it's earned, he's less likely to have an overly optimistic financial outlook -- enhancing his ability to remove any decay before it spreads.
"Financial problems are like a cancer," Klinefelter said. "They eat net worth. They eat profits."
Whether it turns out to be a blessing or a disaster, each serious business decision should be carefully evaluated postmortem.
By dissecting the results of such choices, farmers can see if the outcome is repeatable or preventable, rather than just the product of chance.
Understanding past decisions also offers insight into trends that may develop in the future.
"A lot of people just keep doing the same thing, the same way, over and over again," Klinefelter said.
Without solid data, it's tough for farmers to see where they stand compared to the competition.
Such "benchmark" information can illuminate a company's weaknesses and strengths, which is why some lenders and accountants keep databases of it. Such professionals are potential sources of insight for farmers.
Groups of trusted peers can also help growers arrive at solutions without reinventing the wheel.
"Farmers need to find ways to get objective outside perspective," Klinefelter said.
However, it's important to distinguish between such constructive communication and "coffee shop talk," in which farmers engage in either "bragging or crying in their beer," he said. "It typically isn't representative."
To become more efficient, farmers should spend just as much time analyzing what to stop doing as they do evaluating new opportunities.
Certain tasks, assets and employees are unnecessary but remain part of the farm operation out of inertia.
It's more productive for farmers to reallocate their energy and resources into areas that generate results.
When trying to identify unwanted behavior, the opinions of others are invaluable. A farmer should ask outside parties -- like lenders and clients -- about the most frustrating aspects of dealing with his company and others like it.
By eliminating those undesirable traits, the grower becomes a borrower or supplier of choice, Klinefelter said. The concept also applies to employees and vendors.
"What is it that bugs people?" he said.