ROI

Hyperinflation in land prices is masking whether we are good farmers or not.  Happy bankers creates complacent farm managers.  Sadly, it’s only when times are tight that we really brainstorm ways to innovate. 

I had a client who said to me “last year, we had a good year we made $100,000” and he honestly believed it.  For the previous three years, he had lost money and had the banker at the door.  He was so happy with himself.  I said to him, Lad your farm is worth over $12,000,000 in assets; you had less than a 1% Return On Investment (ROI).  He said to me, that is good right? 

I told him, the top guys in your region with the same assets and your industry are making 8-10% return on investment this year.  He said what do you mean?  I said, well a farm of your size should be making 800,000 to 1,000,000 this year.  You didn’t have a really good year, you are actually way under-performing. 

I didn’t tell him that fact to be a jerk.  I told him that fact so that he’d pull up his socks and look at farm profitability in a different way.  I wanted him to look at his farm in a different way.  

He argued stating how much his assets rose in value.   I countered his argument saying are you in the business of land speculation or are you a farm manager?  A spike in land values is only good to a 92 year old farmer wanting to retire in the next year and gift his estate to his kids in the city.  This farmer had a very large family and had big ambitions to set-up each kid with a farm.  If he wanted to achieve his vision, he couldn’t be happy with mediocrity; he had to be driven to be the most profitable operation in the county. 

When you are at an auction sale, there are a lot of neighbors at the event.  These days with the way that banks are giving away money, it’s easy to put your hand up and buy a farm, just like it was in the 1970’s.  But in five years times, when economic conditions are different and the banker is like a wolf at the door, who will be able to afford farm payments?  Only the farms that have exceptional return on investment.

Your farm has to be able to make profit, in the year of the worst financial crisis.  If you are able to achieve this level of profitability, then you can squeeze by when others beside you fall by the way side.  It’s just plain common sense.

When it was $7 corn, I had to stop a cash crop family from buying the farm next door until they had an outsider do a farm financial analysis.  The family really thought that the previous year was a banner year and they were set for unreal profits in the forthcoming year.  The mother was a full time book keeper and the wife was a commercial Ag Lender on Maternity leave.  The analysis revealed that the farm was losing $200/acre at $7 corn and was on the verge of bankruptcy.  The boys hadn’t cared about looking at the books closely because “the banker was encouraging them to buy the farm”.  Both brothers had business degrees yet they felt it was the banker’s job to tell them whether they should borrow money or not.  They themselves didn’t have any financial metrics by which they governed themselves.  This behavior is more common than you’d think and in my humble opinion, Generation Y hasn’t learned anything from the 80’s farm crisis!    

I have a huge problem with our approach to accounting.  We usually don’t get our books back from the accountants until 3-6 months after the farm’s year end.  Now a lot of accounting firms do provide you a financial analysis.  By that time, you are in a completely different season and that financial information isn’t relevant.  Let’s face it, most farmers only use an accountant is to avoid paying taxes not to make real farm management decisions. 

I recently had to sit down with a farmer that was on the verge of a farm debt crisis and didn’t know it.  We sat down and I said to him, his brother and his boys, we aren’t leaving her until we figure out a way to squeeze out an extra $1,000,000 out of this operation.  Within two hours, we had figured out a way to squeeze an extra $800,000 out of the operation ranging from changing feeding companies to not feeding veal calves to the kids working more hours and hiring fewer employees.  What amazed me was the question of why wasn’t those changes happening two years previously before the farm got into a financial bind.  The answer was simple.  We don’t push ourselves to find new efficiencies when times are good, it’s only when times are tight that we find new profitability in farming. 

Every farm should have the farm’s written target return on investment on the wall.  On the wall beside it should be your current return on investment.  Walking by this wall and seeing the difference will irritate many farmers to the point of thinking of new ways to improve the operation to improve.  It’s like seeing that scoreboard in a hockey game which tells you that you are losing by a goal and have 3 minutes to turn it around.  Numbers motivate! 

When you get these numbers on the wall, it changes family dynamics.  It gets everyone in the family brainstorming together as a team how to improve farm profit.  Ideas for change are no longer seen as a criticism of what dad has done in the past but good ideas on how to cut costs to achieve end goals.  It changes family dynamics! 

Rather than having a question about how you can squeeze an extra thousand dollars of profit out of your operation, you should step back and ask yourself how you can squeeze an extra 5% ROI out of your operation.  It’s not by brainstorming ideas, but the instilling a structured approach to brainstorming/implementation itself.