What Farms Make Money? Three Common Denominators01 April 2015
What makes a farm profitable? A farm management expert draws on experience gained from working within five land grant universities.
There are three traits common to all successful producers, according to Professor Eric A. DuVuyst, Oklahoma State University.
Identify Costs and Strengths
1) They know where profits and losses are coming from.
When talking with the most profitable producers, there are two questions that they can answer without hesitation: What is making you money and what is losing you money? When asked, their responses to these questions are immediate.
So, how can they know the answers? Financially-successful producers keep good production and financial records, and they use them in decision making.
2) They spend money to make money.
When interviewing less financially-successful producers, I’ve often heard comments about not putting on a needed input because the enterprise’s budget was already overspent.
Financially-successful producers, in contrast, understand that past expenditures on a crop or livestock enterprise are sunk and have no impact on the current input decision.
If a crop needs top dressing or a rescue pesticide, financially successful producers do it because the marginal benefit of the application exceeds the marginal cost.
Think of an extreme example, a wheat stocker operator has calves nearly ready for market, but they get sick and without treatment many of the calves are likely to die. If we use the unsuccessful producer decision model, we look at how much is already invested in the calves and decide if there is room in the budget for more expense, potentially leading to large economic losses.
The financially-successful producer understands that it is necessary to spend money to make money (or lose less money).
Plan for Loan Repayments
3) When borrowing money, they have a plan for repaying it.
I once worked with a producer that wanted a new house. His current house was an old farm house in need of repairs, but his capital debt repayment capacity was barely sufficient to meet his existing financial obligations. He was asking us if building a house was feasible.
Our advice was “No, you don’t have the ability to make any additional debt payments without additional sources of cash flow.” Instead of listening to the sound advice, he found a builder willing to finance a new house and proceeded with construction. As you can imagine, this producer’s balance sheet was very unhealthy.
He had a history of taking on debt without a repayment plan, so he struggled to make payments and gain equity in his farm business. Financially successful producers know how much cash flow is available and so are able to plan for repayment of any additional debt.
Again, this requires good record keeping and utilization. While keeping and utilizing production and financial records will not guarantee financial success, there are few financially successful producers who do not keep and use good records.
If you need help with record keeping and decision making, Oklahoma State Cooperative Extension Service offers workshops to teach producers how to use Quicken software. Contact your local extension educator to see when workshops are available. OSU also offers a free farm financial planning service, IFMAPS, to agricultural producers.