By Joli A. Hohenstein
Succeeding on the farm takes more than driving a straight corn row and getting the hogs fed. Where diligence used to meet the operation’s demands, today’s producers must be much more strategic in their thinking. But how do you know what you should be doing — and not doing?
In a recent study by researchers at the University of Florida, Purdue and Michigan State, nearly 2,500 successful farmers quantified what makes their operations profitable. Farmers in the survey produce dairy; beef; hogs; corn and soybeans; wheat, barley and small grains; cotton; and fruits, nuts and vegetables. The survey focused on farms with more than $100,000 in gross sales.
“Today the farmer is a CEO making decisions, operating a general fund, managing a hundred head or hundreds of acres, and marketing his products,” says Michael Gunderson, associate director of Purdue University’s Center for Food and Agricultural Business and one of the study’s directors.
The directors asked participants to rank a series of success drivers. The five management factors — different components of profit — listed were:
- Managing people
- Managing production (yield)
- Controlling costs (inputs)
- Managing land, equipment and facilities
- Managing output prices (marketing)
The most successful farmers closely manage input costs and say it’s a key factor that contributes to success. In fact, 29% say that’s the most important thing they do. They know their cost per acre and are trying to keep their costs in line.
“These successful farmers are dedicated to lifelong learning,” Gunderson says.
The top three success drivers in order were controlling costs, managing production, and managing land, equipment and facilities.
Which one are you?
Looking deeper into the survey reveals four distinct classifications of farm managers: production purists, cost control through people, production management through people, and commodity marketing focused. Each class of farm managers places different importance on the tasks and ranks them differently.
Production-focused farmers prioritize cost control and production, and commodity marketers focus heavily on managing output prices. Two groups prioritize managing people, though using them differently — for cost control or production management.
In addition, researchers found an interesting juxtaposition between larger and midsized farmers.
“Larger farms told us that managing people is a more important success factor,” says David Widmar, senior research associate for Purdue University’s Center for Commercial Agriculture. “Smaller farms were more focused on success factors like revenue, head or acres, and said managing people was the least important.”
Another observation: “We saw growing importance in managing people for all farms, but it was ranked No. 1 more frequently by younger producers than by older producers,” Gunderson says. “Younger people — those under 50 — see an opportunity to access goals by using other people. For our younger group, they’re still establishing relationships.”
5 risk areas
How can producers determine their strengths and weaknesses? Gunderson suggests thinking about risk in five categories: production (yields and variability), marketing (output price), finance (financial leverage), human resources (employee and visitor safety) and legalities. Most will place production first and marketing a close second.
“Those who are not carefully investing in technology to be more efficient, better managing yields and better managing livestock will need to make adjustments,” he says. “But be careful not to make cost-cutting decisions that cost more per bushel than they gain.”
Then, think about how you spend your time and how you balance the different factors, Widmar suggests. Could you outsource grain marketing to spend more time managing people?
“Producers have a great juggling act,” he says. “If everyone on the farm focuses on managing production, maybe that’s a blind spot,” he says.
The biggest mistake a producer can make? “Not understanding how the decisions we make in farming influence the balance sheet,” Gunderson says. “It used to be a producer started with a balance in a checking account, and if at the end of the year it was bigger, that was a success.”
That’s not enough anymore.
Using a good accountant to create excellent financial sheets, and then using them to create financial trends and ratios, should be a key part of successful farming. That came through in the survey — a large portion of respondents said they rely on accountants today and will continue to in five years.
“Short term, these skills are critical,” Gunderson says. If baby boomers don’t have a transition plan and prepare the next generation to manage large ag operations by letting them make decisions and mistakes, it will be their downfall, he says.
That can be as simple as determining the best way to apply anhydrous year over year and as complex as matching seed varieties, technology, traits to soils and soil quality. Says Gunderson: “Being able to make complex decisions, see how they turn out and then learn from them will be a huge determining factor in success for the new generation.”
Like the producers in their study, researchers say managing people will be a critical skill for successful operations going forward. They call the two subgroups of farm managers who rank people management at the top of their priorities as “perhaps crucial to the current state of the agricultural industry.”
The researchers also say these subgroups have the “greatest potential to improve rural communities due to the high likelihood of these farm operators controlling larger agribusinesses that require greater human resources.”
It’s important to recognize that managing people doesn’t have to mean only hired hands. It can also incorporate outside resources, such as accountants, commodity marketing experts, and legal, environmental and management consultants.
The answer won’t be the same for you and your neighbor. “Each farm has a different path to success,” Widmar says. “And as farms and enterprises change, that can change.”
Hohenstein writes from Decatur, Ill.