Farm economics, financials and marketing are all things some farmers handle well, and other farmers struggle with.  Just the other day, there was a group of young folks in their late teens and early twenties who were commenting that “you can’t make a living farming”.  Every one of these grew up on a farm.  They watched their parents struggling on the farm and decided they didn’t want to be a part of that struggle.  Many of these grew up on dairy farms, but some on beef farms and on row crop farms.  

This begs the question, “Can farming be profitable”?  The answer is Yes.  However, real profitability depends on several key factors.  First, we must understand four things:

• Goals or Shared Vision - These include financial, land and soil health, and quality of life.  
• What to Manage – Production, economics & finance, marketing, and people.  
• Three Principal Ways to Improve Net Profit – Increase turnover, decrease overheads, and improve gross margin.
• Five Essentials of Farm Management – Holistic and integrative approach, Continuous improvement of key resources, good planning and decision-making tools, war on costs, strong marketing emphasis.  

Goals and Shared Vision

This category encompasses our financial goals, soil health goals, ecosystem health goals, production goals, growth goals, and our quality-of-life goals.  Within Understanding Ag, we call this your context.  

For profitable decision making we must become systems thinkers.  Systems thinkers are both integrative and holistic.  This involves consistent and intentional observation.  Then we must think, plan, and execute.  

What to Manage

Production, economics and finance, marketing and people are the key things we must manage properly each day.  

Clearly define your production goals and know why you are setting those goals.  Is maximum yield the key to profitability or is it control of input costs and marketing?  The truth is rarely does maximum yield equal consistent net profits.  It doesn’t matter if we are talking bushels per acre, pounds of milk per cow, or individual calf weaning weight.  Far too many economic analyses show us that focus on maximizing yield often equals declining net margins.  

Regarding economics and finance, we have to realize that Schedule F’s are not a good accounting and decision-making tool.  That’s what we turn in to the IRS, but a Schedule F is far from being a sound financial management tool.  

Are we marketers of our farm products or are we sellers?  There is a major difference.   Sellers are price takers and marketers are price makers.  There are simple guidelines on how we manage our costs and our sales.  Costs are the money you spend.  Expenses are how we spend it (and we do have a choice), sales are the money you make, and marketing is how you do it.  We have a choice in all of these.  If you believe you do not have a choice, you probably should not be farming. 

People are the most difficult of all to manage.  It is the human dynamics that often trip us up.  Issues with people occur between family members, staff/employees, neighbors, friends, vendors, consultants, lenders, etc.   Learn how to manage people well and you are well on your way to a productive and profitable farm.  

There are two quotes that are appropriate here.  The first is, “Those who know how to win are far more numerous than those who know how to make proper use of their victories” – Polybius.  

The second quote is, “Wealth is the product of man’s ability to think” – Ayn Rand

Three Principal Ways to Improve Net Profit

In farming there are three primary ways to improve net profit. They are:  Increase Turnover, Decrease Overheads, and Improve Gross Margin.

It is important to understand that it is Profit Per Acre that we must strive to improve, not production or profit per cow (or per pig, per chicken, per bushel).  

In a beef or dairy herd, the major determinants of net profits are:

• Enterprise mix and choices
• Overheads (this includes people)
• Stocking rate
• Adapted cows
• Cow size and milk production (maximizing either does not equal net profit)
• Soil Health
• Grazing & pasture management
• Cropland management
• Fed feed vs grazed feed
• Calving season
• Realized herd fertility
• Wise input use for optimum (not maximum) production
• Marketing

To effectively reduce overheads, we must work to improve three key ratios. These are:

• Acres per Cow – There is a fine line here.  If we try to stock too heavily then we make ourselves far more reliant on fed feed vs grazed feed.  That immediately starts to eat into net profit.  
• Cows per FTE – How many cows can each employee tend to?  There are too many dairies and ranches that have more FTE’s (Full-Time Equivalents) than is profitable.  The most profitable dairies and ranches that we work with have become quite efficient and are able to effectively manage more cows with fewer people. 
• Fed Feed vs Grazed Feed – Managed well, grazed feed is always less expensive than fed feed.  However, when cows cannot get most of what they need from grazing, we have a problem.  

How do we improve gross margin?  Reduce our reliance on inputs.  These inputs can be seed, feed, fertilizer, manure, chemicals, pharmaceuticals, amendments, supplements, fuel, machinery, etc. In more than 25 years of analysis, most farms have more “heavy metal” than they can reasonably afford.  Too many farmers have a machinery addiction.   As my old friend, Dr. Gordon Hazard used to say, “I don’t want to own anything that rusts or depreciates”.  Dr. Hazard was a stocker cattle operator and made millions through the years following this philosophy.  

Five Essentials of Farm Management

The five essentials of farm management are:

• Taking a holistic and integrative approach.
• Continuous improvement of key resources.
• Good Planning and decision-making tools.
• Waging War on costs.
• Strong marketing emphasis.  

Summary

If we understand the four keys to profitability and know how to properly apply them, we can make a major difference in our farm’s bottom line.  Maybe then, the conversation among our teenagers and twenty-somethings will change and they will view farming as a viable, desirable business.