AgDM newsletter article, November 1998

Managing the farm business during a period of rapid change

Mike DuffyBy Mike Duffy, extension economist, 515/294-6160, mduffy@iastate.edu

Change is always with us.  We have to change.  Any living organism that doesn’t change will cease to exist.  It has been written, ‘Disconnecting from change doesn’t capture the past – it loses the future.’

We often hear that now is the time period with the most rapid change.  From one perspective this might be correct.  However, I am not so sure that others, in times past, didn’t express similar sentiments.

Disconnecting from change doesn’t capture the past – it loses the future.

The perception of change is relative to the base from which you are starting.  We often hear about the Internet and the speed it added to communication.  But, was it really any more dramatic than the telegraph or the telephone?  Was going from seconds to nanoseconds more dramatic than going from months to weeks or minutes? 

We think of the changes in agriculture over the past 50 years as the most rapid.  But, again, were these changes any more dramatic than the native Americans witnessed in as short a period of time?

The point is that the world around us is changing rapidly, but rapid change has been with us for generations.  We have to learn to live with it and manage it.  The key is to focus on how we can influence change.  Remember the saying, change what you can change, accept what you cannot change, and hope that you are smart enough to know the difference.

Change what you can change, accept what you cannot change, and hope that you are smart enough to know the difference.

In this article I discuss some considerations for farmers and those who work with them as they ponder the options for managing the farm business in a rapidly changing world.  I will offer some specific examples of things to consider for 1999.

Return to the basics

There is no substitute for the basics.  No matter how sophisticated we become or how much technology we employ, there is no getting around the foundation of knowing what we have and what we want. 

There are two basic questions that farm businesses must continually examine.  These questions are; what resources do I have and how do I combine those resources to achieve my goals?  These sound simple enough but they are difficult questions and ones that are not frequently asked.  This is the basic level of analysis that we cannot escape if we want to have a successful farm business.

What resources are available?

Economists divide resources into four basic categories of land, labor, capital, and management.  There are many variations around the same theme but, in general, this is the easiest way to think about the resources that the farmer has to manipulate. 

The question of resource availability is really one of acquiring the use of the resource.  Resources can be thought of as on-farm (internal) or off-farm (external) resources.  There are many examples of this distinction.  Land can be owned (internal) or rented (external).  We can rely on our own or our families’ labor or we can hire labor.  We can use our own equity or we can borrow money.  We can rely on our own management ability or we can hire a manager. 

External resources – Farmers are relying more on external inputs. We have to realize that the more we depend on external resources, the higher our costs will be.  This has generated increased output but it has also resulted in increased costs.

During the 1950s, net farm income as a percent of gross income averaged 34 percent (with or without including government payments).  Over the past decade this percentage dropped to 21 percent.  It is only 12 percent if we do not include government payments.

If government payments are not included, net farm income as a percent of gross income has dropped from 34 percent in the 1950s to only 12 percent today.

This illustrates the increased costs that are associated with the production methods that are widely used today.  We sell more but the amount we keep is a smaller fraction of the amount we sell. 

This change in the mix of resources (external vs. internal) has other implications.  Farmers with tighter margins have greater risks.  There is simply less room for error or for variation in the level of production to cover the costs. 

Also, the tighter the margins, the harder it is for new people to enter farming.  With high family living expenditures, younger producers simply may not be able to generate the funds needed—regardless of their farming skills.

Too many farmers operate their businesses based on what resources they wish they had available and not what resources are actually available.  We have to farm based on the resources that we have available.

What are our goals?

The second fundamental question that has to be answered is what are the goals for the farm business.  Since most of our farms are still family-owned businesses, it is imperative that the business goals and family goals be considered.  The goals can be financial, personal, family, business, or one of many other categories. 

Economists often use the goal of profit maximization to simplify their analysis.  However, most of the decisions made on farms today are not made to maximize profits.  They are made with profits in mind, but at not the maximum level.  Other goals enter into the decisions.

When deciding how to manage our resources in a rapidly changing world, we must ask themselves what we want and why we are farming.  Do we think of ourselves as entrepreneurs, as environmental stewards, as laborers, or what?  The answers to these questions are very important for determining which way we want to go and how we should manage our businesses.

Types of business rewards

A business is rewarded for three things; risk, work, and luck.  When we look at the farm business, there are many different variations of all three elements. 

Risk rewards

Risk can be related to the weather, pests, and other uncontrollable events.  It can be related to the price received and the method of marketing chosen.  We need to think in terms of risk management not risk avoidance. 

Labor rewards

Farm work can be divided into components similar to any other business.  There is the work of the laborer, the work of the supervisor, and the work of the manager.  How much time we spend wearing each of these hats will often determine how much we get paid.  An accountant or lawyer gets paid far more than a tractor driver, but both types of work need to be done on the farm. 

Some of us have the mental skill and desire to be good business people.  Others enjoy the physical work of farming but not the mental aspects.  This isn't to say that one is right or wrong, but there are differences and these differences will determine the best course of action for the individual to pursue.  It will also determine the amount of income that we earn.

The amount of time we spend wearing different management hats determines how much money we make.  An accountant or lawyer gets paid far more than a tractor driver, but both types of work need to be done on the farm.

We have to realistically assess what needs to be done and then decide the best way to accomplish it.  We need to consider what we enjoy doing, what we are good at doing, and how much time we want to devote to various tasks.  Some things will require outside help and some things will have to be done even if they are unpleasant or not particularly enjoyable.  We have to know our limitations and distinguish the differences between wants and needs.

Luck rewards

Finally, there is luck.  To some degree luck is something that can’t be controlled.  However, when we have identified what we have and what we want, we are more likely to be in a position to take advantage of opportunities and ‘create our own luck’.

Evaluating options

All of us have options available to us.  A critical factor is to know and carefully evaluate our options.  We may not always like our options and sometimes the decision must be one of minimizing losses.  Nonetheless, we always have options. 

For example, some of us will find a contracting option to be the most appealing.  Others of us will find entrepreneurial options.  Others may find some type of joint arrangement to be the superior course.  There isn’t one best way, rather there are several options depending on what we have and what we want. 

Evaluating technologies

Often we ask ourselves, can I afford this new technology?  This is one way to ask the question.  But it is a much different question than asking if this new technology will increases profitability or will move me closer to my goals.  Successful businesses don’t confuse the two.

We must keep in mind what we are trying to accomplish and what we face when we consider new technologies.  A farmer, when asked how he decided which technologies to adopt, replied that “I can’t worry about what the neighbors think, I must concentrate on how to make the farm successful”.

Management thoughts for 1999

Farmers can do several things as they look to 1999.  This will be a year with low commodity prices.  So it is important to lower costs of production, especially cash costs. 

To make money you have to spend money.  Simply cutting back on inputs is not the best approach.  However, careful evaluation of where money is being spent can point to areas where costs can be cut without adversely impacting yields or unduly increasing risks.

Trips across the field

One of the first items to examine is the number of trips across the field.  For a variety of reasons we have seen a cutback in the use of conservation tillage.  Not only will conservation tillage save soil; it also helps reduce cash costs for fuel and repairs.

Pest management

Carefully evaluate the pest management options you utilize.  Farmers have been steering away from using row cultivation, especially in soybeans.  At the same time the cost of herbicide applications has more than doubled since 1991.   There are many changes in the herbicide arena.  But, as with any of the changes, carefully evaluate how they fit in the individual circumstance.  Look at the total weed management costs including the technology fees. 

Herbicide application

Examine how the herbicides are applied.  Most people continue to use a broadcast method.  Banding, with cultivation, can provide similar weed control but with lower out- of-pocket costs.

Farmers do less of their own spraying.  In 1996, over 40 percent of the corn and soybean farmers did not apply any herbicides themselves.  They only used custom applications.  While this may be the best approach for some people, it does represent an area where there might be room for savings.  What works well in times of high output prices may not be so wise in times of low prices.

Fertilizer

Fertilizer use is another area where considerable savings can be achieved.  Over 80 percent of the corn acres receive phosphorus and potassium.  However, two-thirds of the soils tested in the Iowa State Soil Test Lab rated high to very high in P and K.  Research has shown that there is no yield response to adding P and K on these soils.  By soil testing, the farmer will be able to determine the level of nutrients available and whether or not P and K applications will be cost-effective.

Planting rates

Planting rates is another area for possible savings.  The recent trend, especially in soybeans, has been to narrower rows and higher plant populations.  Again, the research shows that after certain levels, depending on the row spacing, further increases in plant populations do not increase yields.

Risk management

There are also several risk management tools available to the farmer that need to be considered.  Revenue insurance and marketing strategies are examples of tools that can be used to help farmers manage risk.

Economies of size

A frequent misconception concerns economies of size.  Often it is assumed that simply increasing the size of the operation will correct problems.  However, analyses of data from the Iowa Farm Business Association shows that the low point in terms of cost of production per unit is achieved much sooner than most people realize.  For row crop acres the low point is achieved somewhere between 400 and 600 acres.  In terms of pigs marketed, the low point is somewhere between 1000 and 1200 pigs marketed per year. 

Therefore, if a farm has efficiency problems, simply expanding the operation may just magnify the problems.  Farms are getting larger, not to lower costs of production, but to increase income. 

There can be many ways to increase income.  One way is to farm more acres with tight margins.  Another is to find ways to widen the margin.  Again, it comes back to what the goals and the resources are for the individual farm.

Value added

Farmers are hearing a lot about value-added.  This is definitely a realistic approach to the problems of farm profitability and tight profit margins.  By increasing the value of the product they are selling, farmers can increase their income without having to greatly expand their operation.  Value-added is not for everyone, but it does offer farmers some opportunities through networking or cooperatives to try to retain a greater share of the value of their production.

The key is to remember that 1999 appears to be a time when cash will be tight.  In such situations farmers must do what they can to minimize cash outflows.  Practices that were acceptable with high prices may not be such a good idea when prices are low.

Conclusion

Successful farm management means making sure you have the basics covered.  Too often farmers adopt technologies because they think they have to, not because they are going to be more profitable, or move them towards their goals. 

Make changes in the direction you perceive you need to go, not in the direction that others say you have to go.  Not all change or new technologies are good for us.  Evaluate them carefully and do what works for the individual circumstances.  No matter how much we change, some things remain the same.  There is no substitute for good, basic farm management.

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