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Tips for producers in times of economic resets

Elaine Froese for Progressive Dairyman Published on 28 March 2018

Minnesota farmer Paul Zimmerman extended a firm handshake and greeting on behalf of his daughter to David Kohl, professor emeritus, Virginia Tech. Zimmerman’s daughter is a likely successor to their farm.

She started her mentorship with Kohl’s insights in Mankato, Minnesota, years ago when she took notes as a high-schooler in the audience. Kohl noticed her with fanfare then.

Her dad reports she now works for Cargill and will soon be getting her Master of Business Administration in agriculture at Cornell University, where Kohl completed his masters degree and Ph.D. Kohl was clearly delighted to hear this news, saying, “This just made my day.”

I share this story because Kohl has been a great encouragement to me over the years as we shared the ag event stage. As a professional speaker, it is very rewarding to hear how your message has impacted farm lives for the better. We all need encouragement.

Here are Kohl’s notes on positioning for success in the economic reset. Even though he was addressing a U.S. audience, we can all learn to be better farmers.

1. Focus on what you can control and manage. This is critical in business. Kohl’s Homestead Creamery made $68,000 this year because people kept their glass milk bottles. His milk business has a plan for people who cherish the glass bottles when the naysayers said this habit would ruin the business.

2. Really good managers are making a cost re-adjustment wherever they can. Kohl told the story of a young farmer who relinquished marginal land, cut family living costs and added thousands to his bottom line. What lines on the balance sheet do you need to reset?

3. Work on making your soil healthier, as healthy soils support better plants and livestock growth which, in turn, is healthy food for healthier people. I overheard one young farmer singing the praises of minimum tillage and the big difference it was making on his farm.

4. Honour the ag entrepreneurs who are returning (called boomerangers) with skill sets from their engineering jobs to create systems and standard operating procedures on their farms and related side businesses.

This is why farm coaches recommend your college grad successors work for another business and manager to get new insights and system ideas for your farm.

Kohl sees lots of opportunity for diversification within agriculture and outside agriculture. One farmwoman at the session had a very successful hair cutting franchise that was surpassing the farm’s income.

5. The tweeners (those too big to be small and too small to be big farmers) are exiting farming, and this becomes an opportunity for growth. Kohl said 10 to 15 percent of tweeners exit with equity, 10 to 15 percent do a partial or total liquidation, and 10 to 15 percent have negative cash flow and negative net worth.

6. $7 corn is not coming back. Warren Buffet said, “When the tide goes out, you find out who was naked.” Farmers made money in the higher commodity price years, but now they are not making a profit, and some producers are having a hard time convincing landlords to lower the land rent.

Kohl depends on the Finbin database to see where the net farm income trends are moving. Make 5 percent changes to increase income and decrease expenses across many lines. This is Danny Klinefelter’s 5 percent rule top farmers use to generate a better net income.

7. Modest living expenses. This one warms my home economist heart. Often, in transition planning, there are shockwaves when the founders want $120,000 annual draw from the farm, and the next generation can only afford $39,000, as a draw to the founders.

I see this many times where people are clueless as to what their true family living costs are. Email me for compensation worksheets developed by Dick Wittman to determine farm perks. If your family living is in the $40,000 to $70,000 U.S. dollar range ($50,000 to $87,000 Canadian dollar range), you are modest; if you are over $90,000 to $140,000 per year, you are enjoying the killer toys and not using that extra $60,000 to $80,000 for cash flow on the farm.

We use QuickBooks to track our family living costs. You can change what you measure. Do you follow the habit of “the more you make, the more you spend?” Kohl likes to see monthly family living budgets with an allowance for adding 25 percent.

8. Paying attention to your financials regularly is critical. Hopefully, you use the accrual accounting method, know your cost of production for each enterprise, have year-to-year comparisons, benchmark with your peers, and keep important data safe (e.g., a fireproof safe).

Kohl relayed the story of a farmer whose records burned in the house. Today, we have the cloud to store data and backups. What are you doing to keep your financial information safe? Our accounting firm gives us a benchmark chart annually to show us our financial report card.

9. How much is enough? The bottom 30 percent of producers has an undisciplined pursuit of more. I’ve seen young farmers do this when they buy campers, fancy trucks and other items they truly cannot afford.

High-maintenance living is causing financial stress. One hog farmer told me he could live on $50,000 annually in the good times and pull back to $18,000. He did not tell me if he was living in his parents’ basement.

10. Follow the HUT principle. Hear what the issues are that need to be addressed. Understand the context of those issues and seek creative solutions. Take action.

Many people have financial plans on the shelf right next to their estate plans, unsigned wills and forgotten transition plans. Focus and execute. You can only eat a great steak one bite at a time, so take baby steps – but get moving.

11. Change your attitudes about paying tax. Go from focusing on minimizing tax to the dance of managing your income tax. Kohl said you likely would never go broke with managing taxes.

12. Where is your legacy? Kohl said, “21 percent of the farms and ranches in the U.S. do not have a next generation … i.e., a successor.” Farming is not fun for people who have lost their legacy. What steps can you take today to create certainty for your farm’s future?  end mark

Elaine Froese is grateful for the four decades of David Kohl’s energy and insight that helps farmers in many practical ways. Her new book is out on her online store. Get to work on your financials.  

Elaine Froese
  • Elaine Froese

  • CSP, CAFA, CHICoach
  • Boissevain, Manitoba
  • Email Elaine Froese

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