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Taking Action in Your Business By Pam Uhlenkamp; Farm Business Management Instructor, South Central College, Mankato MN As the end of the year is wrapping up and everyone working hard on completing their business records, they are also thinking about what 2012 has to offer and their lending needs. It is this time of the year that we need to set goals for 2012 and I encourage every business owner to step up and strive to do a better job of managing their business and relationships with their lenders in the coming year. I recently heard a great presentation from a local ag lender about ‘taking action’ in your business. He recommended that you know your cost of production through accurate, timely, and accrual adjusted income statements. He requires all his clients to have an accurate, up to date balance sheet, and to complete a yearly analysis on each enterprise on the farm. Using the analysis, he wants to know if you understand and utilize key financial ratios to aid in business planning and decisions and are you meeting the goals of the key metrics and ratios. He states that once you have all of the business financials, are you using this information to put together a three prong risk management program that includes revenue, inputs, and interest rates. This is the process of putting together a comprehensive business plan which is also another suggestion for taking action. Once you have taken action, the communication lines are the most important aspect to any business. Are you continually in contact with your lender and do you communicate if there is a problem? As stated by management consultant Peter Drucker, “If you can’t measure it, you can’t manage it.” Through completion of annual balance sheets, cash flows, and financial analysis, every operation is able to measure and then manage their business. The Farm Business Management provides record keeping assistance, Finpack financials, and benchmarking of your business, and goal setting to help with everything this lender is looking for. For more information on the Farm Business Management program, please contact a farm business management instructor at www.fbm.mnscu.edu. Using Options in your Marketing Plan By Robin Schwieger, Farm Business Management Instructor, Mankato, MN 2011 has been a marketing year filled with price strength and volatility. To help manage that volatility, you may want to consider including put options in your marketing plan. The definition of an option is the right, but not the obligation, to buy or sell a particular futures contract at a specific price on or before a certain expiration date. There are two types of options; call options and put options. Each offers an opportunity to take advantage of futures price moves without actually having a futures position. For farmers with commodities to sell, such as grain farmers with bins full of corn, wheat and soybeans, put options offer price protection from down markets. For example, you bought a $7.50 December corn put and December corn traded at $6.00, you have the right to sell corn at $7.50. Remember it is the right, but not the obligation to sell. If you have a $7.50 put, and corn prices have rallied to $8.00, you have no obligation to sell. The biggest negative on buying puts is the cost, or premium. Since it is price insurance, you must pay what is essentially an “insurance premium” for that price protection. On the plus side, you have many different premiums from which to choose. Think about your own insurance, whether home, crop, or health, and think of the put options as ranging from a zero-deductible plan, all the way up to a high-deductible plan. You can choose your level of coverage, and pay the corresponding premium. One put option advantage is you can still sell your cash crop to whomever you desire and have protection of a price if the value of your crop declines. Another advantage is that your risk is limited to what you pay for the premium. If you purchase a put option, three things can happen: let it expire, sell it back, or exercise your right and take a short futures position at your strike price level and assume all the obligation of being short the market. Most put options are not exercised. Remember each option has a buyer and a seller just like futures. Understanding futures makes learning options easier and your farm management instructor can help you. Let us teach you the tools you need to market your crops. You can find a local instructor at www.fbm.mnscu.edu . Where is Your Voice for Animal Agriculture? By Tina Stadtherr, Farm Business Mgmt. Instructor, South Central College, North Mankato, MN If you follow any of today’s big name agriculture economists such as David Kohl, Danny Klienfelter, or Michael Boehlje to name a few, it should come as no surprise to discover one of the leading issues livestock farmers are facing today is government regulations. Regulatory costs are the second largest concern in animal agriculture, right behind high feed costs. Whether it is local, state, or federal regulations, livestock producers are constantly being told how they can or cannot feed, treat, or house their livestock. Are you educated as to why regulations are becoming more and more of an issue in livestock farming operations? If you are not, now is the time to get educated and become a voice for not only the farm business, but your way of life in rural America. The issue is often ignorance. The general public simply does not understand the truth about livestock production and life in rural America. Generations are becoming more and more removed from the farm. Most friends and family who live in urban areas receive their information about animal agriculture from news clips that report on undercover video from PETA or the two minute commercials the Human Society of the United States (HSUS) runs on the television about animal neglect. These same people are sharing false pretenses of animal agriculture with our legislators about what needs to happen in our towns and farms which, in turn, become bills intended to help but, are possibly harming. We must think of ways to educate the general public about animal agriculture and its importance to our world population. It may be as simple as writing a letter to your local legislators about the importance of livestock production or sharing your stories with the youth of your community. Whatever small role you provide can be a vital piece to improving the attitudes our general public carries on the importance of rural America and animal agriculture. If you are interested in learning more about Farm Business Management education visit the website: www.fbm.mnscu .edu. Equity Borrowing & Lending Caution By Wayne Schoper, Farm Business Management Instructor, South Central College A popular marketing technique used in the 1970’s during the farmland price run-up has been reintroduced in recent years. Many producers are being offered loans based on business equity instead of cash-flow available to repay the loan. There are pluses and minuses to equity borrowing or lending. To the lender, it is quick and easy, requiring minimal paperwork. To the borrower, the only need is to get together a quick balance sheet, have an equity ratio over 50 percent, and the loan will be approved. This type of loan can be a good strategy of securing funds in times of medical or family emergencies. It can also be handy when cash is needed to make a down payment on a piece of neighboring land that fits into the operation. However, it is often too easy to purchase items that are expensive and are not really needed for the business. Others find the proceeds handy to cover up management mistakes. Before you borrow money based on equity, look at the possible consequences of this quick and easy method of credit. First, you must examine why you need the equity loan. If it is because of losses on the income statement or cash flow that will become recapitalized on term debt, then one must investigate further. Are the losses a one-time occurrence or a recurring trend? Was the need for credit the result of a natural disaster? Was this disaster preventable or the result of failure to plan, manage and execute a sound strategy? What caused the operation to be short of cash, and can you prevent it from happening again? You need to find the reason for the shortfall before simply plugging the hole with an equity-based loan. The consequences can be tough. First, equity loans can be a quick fix and if done repeatedly, can erode the equity on the balance sheet. In most farmers’ situations, that equity is usually the retirement program for later years, so equity loans can potentially reduce the quality of living in retirement years. Equity is eroded approximately seven percent each time an equity loan is executed because the loan is usually requested to cover operating expenses, losses and personal expenditures already incurred. Thus, one ends up making payments on the proverbial “dead horse.” Next, a producer must consider who will be evaluating their credit after the equity loan is made. In many circumstances, the marketer initiating the loan is not the individual to whom you will be answering if repayment problems occur in the future. This is a caution sign for anyone taking out an equity loan. That back office analyst will see the case through the financial statements in an objective manner, which can be disturbing to some producers who have a vague understanding of the dollars and cents of agriculture and can be intimidated by the “numbers person” Inherent in this financial strategy is the source of payback. Will there be sufficient earnings from the farm or non-farm sources? Will the new loan and payments place your business in a non -competitive position because of increased overhead cost as the result of increased interest and principal payments? What happens if you cannot make the payment? In some cases equity lines of credit have resulted in the loss of the farm or home as a result of the assets or equity being used to secure the loan. Another consequence is whether the loan will be used to position the business to increase net earnings in a sustainable manner. The real crunch comes if we have a repeat of a scenario like the 1980’s when farm assets declined substantially in value. When such declines occur, the balance sheet’s equity can be reduced, or in the worse case become negative, turning the balance sheet “upside-down.” For more information on types of financing, please contact a farm business management instructor at www.fbm.mnscu.edu. By Gene Kuntz, Farm Business Management Instructor, Faribault, MN I’ve been reading more than one article in the past several months focusing on the world’s population reaching seven billion this year. If you give it some thought it has huge implications for our industry. What I find interesting is that the each article questions how can we feed the world with our limited amount of arable acres and water currently available to all of us. The reality is that neither of these two world resources will significantly change in the future, in fact they will decrease. This is the underlying reason there is a fundamental bullish attitude supporting our industry currently and in the long term. That fundamental bullish attitude has caught the attention of outside investors and supporters of our industry. We will pay more for our inputs to make food. Leading the way is equipment (power and machinery) with a projected 17 percent increase in cost for the year. Farmland is second with a projected increase of 15 percent. We will have an increased cost of production for the 2011 and 2012 crop. How much per acre, how much per bushel, how much per farm? Can you answer those questions? Do you really know? Are you prepared to make a reasonable bid on some farm land to purchase or rent and know how far you can go? I am sure you all have heard of the rapid rise in land costs in the past several months. Several pieces of farmland in Minnesota have sold for over $8,000 per acre. We have also witnessed initial cash rents of over $425 per acre for the 2012 crop. Amazing! Amazing, yes but again it is reality. As stated earlier you will now have to contend with outside investors in the farmland market, not just your neighbor. Can you do it? Do you want to do it? Speaking of your neighbor, how about livestock producers? How are they fitting into this fundamental bullish attitude surrounding grain production? Hog producers are finally getting some breathing room in recent months with finishing hogs in the $90 per CWT range. Dairy producers are operating on just a dollar per CWT margin for the past nine months. Poultry producers are struggling as well. What we must keep in mind is that $7 corn and $13 soybeans might be a bonanza for grain producers, but it’s very challenging for the livestock industry in this state. It is simply amazing how the hog and dairy producers have rapidly changed rations to significantly reduce their corn and soybean meal needs. What are they switching to? Well leading the list is dried distillers grain, corn gluten meal, canola meal, and beet pulp. What skills will it take for any farmer to compete in this industry in the next few years? I believe most would agree that identifying your cost of production is an important skill to have. What does it cost you to produce a bushel of corn or soybeans, a 100 CWT of milk, a 100 CWT of hogs. Do you know? Can you accurately calculate it? If you are student enrolled in a Farm Business Management (FBM) program you should know and you can calculate it. With the assistance of your FBM instructor you calculate it every year through the enterprise analysis, and in some cases you calculate it on a quarterly basis. For more information, contact a Farm Business Management Instructor, or visit our website: www.fbm.mnscu.edu By Ira Beckman, Farm Business Management Instructor, South Central College, Mankato When was the last time you seriously thought about or wrote down some short term goals? If you have some recorded short term goals when was the last time you visited them? There are several characteristics of a well written goal. First of all goals should be specific. They must clearly identify some action that must be taken for the goal to come true. Goals must be measurable. You must know when you have reached your goal by assessing its progress. Goals must be attainable and able to be achieved. They must be relevant, worthwhile and beneficial. Finally goals must be time bound. They must have a specific timeline for completing the progress towards the goal. Short term goals are usually accomplished within one year. Farm business managers with short term goals will see nearly immediate financial progress if they gather input, physically write down, and share these goals with their family members, partners, and employees. Short term goals usually involve either ways to generate more income from the farm by increasing yields and/or quality of the production, marketing without increasing costs, or how to reduce some costs without affecting the income from the business. Some examples on a dairy farm may be to increase production per cow, decrease somatic cell count, or to reduce feed or some other major costs. The goals may deal with feed conversion, average daily gain, death loss, or to reduce costs on livestock finishing enterprises. Crop farmers may work on more efficient use of inputs like fertilizer, seed, and fuel without hurting yields. It is also important that someone is specifically responsible for each of these goals, and an overall value for their accomplishment. It is amazing how just a few dollars per acre, or per animal can add up to several thousands of dollars on your bottom line at the end of the year. These goals do require constant attention and discipline. If you would like more information on how farm business management can help you set some short term goals, please find a farm business management instructor at www.fbm.mnscu.edu.
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