Archive for the ‘finance’ Category

Is Bigger Better?

January 22, 2009

When I took economics in University, one of the concepts that I was taught was economies of scale. This concept is defined as obtaining cost advantages that a business obtains due to expansion. In farming there is a constant thirst by farmers to add land or head space to their operation. It is quite common for fellow farmers to judge success by the size of the operation and not profitability. Of course this makes sense because profitability is not a public figure due to the fact most farms are private enterprises.

As your farm grows larger the potential rises for lower costs of inputs, better interest rates and increased commodity market access. Another benefit of improved economies of scale is the lower of your fixed costs per units produced. A great example of this is spreading your office expenses (overhead) over more acres farmed provided that you keep your office expenses flat.

There are challenges for growing farms that are trying to achieve the optimal size and gain real economies of scale. As I talk to many farm customers that are larger farms, there are several common issues that they have to deal with that can be challenging:

  1. Finding staff–For the past five years, finding staff has been terribly difficult. On top of this there has been high rates of turnover as it has become trendy to look for the greener grass all the time.
  2. Managing staff–When you are working for yourself it is easy to justify that you need to work a little harder or longer hours to get the job done. When you are dealing with employees you must manage the balance of their personal life and the jobs at hand. This is not as easy as one would suspect because not all employees view the company’s objectives as their own and may have different values or personal goals.
  3. Handling the change in role–As farms get larger the owner must begin to make choices as to what is the best use of his or her time. This is a challenge for any business owner as the business succeeds. Being the entrepreneur is a much different role than the manager.
  4. Competing with smaller operations head to head–Larger operations have larger overhead costs than in comparison to smaller operations. The larger operation is fighting to survive on volume and thinner margins against a low overhead, smaller operation. To make this clearer think of bidding on custom feeding.

Don’t get me wrong the trend of larger farms is not going to slow and it does happen for a reason as equipment gets gets more productive and the quest for economies of scale are present. Like any other business you need to understand that as your farm grows the role that you may play as the farm owner is going to change and challenges will always be there. Bigger does not mean better for everyone.

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Risk, Currency and the Canadian Dollar

January 15, 2009

Risk is well known board game, played on a map of the world, in which players effectively bet (take on calculated risk) and play to take over more and more countries and ultimately rule the world.

I am just musing here, but if you were taking stock of countries and their respective currencies, would it be wrong to consider a common sense sort of bird’s eye view of the countries in the world in say five different categories and give strong consideration to the impact of the results of such an exercise?

I would consider:

  1. current status (stage and reputation in economic development and world reputation),
  2. political climate (democratic, responsible, international reputation/relations and involvement, the people/voters)
  3. resources (educated or trained people , access to credit/money, water, food production, oil, metals, minerals, lumber etc)
  4. institutional infrastructure and resources (stability of financial institutions, existence of or ability to create education/training to meet needs)
  5. location (ocean ports, proximity/access to significant markets).

It is hard for me to imagine a combined assessment of the above comparing Canada against most countries in the world, would be anything but in favour of Canada. In a time of growing world population, there is surely going to be an opportunity, a reliance even, on Canada to be a significant contributor in the world economy.

I often run strategic business decisions through a “what if gauntlet” to see how they survive different scenarios. So if this kind of assessment makes sense to you like it does to me, maybe some thought in your business should be given to business and managing risk in an environment where in the long term the Canadian Dollar trades much closer to par with the US Dollar than the flirting with the 70’s that it has been doing recently. Just a thought……

Use Input Financing Programs Wisely

November 11, 2008

There are very advantageous pricing programs out in the market right now for inputs (seed, chem fert) before the year end. Along with that there are financing programs that may include do not pay or no interest until a given date. These can be fantastic programs for farmers but you need to be careful. Here are some questions to ask.

  1. Will this input financing agreement be in violation of my covenants with the your other lending institutions I use? For example the covenants that you have on your operating line at the bank.
  2. Are there are up front fees or admin fees? I don’t mean to avoid these sort of programs but make sure you are aware of the total costs of no interest programs
  3. Once the interest starts calculating, is the interest owed back dated to the beginning of the contract or does it start fresh?
  4. At the end date of the contract, can I extend the agreement or is the full balance owed at that time?
  5. Is there a limit on the account and what information will I have to supply to set up the account initially?

Input financing programs can definitely be advantageous to your operation so just ask the right questions and your farm will prosper.

Cash is Not the Only Determining Factor

October 20, 2008

I had a great conversation today with a fellow farmer in Saskatchewan. We talked at length about the significance of the commodity prices hitting the floor boards again. Is the sky falling versus there may be some opportunities for those that do not panic sell. As I have mentioned before these are challenging times that seem where volatility is frequent instead of rare.

One interesting thing that came out of the conversation was that selling based on cash flow requirements is becoming less and less a mantra to live by in all situations. I think in the past farms sold their crop only when they needed cash flow and otherwise just left it sitting in the bin until the bin space was required other wise. And in a lot of cases if your bins were full you just bought more bins (this is no longer available an increase in steel prices and long setup times). Due to the increased volatility of prices you need to take advantage of selling your inventory when the time is right. Many farms missed out out on the last of great prices in July mainly because they did not need the cash flow at the time. This has proved to be a costly mistake for all of us.

Incremental selling is an important strategy while considering all factors and not just cash flow requirements.

Why Are Pre Buys on Fertilizer Down

October 16, 2008

As I talk to customers it seems that there must be lower amounts of fertilizer being purchased this fall. I think that there is less fertilizer being purchased for a couple different reasons.

One is that there was a significant amount of equipment and infrastructure purchased by farmers in the spring while prices were double of today. There were many combines, bins and tractors purchased this past spring that I am some farmers would like to rescind their orders on. Calculating your ability to service the debt on a tractor with $15 canola versus $8.50 is much different. Pile on top of this a tightening credit market and spending is tight for inputs like fertilizer.

Secondly, there seems to be a deep conviction that due to Ag commodity prices dropping that fertilizer must due the same. This is more of the theory that I am following. As I have written before either Ag commodity prices are going up or fertilizer must come down. I think farmers are a little bitter to the huge drop in farm prices and locking in high fert prices now would be a double whammy to the income statement.

Across North America this will be a game of poker between the end user and the market makers. Get ready this will be one interesting winter in fertilizer pricing and purchasing