View all past Braintrust Ag newsletters here.

Edition #40

June 15, 2024

Good morning and welcome to the Braintrust Ag newsletter. Where we give even the most singlest of all single ag people the insight to build an attractive farm business.

2 notes to begin:

• Take a peek at the new website and let me know what you think!

WWW.BRAINTRUSTAG.COM

• ‘Sunrise Sessions’ is a new opportunity for ag people to connect in much needed ways. You can learn more here: Sunrise Sessions

Alright, let’s get to the topics that will help you build a strong, sustainable ag operation.

-Clint

Here’s what we have this week:

• 💸 6 Financial Principles

• 🌱 Seeds

• 🥛 Dairy Insights

• 📅 Happenings

• 🤗 Kum ba yah

• 👨‍👩‍👧‍👦 Succession thoughts

• and more…

THE BIG IDEA

BA Pro Manager Series

#7: Six Principles of Farm & Ranch Financial Responsibility

Managing the finances of a farm or ranch is a complex task, but it's essential for the sustainability and growth of our agricultural operations. In an industry where market prices fluctuate, unexpected weather events occur, and operational costs can spiral, having a strong financial foundation is more important than ever. Effective financial management not only helps us navigate these challenges but also positions our farm or ranch for long-term success.

As a professional manager, your ability to apply these financial principles can distinguish you from the rest, ensuring that your operations are not only sustainable but also poised for growth and profitability. By mastering these core principles, we can make informed decisions, build resilience against uncertainties, and drive our agricultural business towards long-term success.

Here are six key principles for maintaining financial responsibility on today’s farms, ranches, or any ag business:

1. Budgeting

Creating a comprehensive budget is the foundation of financial management for any operation. Your budget should encompass all expenses, from seed, feed, and livestock costs to equipment maintenance, labor, and property taxes. Regularly reviewing and updating your budget is crucial to reflect changes in market prices and to account for new expenses or income sources. This ongoing process helps you stay informed about your financial situation and make necessary adjustments promptly. A well-maintained budget serves as a roadmap for your financial decisions, ensuring that you allocate resources effectively and avoid unexpected shortfalls.

In fact, it’s recommended to have individual budgets for each enterprise (think corn, soybeans, cow/calf, feeders, etc) and those enterprise budgets flow to a whole farm budget. If you really want to be comprehensive, consider including off-farm income and family living expenses in your whole farm budget for a global picture. 

2. Saving

Farming and ranching are inherently unpredictable, with unexpected events such as severe weather, diseases, or sudden market price drops potentially impacting your operations. Establishing a reserve or emergency fund is essential to provide a financial cushion during these tough times. An emergency fund allows you to manage these unforeseen challenges without resorting to debt, maintaining your financial health and operational stability. Prioritizing savings ensures that you are prepared for any disruptions and can continue your operations smoothly.

Place those savings in an interest bearing account so that cash is acting as an insurance policy while making a bit of passive income when not deployed.

3. Smart Debt

While taking on debt may be used for significant investments like purchasing land or machinery, managing this debt wisely is crucial. Before borrowing, carefully assess the return on investment (ROI) and your ability to repay the debt. Ideally, aim to borrow money only for assets that appreciate in value over time, such as land or some buildings and specialty equipment.

Conversely, fight like mad to use cash for purchasing assets and inputs that depreciate, or go down in value. And, fight that urge to max out the amount of debt a lender is willing to send your way. Remember just because you CAN borrow a certain amount, doesn’t mean you should.

An easy trap to fall into is confusing and mixing up “needs” vs “wants.” An acre of wheat or your sheep flock doesn’t need the latest equipment with all the fancy tech to grow a crop. Play the long-term game with debt and try only borrowing on things that go up in value.

This approach ensures that your debt contributes to long-term growth rather than becoming a financial burden. Smart debt management involves careful planning and realistic projections to ensure that your investments enhance your farm's profitability.

4. Invest Wisely

Investing in new technologies, infrastructure upgrades, and other improvements can significantly boost your farm's productivity and profitability. Consider options like precision farming equipment, automated milking machines, improved livestock genetics, or new crop varieties. Each investment should be evaluated for its potential to enhance your farm's operations, but most importantly your farm’s profitability. Wise investments require thorough research and planning to ensure they align with your long-term goals and provide a tangible return. By staying informed about advancements in agricultural technology and practices, you can make strategic investments that keep your farm competitive and efficient.

To reiterate it here: don’t let your “wants” get confused with your “needs” and end up borrowing your way to financial stress just to have the latest creature comforts.

5. Profit Focused

Profit is revenue minus (-) expenses.

Profitability is the cornerstone of any successful farm or ranch. Too often we hear businesses discuss only their revenue numbers. That’s only half the story. Poor financial discipline can lead to expenses getting out of hand and eating up all that revenue.

To maximize profit, look for ways to increase revenue and reduce costs. Effective strategies include diversifying your products, selling directly to consumers, and adding value to your products through processing or branding. Careful marketing and understanding your cost of production are essential for identifying areas where you can cut unnecessary expenses. By tracking and analyzing your break-evens (what it costs to produce one unit), you can make informed decisions that enhance your profitability and ensure that your operations are cost-effective.

Remember, no matter what your revenue is, that’s not what you get to take home at the end of the year. Profit is what stays in your pocket. 

6. Risk Management

Farms and ranches face a variety of risks, but having a robust risk management plan can mitigate potential problems. Consider revenue protection insurance options such as crop or livestock insurance and casualty insurance. Reviewing these policies annually not only ensures proper coverage limits, but also provides an opportunity to shop around for lower premiums, adding to the bottom line.

Setting up legal entities like LLCs can provide additional protection against liabilities. Managing environmental risks through practices like maintaining soil health and good animal husbandry is also crucial. Ensuring compliance with regulations is key to avoiding legal issues and fines. A comprehensive risk management strategy helps safeguard your farm's assets and ensures continuity in the face of challenges.

Think of risk management as a tool to protect those profits you worked so hard to earn. 

Conclusion

By applying these six principles of financial responsibility, you can ensure your farm or ranch maintains financial stability, supports growth, and weathers the inherent challenges of agricultural operations. Embracing budgeting, saving, smart debt management, wise investing, profit focus, and risk management will empower you to make informed decisions, enhance your farm's profitability, and secure its future.

And your operation’s financial viability plays a key role in building an attractive farm/ranch business to pass down for your generational legacy.

I’ve condensed these 6 into an infographic as a reminder of these key principles.

Now that we have an overview of these crucial principles, we’re going to spend the next couple editions diving deeper into the financial tools used for mastering farm finances. We’ll begin to explore in detail (and provide templates) the balance sheet, the income statement, and provide practical guidance on budgeting and accounting/bookkeeping.

Stay tuned for those upcoming editions.

SEEDS

• 🐔 Poultry Pay: The USDA recently announced a new proposed rule aimed at helping poultry growers avoid poultry processor deductions in the so-called “tournament system” for grower contracts.

• 💲 Econ Outlook: According to the Fed’s Beige Book (commentary on economic conditions in each of the fed reserve districts), agricultural outlooks are a becoming a bit more pessimistic with slower than expected growth and farm finances being the main concern. Here’s a summary of the districts.

• 🌾 Carbon Credits: Two of the big fish in the carbon credits pond have recently announced upgrades to their programs. Indigo Ag claims higher payments for farmers and greater access across all states covering 19 different crops. Nori, through a deal with Bayer, has issued 125,000 credits covering 190,000 acres and states they have another 240,000 credits coming soon.

• 📈 Budgets: If you read the first principle for financial responsibility above, you saw budgeting. UnCommon Farms has a great article with insight on how to get started with farm budgeting. It’s the 101 on tackling this topic.

• 🥛 Solar Dairy: Connecticut based Oakridge Dairy, billed as the largest dairy in the Northeast, has topped their barn with 752 solar panels in an effort power their dairy with alternative energy.

IT’S DAIRY MONTH

June is Dairy Month, so I’ve been reading up on the dairy industry.

Came across the “State of the Dairy Industry” report. Here’s some things you may find interesting, like I did:

The dairy herd is migrating.

→ Cows are leaving NM, PA, FL, CA, VA, IL, WA, and VT

→ And going to TX, WI, ID, MI, NY, SD, CO, MN, etc

The dairy herd is consolidating.

Economies of scale at play here, with bigger farms growing & smaller farms phasing out. Larger farms have more efficient cost of production.

A survey of the operations said their top challenges were:

• #1 Milk Prices

• #2 Labor

• #3 Cost of inputs

• #4 Regulation

• #5 Land

Sounds kind of like the rest of the ag industry…

That same survey pointed to the top areas of investment being:

• #1 Improving facilities

• #2 Growing land base

• #3 Genetics

• #4 Animal health technology

• #5 Feeding technology

Automation/robotic milkers came in at #6.

Succession Planning

→ Small dairies have a dismal outlook on succession

→ Bigger operations more likely to add non-family partners

→ The farm size with the highest % of succession plans in place was still ONLY AT 52%

Diversification is top of mind.

Things like on farm:

• cheese

• ice cream

• agritourism

• fluid milk bottling

• retail/branded beef

But the biggest area of focus for diversification is beef-on-dairy.

There was a bunch more info in the report, but these are the things that caught my attention.

You can access the full report here.

As is the case in all of ag…the dairy industry can use more consumer support.

So, as for me and mine, I’ll now go eat some cheese, wash it down with some milk, and top it off with some ice cream.

Become a member today for lifetime access to everything. It’s a small one-time cost with NO recurring subscription.

PEER GROUP HAPPENINGS

A couple mentions on what Braintrust Ag members are up to:

1) Commodity Broker shares incredible insight

Members were lucky to have Michael Rowen, a commodity broker, break down the basics of futures, options, and livestock price insurance and how to use them on our farms & ranches.

Here’s the summary with a link to the recording:

2) Upcoming SOIL Gathering on “Conflict Resolution”

Thurs. June 20th @ 2:00 CST

3) Sunrise Sessions

As announced above, I hope you’ll consider joining us as we further our spiritual and personal development through the small group gatherings each Wednesday morning.

This inaugural session, on Wed. June 19th @ 6:30 am CST, will be an introduction to the small group and what to expect going forward.

Here’s more info: Sunrise Sessions

CAN’T WE ALL JUST GET ALONG?

I recently had a refreshing phone call…

A passionate lady reached out to discuss her non-profit initiative and how their purpose might be aligned with Braintrust Ag’s focus of ag business & ag transitions.

Based on their website, I suspected before the call that we may have opposing views on some things. Mainly, the definitive language stating a climate change emergency and if we just fundamentally change our current farming practices we can avoid catastrophe.

From a rural background, with family who still farms, she’s now a resident of one of the big metros. A very polite, positive, and respectful visit ensued:

Her perspective of the perils of modern ag production, the solutions, and consumer attitudes toward food is vastly different than mine.

My thoughts on modern ag challenges, the solutions, and consumer purchasing are vastly different than hers.

This could have been a tinderbox for an ideological debate. But it wasn’t.

During our conversation, there was no “I’m right, you’re wrong” attitude. We were both curious to hear each other out. The result was both of us leaving the call with new perspectives to wrestle with.

The point is this: while our opinions may be on different ends of the spectrum, rather than declaring war on each other’s views, we were able to have a fruitful discussion about the ag industry.

She left with a better understanding of the financial motives and challenges for farmers. I left with a better understanding of urban investors & consumers’ perspectives of ag. All because of our respectful approach to one another.

So maybe we ought to have more 1-on-1 conversations, set aside our defensive armor, and approach these conversations with respect, open-mindedness, and civility.

If you get value from these newsletters, consider joining 250+ other ag people and become a member of Braintrust Ag. Your support makes this content possible.

SUCCESSION THOUGHTS

These two trends keep popping up when visiting with folks who have had a smooth farm succession:

1. The operation was well managed, like a stand-alone business entity with a focus on financial viability.

In other words it was an "attractive" business to hand down.

2. A written management & ownership transition plan was in place & had the buy-in from both generations.

Management first; ownership second.

The drama filled & ugly succession stories get talked about a lot, and can teach valuable lessons…

But fewer eyeballs see what we really ought to be learning from:

→ those smooth transitions that don't end up with broken family relationships & the farm being sold for parts.

MEME OF THE WEEK

That’s a wrap, folks.

Until next week, thank you to everyone involved in ag.

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DISCLAIMER: All content, communications, and resources provided by Braintrust Ag, its principals, operators, or members is intended to merely be educational and entertaining. Nothing published by Braintrust Ag should be relied on as legal, financial, investment, or other professional advice. Investments and legal matters involve substantial risk and are not suitable for all individuals. It is recommended to enter into a client relationship with an ESP for obtaining professional advice.