Plan for farm profits even when margins are tight

It almost feels like halftime in a locker room some days at LongView Farms in central Iowa. But instead of drawing up X’s and O’s, Scott Henry and family members move tractors, sprayers and other farm assets around a whiteboard in their conference room.

This information is duplicated in a computer spreadsheet. Henry says the process helps them visualize the farm’s current and future capital expenditure needs. “We like using something we can erase or scratch around with a larger group,” he says.

The underlying challenge is hardly unique to LongView — after all, it’s easy to spend money when you’re clearing $500 per acre. But what about when times are tight like they have been for the past four or five years? What’s the best way to plan and prioritize capital expenditures in the age of frugality?

Opportunity costs

There’s no single path to success, but Henry has the right idea, according to David Widmar, a Purdue ag economist and co-founder of Agricultural Economic Insights. “The very first thing I encourage producers to do when looking at capital purchases is to develop a written plan and update it at least every year.”

A disciplined plan in writing will prevent farmers from pursuing good deals that, nonetheless, will fail to add to the bottom line — “and there will be good deals to be had,” Widmar adds. “A list helps you step back and look at what you actually need to pursue.”

Prioritizing is a smart way to stay within budget, according to Thomas Eatherly, manager at K-Coe Isom. For example, if a large-ticket item such as a combine or a new piece of ground is at the top of that list, maybe your operation can only afford a single purchase this year, he says. But if your biggest needs are several small pieces of equipment, it may make more sense to knock more than one item off your list. “It makes sense to step back and pick your project,” he says. “You probably can’t do everything in one year.”

Again, a written plan for capital expenditures help the process, especially on larger operations with lots of moving parts. But many farmers still don’t have one, Eatherly says.

“Their ‘written plan’ oftentimes ends up just being in their mind,” he says. “That’s one thing we’ve been trying to move the needle on.”

But even with a written plan, Widmar says it takes no small amount of discipline to say no. “When you say no to a purchase now, you’re saying yes to something else down the road. The corollary is also true. When you say yes now, you might be saying no to a future purchase.”

It takes careful planning

That point is not lost on Henry, who says prioritizing capital expenditures takes careful planning to do correctly. “We ask ourselves how much of each decision is based on cash flow today versus cash flow tomorrow?” he says. “We try to think strategically and know relatively what pays for itself.”

LongView Farms sorts capital expenditures into two basic buckets: infrastructure investments for long-term growth and replacement needs for existing assets.

Henry wants to engage in purposeful growth. A few years ago he realized the farm was underinvested in grain storage, so building a facility became a priority. With an eye to diversification, LongView also recently broke ground on a new hog-to-finish barn.

As for farm equipment purchases, Henry admits the farm has struggled with the best plan of attack. Traditionally, the farm had been “first owner” buyers and rolled equipment over one to three years. As low commodity prices continue pressure profit potential, those plans have shifted.

“Now, deals have made more sense when leasing or becoming the second owner on some equipment,” Henry says. “But we continually ask if we should be buying new or used, or lease. It can come down to a deal-by-deal basis, based on dealer programs and incentives.”

Henry has the farm’s equipment appraised on an annual basis and meets with his operations manager regularly to go over repair bills. Everything is mapped out on the whiteboard, which allows for a group discussion about the farm’s needs in 2020, 2021 and beyond.

Consider keeping everyone in the loop as a best practice, Widmar says — and don’t forget to include your lender in some of these topline discussions. “Your lender can sometimes come to the table with creative solutions to help you navigate through,” he says.

And after you make capital expenditures, look back on your decisions to analyze what paid off — and what didn’t, Widmar says. “Learn to ask the right questions and look back on your decisions to see how they turned out.”

If you do this well, your half-time locker-room strategy session will result in victory.

Bonus tip: What you can learn from Buffet’s big bucks buffer

Business mogul Warren Buffet famously stockpiles cash. At one point last year his cash coffers were more than $110 billion. That strategy has served him well throughout his career, allowing his company, Berkshire Hathaway Inc., to land big bargains by buying large amounts of stocks or even entire businesses outright, due to the massive flexibility that his cash pile provides.

“He prepares himself, so he can make those big deals,” says ag economist David Widmar.

Obviously, no farmer is going to have a couple billion dollars laying around for a rainy day. Even so, farmers can borrow a page from Buffet’s playbook by building their own war chest so they are better positioned to strike while the iron is hot.

“The key takeaway is to plan ahead when possible,” Widmar says. “On the other hand, don’t wait until the last minute to make a purchase. It limits your opportunities.”

Source: Ben Potter, Farm Futures