Edition #18

November 4, 2023

Good morning and welcome to the Braintrust Ag newsletter. Where we comb through and compile ag business & transition content so you can avoid this ⤵

A couple notes to begin:

• If you haven’t checked out the community page, why not? There’s 112 other ag folks eager to learn and share about ag business opportunities.

• Upcoming Events:

  • SOIL Gathering (Thurs, November 9)

    • Topic: Value Added Opportunities

  • Expert Q&A (Tues, November 14)

    • This will be our FIRST EVER expert event! More details coming soon.

Alright, let’s get to the topics that will help you build a strong, sustainable agri-business.

-Clint

Here’s what we have this week:

• ⚖ Individual & Business Assessment

• 🌱 Seeds

• ⁉ Known Unknown Framework

• ➗ Ratios

• and more…

WHOLE FARM PLANNING:

Individual Assessment & Business Analysis

Comprehensive planning is crucial for farm businesses because it ensures proactive management, addresses the unique challenges of agriculture, and lays a foundation for long-term sustainability and success.

Previously, we discussed the approach and the farm family. This week it’s a look at individual assessments and the business analysis. 

Individual Assessments

First, not everyone’s cut out for farm life. It's not like there's a single quiz out there that can tell you if someone's a good fit for farming. It's more about each person on the team taking a good, hard look at what they bring to the table. We're talking about skills in managing people, handling money, growing things, getting products out there, and keeping the whole show running.

Here's the deal: Every person has their own mix of things they're awesome at. One might have a knack for keeping the books tight, while another is a whiz at caring for livestock or can fix a tractor with their eyes closed. With ag being as complex as it is, having a crew with a wide range of talents is a big win.

So, it’s a good move for everyone to take a step back and think about where they shine.

• What makes you want to farm in the first place?

• What's really important to you?

• What are your big dreams for the farm, and do they mesh with the family business plan or not?

• What are you best at that can bring value to the operation?

Everyone's got their strong points and their not-so-strong points. And it's not just about the production side of things. It's also asking yourself how you make decisions, how you handle conflict, if you're willing to endure the struggles to realize the rewards.

Of course, there's the personal side of things to think about—does your personality meld with the other workers? What does your family need, financially, to keep the lights on? And really, how does your family feel about the whole farming business?

Business Analysis

Doing a deep dive into your farm business is like pulling out a map during a road trip. You need to scope out where you're at before you can hit the gas towards where you want to go. So, you start by taking a look at the basics: How much land do you have to work with? How labor is available to pitch in? What's the state of your finances? And who's keeping all the wheels turning?

Then you get into the nitty-gritty, the:

• Who

• What

• Where

• Why

of the farming enterprise. Answer those questions to determine the physical, fiscal, and personnel side of the business.

Now, efficiency is key. Your analysis ought to make sure you're not wasting a single seed or a drop of sweat. If there's something or someone that’s not being used to its full potential, you’re leaving money on the table.

Next up, you look at the cash coming in and the cash going out, the business structure, operating procedures, and key personnel. It's also important to keep an eye on what's going down around you. Things like new laws, market trends, even the weather—anything outside the farm that can throw you a curveball.

Once you've got a clear picture of the current farm scene, it’s time to huddle up and figure out where to go from here. Everyone involved in the operation needs to toss their dreams and skills into the pot. This way, you make sure the goals you set for the farm are actually doable because they're based on what everyone's good at and what they want out of the gig.

Remember, the best farm plans are the ones that reflect the whole squad. It’s about everyone being heard and finding the sweet spot where all those individual goals meet up with the farm's goals. It's like putting together a puzzle where each piece is crucial to get the full picture.

And that’s where individual assessment meets business analysis.

Next week, we’ll dive into the 5 essential plans.

SEEDS

• 🧠 $martMoney Week: The University of Nebraska is hosting a pile of free workshops and webinars dedicated to farm finance next week. I’d venture to guess you’ll find value in this content even if you live 1,000 miles from NE.

• 👍 Oldie but Goodie: This article, Ten Rules of Transition Management, is from way back in 1996, but still rings true today. You may have to update the numbers on Rule #1, but other than that it hits the nail on the head.

• 🌪 More ERP: USDA announced another $3 billion of Emergency Relief Program payments for row crop and specialty crop growers. Applications are now being accepted.

• 📆 Year End: Gathering year-end records is stressful. This article offers some tips and insight into easing the process and highlights the importance of accurate recordkeeping.

• 🏭 Other Leased Assets: A discussion on things to consider when you’re leasing farm assets that are more than just bare farmground. Buildings and equipment have other considerations that land doesn’t.

RESOURCES UPDATE

A few more resources have been uploaded since this list was made, but this is an (almost-complete) compilation of the resources available for download.

FINANCE

If I told you as a farmer or rancher that you’re a small business owner, would you nod your head in agreement or wrinkle your face and say, “huh?” Often times, our perception of small businesses is the local mechanic, HVAC, boutique, or online Etsy store.

But, as an ag operator, you are also a small business owner. For example, if you’re a corn farmer and have less than $2.5 million in average revenue, the U.S. Small Business Administration (SBA) qualifies you as a “small business.” In comparison, if you’re a dairy farmer, your revenue threshold is $3.75 million to be a small business.

Interesting enough, but what does this mean to you, the small business owner?

Well, it means we ought to treat our farm and ranch finances as every healthy small business should. By paying attention to them. One of the ways to accomplish this is by tracking and monitoring farm financial ratios.

We track a lot of data in the ag industry, but often we don’t know what financial Key Performance Indicator (KPI) or ratio targets are healthy. Don’t fear - today’s your lucky day. With resources from Michigan State University, I put together this “Farm Financial Ratios Cheat Sheet.”

Here’s 18 Farm Ratio Targets for a healthy ag operation:

• Current Ratio – Above 1.5

• EBITDA – Higher the better

• Debt to Equity Ratio – Below 1

• Net Income Ratio – Above 20%

• Debt to Asset Ratio – Below 30%

• Asset Turnover Rate – Above 45%

• Interest Expense Ratio – Below 5%

• Equity to Asset Ratio – Above 70%

• Net Farm Income – Higher the better

• Operating Profit Margin – Above 25%

• Rate of Return on Equity – Above 10%

• Rate of Return on Assets – Above 10%

• Operating Expense Ratio – Below 60%

• Depreciation Expense Ratio – Below 5%

• Debt Service Coverage Ratio – Above 1.5

• Capital Debt Repayment Coverage – Above 1.5

• Replacement Margin Coverage Ratio – Above 1

• Working Capital to Gross Revenues – Above 25%

Use these benchmarks to gauge and monitor your agri-business financial health.

Also, click here to get the eBook explaining more about each of the metrics.

TESTIMONIALS

I’ve been encouraged to set up an easy way for folks to leave a testimonial.

If you’d be willing to take a minute, click here to leave your thoughts.

Thank you, kindly!

RISK MANAGEMENT

The known unknown framework can help farmers and ag managers identify and categorize risks inherent to the ag industry.

Popularized following the 2008 financial collapse, this matrix helps classify risks based on the knowledge we have of them.

→ Known Known Risks: These are the risks you're aware of and can quantify.

For a farm, this could include predictable and measurable risks like price fluctuations in the market for your crops or livestock, seasonal weather patterns that impact production, or the anticipated maintenance costs of farm equipment. You can manage these risks by setting up futures contracts for your crops, diversifying crop types, investing in specific crop varieties, and maintaining a robust equipment servicing schedule.

→ Known Unknown Risks: These are risks you know exist but can't predict their likelihood or impact accurately.

In farming, this might include the potential for a disease outbreak in livestock or the sudden onset of a plant pest infestation. While you know these risks are real, the timing and severity are uncertain. To mitigate these, you might invest in comprehensive insurance policies, engage in regular veterinary check-ups for livestock, or keep aware of regional disease and pest reports to act swiftly if necessary.

→ Unknown Known Risks: These are risks that should be on your radar but are often overlooked due to negligence or complacency.

For example, you might undervalue the risk of water scarcity or ignore the legal implications of hiring practices. Such oversight can lead to significant issues. Ensuring that you are fully aware of regulatory compliance, environmental changes, and resource availability, and incorporating them into your risk management strategy, is crucial to safeguarding your farm's future.

→ Unknown Unknown Risks: These risks are completely off your radar and impossible to predict or measure in advance.

For instance, the emergence of a new plant disease or an unprecedented weather event could drastically affect your operations. While these "black swan" events are rare, they can be catastrophic. To prepare, you should develop a robust business continuity plan that includes emergency funds, backup suppliers, various insurance policies, and alternative distribution channels to remain operational under unforeseen circumstances.

By adapting the known unknown framework to your farm or ranch management practices, you can systematically:

• Identify

• Assess

• Address

the multitude of risks associated with agricultural production.

This strategic approach can help you minimize losses, enhance resilience, and secure the long-term sustainability of your farming business.

MEME OF THE WEEK

That’s a wrap, folks.

Until next week, thank you to everyone involved in ag. Come engage on the new platform & let’s grow profitable ag businesses together.

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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.