Edition #2

April 29, 2023

Good morning and welcome to The Agri-Business Braintrust newsletter. We’re the spark to your kindling so your ag operation can grow like a California wildfire…

A few notes to begin:

• We’re on week 2 of this experiment, and I want to thank all of you for the comments & feedback… keep ‘em coming!

• You can expect a few new things uploaded to the Resource Library in the coming days. I think they’re pretty great.

• If anyone is good with websites/landing pages, I could use some help. Here’s my email address: [email protected]

• Hoping to have our first Expert Q&A later next week… stay tuned!

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:

• 📃 Business Plan (Part 2 of ?)

• 🏠 AI

• ��Climate $$

• 📝 Sole Proprietorships

• 📈 Financial Metrics

BUSINESS PLAN SERIES - Week 2

Last week we began diving into how to create a comprehensive business plan for your ag operation. As a refresher, successful farms and ranches don’t just happen by mistake.

They are the result of a well thought out plan that allows for growth and flexibility designed to reach a distant goal.

Whether you have been running a farm for years, are looking to start one from scratch, or are somewhere in between, you ought to have a business plan.

We began by looking at Part 1: Business Description. If you missed it, here’s a link.

Reminder: we’re working through this Google Docs template to build out our example. If you didn’t already do so for your homework last week, download and save a copy to build out your own business plan.

Now, let’s continue building our comprehensive business plan.

Part 2: Products & Services

Diving right in - we need to define what our business is producing and why customers will pay us for it.

First, we’ll fill out the section on defining what our products & services are.

Products could include things like crops, livestock, equipment, livestock products, value-added products, etc.

Services could include things like advising, building things, delivering items, or performing any type of work where you get paid based on your time.

Here’s what we defined our products & services as:

Next, we identify the benefits to our products and why they are unique to others. This is difficult to do with commodities, such as our examples with Sample Farms, but we can still describe ways we differentiate our crops & farming practices.

If you are building a business plan for an “ag adjacent” business, this may be an easier task.

For instance, if I build windbreaks & freestanding panels in the winter, I may say something like, “Our products are different from others on the market because we use oil pipe and continuous fence portions that are galvanized, preventing rust and corrosion….”

I think you get the gist.

Last, we are giving a description of our pricing strategies. Again, this can be much more detailed with a manufactured product, or a service based product where we have set prices. Unfortunately, for Sample Farms, we are at the whim of the commodity markets to a large extent.

So, here’s how we’ll describe our pricing for Sample Farms:

Now it’s your turn!

Homework: Over the next week, spend some time thinking about your products & services. Carve out an hour and fill out your products, services, benefits, and pricing structures.

This will help bring clarity to what it is that you’re actually selling.

Next week, we’ll cover Section IV Marketing Plan, complete with a SWOT analysis. This will get more into the moving parts & how we’ll pull off this farm.

Questions? Ask them. [email protected]

SEEDS

• 🤖 Ag AI: Artificial Intelligence (AI) is here to stay, and this article explores some of the ways it may have an impact on agriculture. FBN launched their AI consultation tool, and odds are AI will have a big impact on data analysis, financial reporting & monitoring, equipment autonomy, and general decision making.

• 🦹 For Fun: Here’s a crazy tale of how the “Salad Oil King” leveraged soybeans to steal over $1 billion and lived a life of crime and fraud in the 1930’s & 40’s.

• 🫘 Iowa Billionaire: Speaking of soybeans, here’s how Harry Stine became one of the richest people in the world through betting on himself and creating true value in agriculture. This inspiring story gives hope to ag entrepreneurs by looking at someone who succeeded, the right way.

• 📝 Climate $$: We’ll keep an eye on this USDA announcement where they’re investing $3.1 billion in climate smart projects. This could lead to some opportunities for agri-businesses to diversify or change farming practices and get paid handsomely to do so. Here’s an infographic.

LEGAL

Last week we looked at the 5 business entity types that agri-businesses could fall into.

To recap, there’s:

• Sole Proprietorship

• Limited Liability Company (LLC)

• Partnerships

• Corporations

• Cooperatives

Each has their own best uses along with their unique pros and cons. Let’s take a closer look at them one by one. This week, the focus is sole proprietorship…

Alright, now that Investopedia defined it, let’s look at some pros and cons of a sole proprietorship.

Pros:

✓ Easy to establish & dismantle

Because it’s unincorporated, there is no need to file a bunch of paperwork with the state. Also, you don’t need to draft any type of operating agreement or by-laws which can cost time and money.

Depending on your state and the nature of your business, you may have to obtain a business license or permit. Typically, these requirements can be found on your Secretary of State’s website.

✓ Pass Through Entity

A pass through entity means you pay personal income tax on the business profits. In other words, your profits are not “double taxed.” (Once at the corporation level & once at the personal level.)

The tax filing process is also simpler, as you don’t need to obtain an EIN (Employer Identification Number) from the IRS. You simply use your social security number and in some cases you may be eligible for a 20% tax deduction.

(If you plan to hire employees, you will need an EIN)

✓ Low Fees

The creation and maintenance of a sole proprietorship is simple, so the costs are effectively zero. (Unless you need a business license/permit)

Also, you do not need a fancy business checking account, but I do recommend you set up a separate, simple checking account to conduct all your business transactions through.

Cons:

👎 Unlimited Liability

This means that in the event your business defaults on a loan, gets sued, or files bankruptcy, your personal assets (house, car, bank accounts) could be at risk of being seized to make payments.

There are some protections in place through bankrupcty to make sure you won’t be left penniless…

👎 Issuing Equity

For businesses that want to raise money from investors, provide vesting ownership to employees, or transition to multiple heirs, you need to be able to issue equity. With a sole proprietorship, there is no means to legally transfer a portion of the ownership of your business.

Summary

A sole proprietorship is simple, cheap, and provides pass through tax benefits, but it leaves the owner open to unlimited liability and it’s tougher to raise funding.

Commonly, a new business starts as a sole proprietorship and as it grows it evolves into different legal structures.

I don’t typically recommend going through the formal process of incorporating a new business until it is generating significant income, holding valuable assets, or does work with a high likelihood of being sued.

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.

You can check out your operation’s category on pages 2 & 3 of this SBA Table of Size Standards.

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 guage and monitor your agri-business financial health.

A downloadable version of this cheat sheet, a guide to what each ratio means, and how to calculate each KPI will be available soon…

RISK MANAGEMENT

Every morning when you blink your eyes open and roll out of bed, you are taking on some amount of risk. Even the most cautious and careful person lives with risk each day (and we’re not talking about the frustrating board game that’s been around since the ‘50’s).

You risk burning your hand on the stove while you make your over-easy eggs; you risk a fender bender as you drive to drop your kids off (it’s always the other drivers we’re worried about…); you risk your retirement in the stock market; your relationships, your reputation, your health, and the list goes on…

You get the idea.

Well, farmers and ranchers have market risk and that’s how you make a living in ag. I wanted to learn more about managing that risk, so I sought out an expert. I found a gentleman passionate about educating folks on what Risk Management is, and lucky you, he’s an Endorsed Service Provider (ESP) willing to share his knowledge with all of us.

Meet Devin Patton… he grew up on a commercial cow/calf operation in Oregon and now is a Series 3 Licensed Broker who also sells Livestock Risk Insurance. Living at the foot of the Wallowa Mountains with his wife and four kiddos, he’s passionate about educating the Ag community about Market Risk Management.

Here’s his thoughts:

The term Risk Management (RM) refers to market risk. First, you must understand that you carry market risk. Farmers are perpetually Long their crop market. RM is simply managing your Long position by making it smaller, or leaving it as large as it naturally is.

For crop marketing, the most simple choice is to make cash sales after your crop is harvested and stored. Or, you can be as complex as utilizing hedge-to-arrives (HTA’s) and Basis Contracts, hedging with Futures, or using Options on Futures.

Most farmers understand selling their physical crop to the elevator, so let’s learn about futures contracts.

A futures contract is a contract with specifications that is easily bought or sold via an exchange like the Chicago Board of Trade or the Chicago Mercantile Exchange. For example, a corn futures contract is for 5,000 bushels of Number 2 yellow corn. Each commodity futures contract has a specific quantity and quality grade for the par value.

Most futures contracts are deliverable, which means there are times where it might be advantageous for an owner of the commodity to deliver on their Short position. This is important to maintain a real tether between the futures prices and the price at which the physical commodities are trading.

Taking a Short position on a futures contract (short hedging) means you have gone from being Long your physical crop, to being Neutral the market.

The futures contract offsets any change in your physical crop value. If the market price falls, your hedge will profit, and your crop value will decrease. Likewise, if the market rises then your crop value will increase and be offset by losses on your futures hedge.

And there’s your first lesson on futures contracts being used for risk management.

Devin is ready and willing to answer any questions and further go down the rabbit trail with you. Shoot him an email here: [email protected]

Disclaimer

Trading futures and options involves substantial risk of loss and is not suitable for all investors. An investment in futures contracts involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of their margin deposits. You should carefully consider whether futures trading is appropriate for you in light of your investment experience, trading objectives, financial resources, and other relevant circumstances. Past performance is not necessarily indicative of future results.

MEME OF THE WEEK

That’s a wrap, folks.

Until next week, thank you to everyone involved in ag. Let’s grow profitable agri-businesses together.

Referral Program:

Want $50 cash? Just refer 3 new members, and you’ll get paid!

DISCLAIMER: All content, communications, and resources provided by Agri-Business Braintrust, its principals, operators, or members is intended to merely be educational and entertaining. Nothing published by Agri-Business Braintrust 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.