Edition #5

May 20, 2023

Good afternoon and welcome to The Agri-Business Braintrust newsletter. We’re like your mom nagging you about the business things you aren’t doing but ought to be doing…

A few notes to begin:

• Looking into doing some live chats with members (maybe non-members too?) I think this will look like a Q&A or general discussion on whatever is on folk’s minds. (Poll at the end of the newsletter)

• Let me know what resources would be most beneficial to you… I have a lot available, but don’t want to clog the resources page with things that don’t bring value… [email protected]

• Do any of you want to help on a couple digital product ideas I have but don’t seem to find the time for? (PAID) Let me know, please…

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:

• 📊 Intro to Financial Statements

• 🌽 Weekly Grain Report

• 💵 Credit Crunch

• 📜 Corporations

• 📈 Puts

• 🤝 Employee Ideas

BUSINESS PLAN SERIES - Week 5 (Postponed)

We are pausing our business plan series, as we continue to gather data to provide an accurate and comprehensive forecast for the financial aspect of Sample Farms.

I want this to be as true to real life as possible, so stay tuned where we will have the full forecast ready to 1) show an example, and 2) be used by you for your business plan.

If you’re just joining us, here’s the previous editions:

Here’s Part 1: Business Description

Here’s Part 2: Products & Services

Here’s Part 3: Marketing & SWOT Analysis

Here’s Part 4: Operational Plan

Reminder: we’re working through this Google Docs template (and supplemental documents) 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.

Next week, we’ll get into the meat & potatoes many of you have been waiting for: the financial considerations. Startup expenses, deal structure, and the financial forecasts.

FINANCE

Ag Finance guru Joey de Wit (ESP) is helping us with our financial literacy by sharing some wisdom on the three common financial statements.

These are important for every business to understand, as they show the temperature of your business’ financial standing & these reports are typically required by banks and other lenders.

Here’s Joey’s wisdom:

To set the stage, financial statements simply tell you how your business is doing, financially speaking. And you got three different statements to tell you this: the income statement, the balance sheet, and the cash flow statement.

• The income statement shows how much money you bring in and how much you spend to achieve this.

• The balance sheet is a ‘snapshot’ of what you own (like your cash, equipment, and livestock), and how you paid for this (like loans or your own money).

• The cash flow statement ties it all together and shows you how the most precious thing in your business (cash!) changed over the year.

My take on Financial Statements

But before we get into it, I’m going to say something controversial. Because if I’m honest, I don’t think they are all that useful to run your business…

The way I see it, financial statements are crucial for reporting purposes, but not for making management decisions. They're mainly designed to give other people (like banks or investors) a snapshot of your financial health.

I believe this even more for seasonal businesses, like most farms.

Because take this example:

You look at your financial statements and see you got a 15% net profit margin. All this tells you is that you, in the accounting world, created economic income. This does not tell you that in July during harvest you had no money coming in to pay your employees. See what I mean? They don’t tell you the real day-to-day picture. It only says that at the end of the year, you made a profit. (The day-to-day is where the Cash Budget comes into play).

The Mini-Series

But, there is still a time and place for them, as I will discuss later on!

This week I’m introducing the financial statements…

• Next week, we’ll cover the Income Statement

• The following week the Balance Sheet 

• And the week after the Cash Flow Statement

All editions will have a bit of an agriculture twist to them and contain real world examples.

So, stay tuned.

If you’re impatient, reach out to Joey here: [email protected]

SEEDS

• 💵 Credit Crunch: Borrowing from your ag lender is expected to become more challenging as regional and global banking issues, inflation, and higher interest rates are tightening the credit availability throughout ag. This article outlines 5 steps to boost your relationship with your lender:

  • Know your cost of production & break-evens

  • Maintain strong working capital

  • Develop financial models with best, average, & worst case scenarios

  • Define your family living budget

  • Monitor your financials quarterly & communicate with your lender

• 🌱 Consolidation: Growers Retail Network has added Iowa’s largest farmer-owned collective, Landus to its team. Here’s a bit on what that means for producers…

• 🦹 Con Artist: Be wary of investing in any ag operation, cattle feeding in particular, that claims to have incredible returns year over year… Another example of a Ponzi scheme unraveling took place earlier this month in Kentucky & Texas when investors & lenders were left holding the bag on $100 million of non-existent cattle.

• 📈 Weekly Report: Our friends at Consus are masters at grain marketing. Here’s this past week’s wrap up report.

LEGAL

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

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. This week, the focus is Corporations…

Quite the vague definition… basically, a corporation is similar and distinct from both a LLC and a partnership. It’s very different than a sole proprietorship.

In reality, corporations are much different from the other legal entities we’ve looked at. First and foremost, a corporation is much more separated from its owners than the other entities we’ve discussed.

Think of a corporation as an entirely different, living, breathing, and removed “legal person” from its owners.

Corporations possess many of the same legal rights and responsibilities as individuals.

Such as:

• Enter contracts

• Loan & borrow money

• Sue & be sued

• Hire employees

• Own assets

• Pay taxes

Like LLCs, Corporations can have many owners (shareholders) and those owners enjoy limited liability. Which means they are not individually liable for the company’s debts.

Shareholders typically receive one vote per share and they elect a board of directors who hire the day to day management staff of the business.

Now to the Pros & Cons of corporations…

Pros:

✓ Limited liability

The main advantage of corporations, the owners (shareholders) are not held individually responsible for the debts of the company.

✓ Unlimited shareholders

Corporations can have from one to thousands of shareholders. Often, larger companies allow for shareholders to be “hands off” the management by electing a board of directors who hire management staff.

✓ Raising funds

If you are looking to raise money from investors or eventually become publicly traded, corporations are the best vehicle for that. Fundraising laws are generally established and the corporate structure allows for predictability for shareholder governance.

Cons:

👎 Double taxation

This means the corporation’s profits are taxed twice. Once at the corporation level through its own tax filing, and again at the shareholder level when dividends are paid.

👎 Set up costs

Of all the entities, corporations are the most burdensome and expensive to set up. There are established and strict rules, which vary from state to state, on how a corporation must be formed and incorporated.

👎 Governance

Corporations must follow specific governance rules, such as elections, meeting minutes, board meetings, resolutions, and more. Remaining compliant with the rules is often a burden to smaller companies which may only have a few shareholders.

Summary

A corporation has it’s own “identity” and is legally treated as an individual person.

Shareholder numbers can vary widely, and all shareholders enjoy limited liability.

Being the most costly and burdensome entity to establish, corporations are often reserved for larger companies, but can be smaller ag businesses. Corporations may be a good vehicle for estate planning, as the shares are easily bought, sold, or inherited.

RISK MANAGEMENT

Over the past few weeks, we’ve been learning about Risk Management (RM) from our ESP Devin Patton.

Today, let’s take a look at Options…specifically Puts.

Options can be used to hedge and manage price risk. This week we’ll talk about Puts.

A Put option is the right to be short, but not the obligation. What does that mean?

Simply, if the market price fell you would want to be short and if the market price rose higher, you would not want to be short. A Put allows for this, but it comes at a cost. The cost is known as the premium.  

For example, a guy raising corn could buy a $5.00 price Put that is for the December expiring futures contract. He would pay 37 cents/bu (5,000 bu contract) to buy it, or $1850 cash.

This way if the market drops by harvest time, he will have the right to be short December futures at $5.00, but if the market rises due to supply and demand factors, he would not be short.

Either way he still paid the 37 cents/bu, but it’s like buying price insurance for when you believe the market will go higher, and just want to be covered in case you are wrong, and it goes lower.  

When you buy a Put there is no margin required. The only risk to the trade is the cost of buying it. If the market price rises, you will not be subject to the infamous “margin call” from your broker.

As a hedger, the best-case scenario of buying a put is having the market rise dramatically. This way you capture the increase in your crop value, and only lose the premium of buying the Put. Having a side-ways to lower market means you are losing more in crop value than you are making back with your Put option hedge trade.  

Puts are the sort of trade that can work for beginner hedgers looking to manage risk in a very controlled way where the costs are completely known up front.

The problem with them is that they will not be “profitable” without a large move in price, which means your crop value has lost much more in the same market move, but they are better than having done nothing under the same circumstances.  

Want more?

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.

INSURANCE

Protecting your business and employees

Dustin Christensen, Endorsed Service Provider (ESP)

If you have employees, you know firsthand that the loss of a key employee can have a profound impact on business operations. When an employee leaves, customers who dealt directly with that person may worry about receiving their goods or services in a timely manner; suppliers may be concerned about getting paid for their deliveries; and staff morale can also take a dip as remaining employees worry about assuming a heavier workload.

That’s why it’s important to make sure your business is prepared to deal with the unexpected departure of a key employee, which usually happens for one of three reasons: the employee chooses to resign, the employee becomes disabled, or he or she passes away.

While life insurance cannot protect against employees choosing to leave, it is often used as a tool to help incentivize them to stay… deferred compensation plans are powerful vehicles for doing just this.

Deferred compensation arrangements allow you to provide retirement income to select employees. The way it works is you and the selected employee enter a contract that specifies the compensation you will pay out to him or her in the future. Since you may not set up a specific reserve fund in which a participant has a vested right, a life insurance policy is uniquely suited to informally finance a deferred compensation plan. The future of your business depends on attracting and retaining the right talent with the right tools.

It’s also important to protect your business against the economic losses it may face as the result of a top employee’s death with the use of key person insurance.  

The way it works is the business applies for and becomes the owner and beneficiary of a life insurance policy covering the key employee. If the insured employee dies, the business receives the policy proceeds.

Deferred compensation and key employee insurance are benefits that are related exclusively to your top employees, but New York Life also has options that you can offer your entire team to help cultivate a rewarding work environment, such as life and disability insurance.

These benefits can provide employees and their family’s peace of mind and added financial security, which can go a long way toward attracting and retaining valuable employees.

As a business owner, you’ve worked hard to get where you are today. Having a contingency in place will allow you to focus on making the best possible decisions for the future your business.

This educational third-party article is provided as a courtesy by Dustin J Christensen, Agent, New York Life Insurance Company. To learn more about the information or topics discussed, please contact Dustin J Christensen at 605-840-9384

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.

Don’t forget you’re able to leave comments on the post on the website. Looking forward to reading people’s feedback!

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.