How to Be Best in ClassPosted in: Farming By Agri-Trend Agrology March 28 2016
In a tight farm economy, growers need to understand cost of production, find efficiencies and know how to manage risk. Find out how to become best in class by following this 10-point action plan.
The agriculture industry’s most successful growers always work to be best in class. But during a tight farm economy and depressed commodity prices, the need becomes even greater, says a leading ag economist.
“It’s much more critical when you are under the kind of economic and financial pressure we are facing now,” says Dr.
Mike Boehlje, Distinguished Professor in the Department of Agricultural Economics and the Center for Food and Agricultural Business at Purdue University. “When incomes are higher, farmers can become more relaxed and have less focus on doing the things they need to do to become more effective. Now is a good time to revisit some of the basic things we likely should have been doing all along.”
Boehlje has a 10-point action plan to becoming a ‘best in class’ farmer. While all points are important, he encourages growers to spend more time focusing on the key ones:
Point 1 — Intense Cost Control
Point 2 — Margin Management
Point 9 — Do Fewer Things Better
Intense cost control and effective management of margins are overlapping strategies, and both are critical during a tight economic environment, says Boehlje.
When it comes to cost control, growers are advised to use cost per unit of production ($/bu), rather than the more common measurement of cost per acre ($/ac).
“While it’s easier to think about cost per acre”, he explains, “cost per bushel or cost per unit of production is a more valuable calculation. “It helps you think about what are your most important costs and do a better job of pricing.” “The excuse many farmers give for not using cost per bushel is that they don’t know exactly how many bushels they will be selling.”
Boehlje doesn’t buy it. “Maybe we don’t know how exactly many bushels we are selling, but we do know how many acres we are going to be applying fertilizer to. Most growers don’t put fertilizer on without some expectation of the yield, so they can take cost per acre and divide by bushels — they don’t know for sure, but it’s worth doing the calculation.”
Boehlje also advises that growers try to focus on doing fewer things, better.
“This sounds intuitive but it’s harder for farmers than you might realize,” he says. “They have a tendency try to be best in class in a few different classes. They feel that they have to do everything on the farm to produce that crop. In reality, there might be someone else who is a lot better at it than they are.”
Boehlje’s 10 Point Action Plan
1. Intense Cost Control
Focus on efficiency and productivity is critical
Know your cost components per unit sold
2. Margin Management
Know your costs of production
Know your margins
A – contribution margin: revenue above operating costs
B – profit margin: revenue above all costs
Protect positive margins
Use SOP’s (standard operating procedures)
Attention to detail!
4. Buying Right
Compare supplier offers
Use a bid sheet
Don’t pay premiums for control
Consider repairing rather than replacing
5. Logistics Management
Input flow scheduling
Product flow scheduling
24/7 operations when possible
6. Managing Operating Risk
Technology performance – pest control, fertility effectiveness/loss, seed selection
Marketing/pricing of inputs and products
Government program and crop insurance participation
Casualty and liability insurance
7. Debt/Capital Management
Maintain working capital
Sources of debt (dealer financing)
Buy vs. lease
Lengthen payment terms
Fix interest rates
Reduce capital expenditures
Don’t surprise your lender
Complexity creates confusion/errors/mistakes
Systemize work activities and processes
Adopt user-friendly automation technology
9. Do Fewer Things Better
Ask: What do you do better than anyone else?
Focus and intensify
10. Data Management
Collect data efficiently
Aggregate but share carefully
Capture the insights
Think carefully – beware of false signals and confirmation bias
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