BEST PRACTICE OF LEADING FARMERS Phase II August 2006
Acknowledgements An AdFarm / Pike Management Group Joint Venture We welcome comments and critiques of this report as part of the process in identifying policies and programs that can quickly transform Canadian agriculture to financially viable and sustainable world-class stewards of the land Making Transformational Change in the Business of Agriculture SASKATCHEWAN AGRIVISION CORPORATION INC. 502 45th Street West, Second Floor, Saskatoon, SK S7L 6H2 Canada Tel: 306-384-4491 Fax: 306-244-4497 Email: info@agrivision.ca Web: www.agrivision.ca i
Purpose of this Report Dear Reader, It is not news for farmers across Canada to be told their profit margins have been declining for decades and, based on information from leading economists, this situation will continue for a number of valid reasons, unless there are significant changes. Despite the clamour about lack of profitability and survival of the industry, some farm operations show a profit each year and, in fact, grow their business year over year, despite the market and climatic challenges. How can this be? Is it good luck or good management, intergeneration transfer or the year they started farming or a combination? Various government support programs have been devised for farmers over the years to no avail. The best that can be said for government support is it keeps most farmers operating for another year, but does not offer either a viable short-term or long-term solution. Plus, programs are largely based on ways to sustain farm operations within the traditional production paradigm. A logical strategy was to examine those family farm business operations that are financially successful, particularly during these challenging times. As a result, SAC developed the Best Practice of Leading Farmers Project, which has the objective of identifying the secret or the specific business practice and models that enable short-term and long-term sustainable profits at the farm gate. This report summarizes the key findings from the eastern half of Canada and correlates the results from a previous western Canada project completed in 2004. In many ways, what was learned from top farmers is not rocket science. But, on the other hand, the way they manage and operate their farm business is radically different than average farms. This Best Practice study is clearly part of the solution to the farm crisis. The findings and common sense recommendations for improved business management skills are obvious. There can be profitability at the farm gate but it requires a transformational change in thinking and direction for the average farmer. The report summarizes the best management practices that are common among all top farmers. The report is a clear checklist and road map to implement or support the application of best practice throughout the Canadian farm sector. Sincerely yours, Saskatchewan Agrivision Corporation Inc. C.M. (RED) WILLIAMS, PhD, PAg, FAIC President AL SCHOLZ, PAg, CAC Executive Director ii
Table of Contents EXECUTIVE SUMMARY............................................................. 3 KEY FINDINGS SUMMARY REPORT INTRODUCTION.................................................................. 7 BEST PRACTICES................................................................ 9 Cost Management................................................................. 9 Enterprise Growth................................................................. 9 Produce More.................................................................... 10 Technology...................................................................... 10 Marketing Excellence.............................................................. 11 Financial Where-with-all........................................................... 12 Relationship Building.............................................................. 12 Continued Learning............................................................... 13 Management Team Clearly Defined.................................................. 13 Management of time and logistics.................................................. 14 Adaptability...................................................................... 14 Benchmarking..................................................................... 15 Risk Management................................................................. 16 Outside Advisors................................................................. 16 People Management.............................................................. 17 Take time to think................................................................ 18 Summary........................................................................ 18 Difference Between East and West.................................................. 19 APPENDIX I: BEST PRACTICES GREATER DETAIL................................. 21 APPENDIX II: CASE STUDIES...................................................... 37 APPENDIX III: ADDITIONAL CASE STUDIES........................................ 111 APPENDIX IV: INTERVIEW QUESTIONNAIRE...................................... 133 APPENDIX V: FRENCH........................................................... 137 1
Executive Summary BEST PRACTICE OF LEADING FARMERS IN EASTERN CANADA Key Findings Phase II Phase II of the Best Practice of Leading Farmers project focused on identifying the top management practices used by top producers in Eastern Canada. The project analyzed a short list of 156 farm operations in a variety of agricultural sectors. Successful farm managers responded to a detailed questionnaire about their management practices. A group of top producers was then identified and personally interviewed, which supplied in-depth supplementary details about the management of the farm business. Leading farmers differentiate themselves from the average producer by focusing on what the project team refers to as the 20% rule of thumb the revenue these top producers receive from marketing their products is in the top 20% compared to revenue received by other farm enterprises within their agricultural sector and their cost of production is in the bottom 20% when compared to other farm enterprises within their sector. From a cost management perspective, top producers manage costs well by calculating their exact cost of production and place top priority on controlling fixed costs. They do this by focusing attention on reducing their per unit production costs which in turn improves their return on investment. They research their decisions and rely on accurately calculating profitability projections to increase the operation s efficiency and growth. From a revenue perspective, top producers have grown their businesses faster than industry average. They have done this via enterprise growth which most often occurs through land acquisition and/or the purchase of new ventures that are usually linked to the farm operation. Growth in both scale and profitability often occurs within the primary business. Leading farmers also achieve greater revenue by producing more than average yields or gain from their asset base. The quality of their assets, whether land or livestock and across all farming sectors and geographical areas, is also higher than average. They search for new and innovative methods to improve their rate of production. Quality enhancements and branding of products are two methods used to increase value and improve net return. 3
Marketing excellence is a major factor in consistently attaining higher revenue and top producer performance. Achieving top returns for their product is a high priority for leading producers and distinguishes them from the average producer. They boost their marketing intelligence by regularly accessing current information and they have a strong industry network. They watch for and capitalize on market opportunities through daily use of internet, links to brokers, email updates and other available resources. Technology use such as computers, GPS and new genetics is linked to higher performance and improved farm efficiency. Top producers evaluate the benefits and costs of new technology and adopt it only when positive results are assured. Strong financial where-with-all allows these producers to take advantage of opportunities and to withstand periods of economic and environmental turmoil. Top producers maintain long-term business relationships. They develop and maintain strong relationships with their bankers, accountants and lawyers and regard these relationships as information avenues that expand their knowledge. They network with people who share similar interests and are active in local, national and even global organizations. Most top producers have post secondary education and continue to take advantage of learning opportunities. They also take advantage of the new educational opportunities offered through technology. On these farms, sound management techniques result in an efficient team that works together. Each staff or family member is apprised of the farm s goals. Management roles and responsibilities are clearly defined in order for staff and family members to capitalize on the competencies within the team. Top producers improve communication on farm through formal and informal meetings. Effective time management is top of mind. Top producers look for methods and tools that will assist them in running their business more efficiently and profitably. Benchmarking is an integral part of many farm business management programs. It is used to measure performance and set goals. 4
Top producers adapt quickly to changing market situations. For many, their ability to adapt has led to specialization or diversification. Leading producers also seek out and analyze new opportunities to increase revenue and spread risk and are often able to anticipate market changes. Top producers are forward-thinkers and search out a variety of tools to manage risk. They are most often knowledgeable about current affairs and the programs and policies affecting their industry. Top producers value their employees. They work closely and often alongside both family members and employees. They emphasize the importance of good working relationships and take intentional steps to develop a team environment. Leading producers are very often excellent communicators. Top producers avoid burn-out. They understand that they must find ways and time to relax and renew. They all take time, sometimes reluctantly, to recharge their mental and physical batteries. On a national level, the Best Practice of Leading Farmers project definitively shows many similarities between the practices of top producers in Eastern and Western Canada. Best farm management practices in both regions are, in fact, much the same regardless of the sector, size and output. 5
Introduction Farmers across Canada are facing some of the most challenging times this industry has ever experienced. Those who can survive and prosper in times like these are truly exceptional professionals and worthy mentors. This report is a summary of key findings from Phase II of the Best Practice of Leading Farmers project. This phase focused on identifying the top management practices used by top performing producers in Eastern Canada 1. Phase 1 of the project studied the practices of top producers in Western Canada 2 and was completed in 2004. Defining a leading farmer is very subjective. Many factors and method of judgment could be used. The 2006 project team, led by AgCoach Insights a joint venture between AdFarm and Pike Management Group, chose the following factors as the criteria for selecting a leading farmer business: 1. Farm operation must have been in business for at least 10 years. 2. The primary source of income prior to and post farm business crisis is from the farm business operation. 3. Average Gross Income from farm business operations for each of the years 2002-2005 must have exceeded $250,000. 4. The growth rate as measured by Gross Income and Net Income Before Depreciation and Taxes (NIBDT) is significantly higher than industry average for that agricultural sector. 5. Any and all forms of business structure proprietorship, partnership, corporation or co-operative are eligible. The first step of the project analysis included 156 farm operations who met the criteria and agreed to share their management practices by completing a detailed questionnaire. These producers represented a wide variety of sectors in production agriculture including livestock, crops and horticulture. The second step of the project involved in-depth personal interviews with a group of top producers who provided additional detail and farm practice insights. 7
From these two steps a series of best practices were identified. While some of the findings are obvious, others may fly in the face of traditional farm business practices yet offer some intriguing insights. One overriding principle seems to differentiate leading farmers from average producers. Leading farmers inherently focus on following what the project team calls the 20% Rule the Revenue they receive from marketing their products is in the top 20% compared to Revenue received by other farm enterprises within their agricultural sector AND their Cost of Production compared to other farm enterprises within their agricultural sector is in the bottom 20%. The following summary of key findings highlights these key practices as well as a number of other best practices that complement and strengthen the farm business. As you review this summary report, please note that the authors have used the terms leading farmer, leading producer and top producer interchangeably. All three terms describe individuals leading the business operations of some of Canada s best farm enterprises. 1 Eastern Canada is defined as producers with farm enterprises located in Ontario, Quebec and the Atlantic provinces. 2 Western Canada is defined as producers with farm enterprises located in B.C., Alberta, Saskatchewan and Manitoba. 8
Best Practices The following are best practices followed by leading farmers. Some of these practices are obvious. Some may fly in the face of tradition. COST MANAGEMENT Top producers know their cost of production not approximately, exactly. They know these costs as they relate to per unit production and they know them from a total farm perspective. These producers make financial and management record keeping a top priority and have a system to do it efficiently. Top producers focus attention on both Fixed and Operating Costs. And they give high priority to optimizing their Fixed Costs by spreading these over more acres, more crop units or more livestock units. Top producers review their costs on a regular basis depending on the farming enterprise it may be monthly, quarterly or semi-annually. It is not uncommon to include outside consultants in these sessions. Cost comparisons are made to industry benchmarks. Valuable insight is gained through these exercises. Top producers take time to research their costs and their decisions. They gather information from a variety of sources and compare quotes. Many use scenario planning as a means to confirm their decisions. This approach is used in planning for major projects such as building a new barn, making a land purchase or buying new equipment as well as operating expenses like farm inputs. Decisions on marketing and production are made based on profitability projections both short- and long-term. Leading producers utilize this information in the management of their operation; it is a vital component for increased efficiency and growth. ENTERPRISE GROWTH Whether it is a means of spreading fixed costs or a strategy to counter cost increases, enterprise growth has been a practice used by many leading producers. Growth occurs through a number of avenues, be it land purchase or acquisition, the adoption of a new venture, vertical integration or growth from within the existing operation. 9
The primary reasons driving enterprise growth are to reduce per unit production costs and improve ROI (Return on Investment). Top producers appear to have grown their business faster than industry average. In most cases, these producers decision to grow their enterprise has been driven by knowledge not trends. Timing of growth appears to be as important as growth itself. In the majority of cases, leading producers have been able to time growth to take advantage of low costs and/or good times. PRODUCE MORE In all types of farming enterprises, top farmers produce more from their asset base than the average producer. Whether it is litres of milk, bushels per acre or pounds per calf, top producers achieve higher gain. Their ability to produce more is derived from a number of factors. It begins with the quality of their assets whether it s livestock or land, quality is job one. And they don t skimp on the inputs to gain greater output from these assets. Top producers are very inquisitive; they are always searching for new and innovative methods to improve their operation. They look for and evaluate new technology be it in areas of genetics, nutrition, disease and/or pest management. They are continually seeking ways to produce more from their valued asset base. TECHNOLOGY Top producers use technology as a tool to achieve higher performance but they are not driven to acquire the next newest invention simply for the sake of having it. From a technology perspective, some of these producers could be categorized as innovators but the majority of these farmers are probably early adopters. Top producers evaluate the benefits and bottom line value new technology can deliver much more thoroughly than the average producer. If they can see a positive reason to adapt the technology then they utilize it. If not, then they pass. Computers are an essential tool on most leading producer operations. Almost all use a computer for managing the finances of their operation and nearly half utilize computers for production management. Computers play important roles in running equipment from climate control in barns and storage sheds, to GPS and auto-steer on equipment to automatic feeding systems. 10
The Internet is also used more extensively on these farm operations than by average producers. Top farmers cite the quick and easily accessible source of market and production information the Internet provides. And they use email for global communication and networking. These producers utilize agronomic technology to continually improve their farm efficiency. Top producers in both the livestock and crop sectors have adopted new genetics resulting in improved quality, production and efficiency. Technology has played, and continues to play a key role in the performance of leading farm operations. Top producers are attaining lower costs and increased profitability through the adoption and application of new technology. MARKETING EXCELLENCE The marketing of agricultural products is driven differently depending on the sector. In some sectors marketing rests in the hands of the producer. In other sectors, marketing is delegated. In all sectors, achieving top returns for their product or commodity is extremely important and a key factor that differentiates top producers from average producers. Marketing excellence is defined as receiving a higher than average return on their product. To achieve marketing excellence top producers are implementing one or more of the following practices: They make marketing intelligence a high priority leading producers have a solid understanding of the global markets and prices. These producers read and follow market situations (online, through newsletters and through marketing experts) much more closely than the average producer. They utilize production contracts and forward pricing to capitalize on market opportunities and spread their risk. They enhance the quality of their product. For example poultry and dairy producers implement specialized feeding programs which in turn earns them a premium on their product (omega-3 egg production). They participate in ventures that enable them to take their product one step closer to the end consumer. For example, they own shares in a processing plant. 11
They direct market their product though local businesses, farmer markets or direct farm sales. They brand their product in a manner that allows them to gain increased value. This can include individual product brands or category brands like natural beef. Top producers utilize marketing practices and channels that work best for them. They place a value on their time and they employ marketing practices that use this time most efficiently. FINANCIAL WHERE-WITH-ALL A properly capitalized business is a healthy business. And a farm with the financial where-withall to support the business and the business plan is in a considerably stronger and less vulnerable position than an under-capitalized operation. Top producers in almost every case are acutely aware of decisions that will positively or negatively impact cash flow and their balance sheet. And they almost always have a good and close working relationship with their banker a relationship where both the producer and the banker understand the goals of the farm and what is required to move the farm business forward. Leading producers also utilize sound financial risk management tools and practices. From insurance to agronomic practices, they make management decisions that limit negative impact on cash flow and their balance sheet. Good financial where-with-all provides top producers with the necessary means and resources to take advantage of short-window opportunities and withstand times of economic and environmental turmoil. And it also provides a greater degree of peace of mind. RELATIONSHIP BUILDING Top producers see great value in developing long-term business relationships, especially relationships that provide them a link to information. Just to what extent the producer has to go to find and develop these relationships depends on the sector. Many leading producers are active in groups and organizations at a local, provincial and national level. In addition to strong relationships with key suppliers including their banker and input retailers, top producers also develop relationships with industry influencers including government, industry and university researchers. 12
The networking component of interacting with other people who share a common interest is a very strong draw for these producers. They take advantage of the opportunity to discuss business with their peers and key influencers. They are always searching for new information in areas such as marketing or new technology that they can apply to improve their efficiency and profitability. These relationships provide a link to expanding the producer s circle of knowledge outside their local area. These producers think outside the box and see value in using their connections to search out and develop global links. CONTINUED LEARNING Leading farmers are strong believers in ongoing education. The majority of top producers have some level of post-secondary education, and they take advantage of continued learning opportunities. These opportunities provide a source of outside stimuli and are accessed through formal certificate or diploma programs, on-line education and one-day seminars. Top producers seek out conferences and seminars in areas that interest them. They see value in making time to capitalize on opportunities to further their knowledge and education. Technology has opened up new means to accessing education in rural regions and top producers have taken advantage of the opportunities. The Internet and technology advancements such as teleconferencing, video conferencing and webinars make the search for knowledge much more accessible and more efficient. Education opens the door not only to knowledge but also offers the opportunity to network, to know who the key influencers are and what research is being done. Networking can lead to participation in research and development trials in most sectors. In livestock and in crops, top producers often find that networking offers greater access to new genetics. MANAGEMENT TEAM CLEARLY DEFINED Management of a successful farm, like any successful business, requires sound management. Larger operations have the ability to divide the management responsibilities among various individuals while the majority of tasks must be completed by one or two people in smaller operations. Whether the heads in the hats are few or many, having an efficiently functioning management team working in unison toward the goals of the business is a key to the farm s success. 13
On operations where management responsibilities are shared there is a clear division between roles and responsibilities. One person may look after the crop enterprise, another the livestock enterprise and another the financial affairs. Whatever the breakout, top operations capitalize on the competencies of the team with members evolving into the role most suited to them. There is rarely a written agreement concerning the responsibilities of each role but rather an understanding this is especially true in family operations. Good communication is an integral part of the success of these management teams. Scheduled team meetings are common to ensure an effective flow of information and smooth decision making. Good communications appears to lead to better efficiency and greater profitability. In family enterprises, it also makes for healthier relationships. MANAGEMENT OF TIME AND LOGISTICS Top producers identify time management as a critical component of success. They acknowledge that managing their time effectively is a challenge but one they are continually working to improve. Effective time management brings greater efficiency and profitability to the operation. Leading farmers are quick to adopt new methods and technological tools that assist them with their time and improve efficiency in their day to day operations. Cell phones are common and Blackberries are frequently used. Top producers know how to use these effectively while not becoming slaves to them. Managing a large operation can be a logistical nightmare especially in busy seasons of the year. Leading producers understand the importance of logistics and have both the capacity and the capability to manage accordingly. This skill set appears to be becoming increasingly important and one that top producers are seeking additional support. By increasing the efficiency of their business, leading producers find they have better access to personal time. They choose to use this time in different ways; for some it is family time, while others take the opportunity to increase their networking and/or further their education. ADAPTABILITY Diversified or specialized? That is a question producers have been wrestling with for generations. And it appears there is no right or wrong answer; it depends on the operators, the farm enterprise and the situation. 14
What does appear to be consistent among leading producers, however, is their ability to adapt to market opportunities and do so at the proper time. Top producers are flexible and appear to adapt more readily to opportunities and situations as they arise. To some this means diversifying into a new venture such as a hog producer seeing opportunity in the greenhouse business. To some producers it means specializing, like a poultry producer specializing in omega-3 eggs, or the greenhouse operator specializing in one type of flower. And to others it means just taking advantage of opportunities that pay better today such growing their own feed versus buying it, selling direct through farmers markets or to local stores and restaurants or devoting a percentage of their acres to growing and selling an IP crop. Top producers search out and analyze opportunities that will increase their revenue and spread their risk. The majority seek insight from outside advisors when making important decisions such as these. BENCHMARKING Top producers understand their farm business. They know their financial and production profiles. And they use benchmarking to compare the performance of their farm operation against that of their peers. Benchmarking assists them in identifying strengths and weaknesses of their operation as well as areas in need of improvement. It also allows them to set future goals and improve their production levels. Historically benchmarking has been used to compare yields, piglets/sow, return per bird, production per cow, etc. Today s top producers are taking benchmarking to a much more sophisticated level. Some are comparing to global performance and most are eager to compare to provincial and national benchmarks both from a production and a financial comparison perspective. Communication technology has improved the ability of producers to access information. Leading producers are finding that benchmarking also makes the business of farming more rewarding. The farm operation is looked at not just as a business, a profit centre and/or a lifestyle but also somewhat like a dynamic game where they can compete against themselves and their past performance and also compare/compete with others both locally and nationally/internationally. 15
RISK MANAGEMENT While entrepreneurial by nature top producers prefer to limit risk wherever possible. These producers utilize a variety of risk management tools in running their farm operation. They also have the sense of awareness to continue searching for new and better tools to include as part of their risk management strategy. Top producers recognize weather as an uncontrollable variable in farming. They think ahead and are prepared to meet weather-related challenges when they arise. They employ strategies such as purchasing insurance and varying seeding dates to spread the risk in crop production. Leading producers make maximum use of the risk management tools that are available but through experience and intuition take risk management to a higher level. They analyze the risks associated with buying or leasing land and equipment, signing production and marketing contracts, and in vertical integration. They consider crop varieties with different maturity dates as a tool to incorporate into production plans. They consider the purchase of marketing contracts as a strategy to mitigate and manage risk. Leading farmers are very knowledgeable when it comes to government policies and programs. They are also on top of trade talks and actions that may affect their business. They recognize that many markets are dependent on what is happening at a global level not just at the provincial or national level. Whether it s vegetables or flowers being marketed to Ontario, beef to Japan or potatoes to the USA they are careful to keep current on what is happening and plan effectively. OUTSIDE ADVISORS The quest for knowledge is a common trait among leading producers. They realize information is key to the operation of a successful business and obtaining this information from informed advisors can be very beneficial. How they acquire this information varies. They may take advantage of services offered by suppliers such veterinarians, nutritionists or agronomic consultants. Many retain the professional services of accountants, lawyers, financial consultants, and in some cases, production consultants. Some farm operations (both large and small) are beginning to set up a Board of Directors or Board of Advisors that include one or two respected individuals who can provide another 16