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Managing for Profit: How One Farm Family Succeeds
By Dr. Laurence M. Crane, NCIS
Recently I visited with a farm family in southeastern Nebraska who is well worth watching. This family has to work hard because they rely totally on the farm for their livelihood—they have no off-farm income. They have developed some exemplary management habits that I recommend to other farm families.
Ken and Debora Heidzig have been farming near Auburn, Nebraska, for approximately 25 years. They operate a moderate-sized crop and livestock farm (corn, soybeans, cattle and hogs) following production practices that would be typical for much of the Midwest. What is not typical is their solid understanding of basic economic principles and their ability to effectively manage all of the resources at their disposal. The Heidzigs understand that profitability and long-range survivability requires them to not only be efficient producers, but also proficient marketers.
Having no off-farm income, and knowing the amount of capital it takes to purchase the inputs needed to operate a farm and generate an acceptable level of family income, Ken and Debora realized early on that the only way to succeed was to become more effective marketers. "We determined that probably the weak link in our whole operation was marketing—how could we be better marketers? We felt we were handling production right and doing those things fairly well," says Debora. "But we were uncomfortable with the risks we were taking and knew improving the marketing part of the operation was what we needed to look at."
Moreover, they recognized the necessity of effectively managing risk because they had no off-farm income to fall back on to cover shortages in family living or to meet cash flow requirements of the farm. Crop insurance is an important tool for the Heidzigs and they have used different products over the years. Currently they use Crop Revenue Coverage (CRC) on both their corn and beans. "We do that because we have no off-farm income, and we must cover our operating risk," says Ken. "But probably the biggest part of what we like about the CRC is the marketing ability. CRC gives us the safety net to market more bushels at ease without the risk that normally goes through your mind."
The Heidzigs readily admit their formal education and training in marketing is limited, and their degrees have come from the "school of hard knocks." However, what they lack in formal education they have more than compensated for with attendance at producer meetings, membership in management associations and active participation in a local marketing club; not to mention hard work, common sense and practical experience. They religiously attend their weekly marketing club meeting every Monday night. "We go to church on Sunday mornings and we go to marketing on Monday nights, and we pray at both of ‘em," Debora wryly says.
Regular participation in the marketing club provides discipline to keep current in their market charting and analysis and to follow their established marketing plan. It also provides a mechanism to keep from getting too emotionally involved. "Every week we sit down and I’ve got to have those charts current. I’ve got to look at the strengths or weaknesses of the market. So I get the discipline to look at the markets and not be shocked after a month because corn has fallen 40 cents or something of that nature," says Ken. "I don’t believe that you necessarily have to see every day if the market has been higher or lower. But I think if you have it in prospective of where on these charts the corn (or the soybeans or hogs or cattle) could be trending, it gives you a lot more confidence in your plan and makes it easier to keep the emotion out of your marketing decisions."
Production Records
To build a marketing plan that effectively manages risks and generates an acceptable return on their investment and to their management and labor, the Heidzigs start with good enterprise budgets and performance records and use these to prepare production and price tables. They establish both personal and business goals and determine what level of income is needed to meet their goals. Then they evaluate what management strategies to follow to meet their goals.
Maintaining good performance records is essential to knowing costs of production and income potential. They are essential to being able to take full advantage of crop insurance. "Establishing our APH (Actual Production History) allows us higher levels of protection," says Debora. "The production and price tables are just a quick way for me to calculate what we’re expecting to produce and how many bushels are guaranteed. This helps me determine the coverage I take or the amount of revenue that could be guaranteed."
Using a simple spreadsheet they are able to review their costs of production and answer some critical questions necessary to make important marketing decisions. Debora says, "We need to know answers to questions like: ‘How much does it cost us to grow corn?’ ‘Soybeans?’ ‘What level of production do we actually need to generate an acceptable profit and what is necessary to cover production costs?’." Ken adds, "We have costs in seeds, fertilizer, chemicals and equipment, but we want to know what our costs are for a return on our investment for our time and labor. The most important line on the spreadsheet is the cost of living per acre."
Market Analysis
In addition to preparing and evaluating their production records, they spend considerable effort following and analyzing the market. They prepare several charts covering both short- and long-term periods. "The most important chart we use is the monthly chart," Debora says. "This gives me the trend from month-to-month. I divide it into thirds and my general goal is to be somewhere in the top third." Reviewing the charts, they can evaluate the trends and determine when the most likely time will occur that the price is acceptable to lock in and develop a marketing plan. "I view a marketing plan as a contract between us and our goals," she says.
The Heidzigs have learned the important lesson that writing focuses thinking, and that planning is a process and not an event. "I think everybody should have a plan of action of what to do," says Debora. "Going through the thought process and writing your analysis and marketing plan down helps. When you have developed the thought process that makes you think about how you’re going to do it, what positions and strategies you want to handle to do it, I think that helps out a lot. Writing it down makes you think it through. I don’t care if you need to change it, but just make yourself think through it so you can be comfortable with the changes."
Another impressive habit of the Heidzigs is their understanding of macroeconomics and how global and national policies impact their operation. During our conversation they explained how they integrated information from a variety of credible sources into their decision process. Again, discussions at the marketing club play a key role, as does frequent conversations with their lender and crop insurance agent.
Changes in interest rates, inflation rates, and exchange rates can affect farmers. The Heidzigs have a good working knowledge of how the business cycle as a whole behaves and how changes in monetary and fiscal policy at the state, federal and international level can impact these variables. Even though they have no control over these factors, understanding how changes in these variables affect the well being of their farm business is important to them. "I think you need to have that global perspective," Debora says. "One of the values of keeping records and understanding market forces from the global perspective right down to the micro themes you do on the farm, is giving the ability and confidence to make the best decisions and to market at a profit. The bottom line comes down to the fact that, if you marketed for a profit, you are going to be in business next year."
For the Right Reason
Probably the most impressive aspect of what this farm family does to understand their farm business is that they do all of the things described above for the right reason—to better manage their farm. Their lender is interested, of course, but that is not the reason for their analysis. "We don’t keep records and do our analysis for the bank to get a loan," explains Ken. "We don’t do cash flows for the bank to get a loan. Our goal is to improve our operation and know where we’re standing as an operation. ‘Are we doing healthy things in our operation?’ ‘Are we making good business management decisions?’ And I think you need to know those business management decisions by actually knowing what your numbers are and what they are generating and where you set. We need to know where our weaknesses and strengths are. That’s why we do our analysis, to know where all the ugly stuff is."
Debora is equally as dedicated to understanding all aspects of the farm and performing analysis for the sake of making good management decisions. "Every enterprise and every farm is so different, says Debora. And I don’t always know if it’s right. But I know what my books tell me I need to do and that’s what we try to achieve."
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