October 1998
These are hard times for agriculture in North America. While the crop yield is good in many places, the world’s economic and political situation has sent commodity prices to dangerous lows. Beware to those who have borrowed heavily to expand while corn was above $145/mt. This sudden shock should cause one to reflect on some basic business rules that apply equally well to farms, small businesses and large companies.
Sustainability is a key issue in agriculture: the ability to keep on farming in the long term with the resources at hand. Today’s column reviews some important business rules that a sustainable farm tends to implement. These are not hard rules; it is very important that each rule be considered in relation to all the options available.
Only the bottom line counts! We farm or hold a job or run a business normally to earn a living, to put food on the table, and to generally improve or sustain the quality of life for ourselves and our family. Most decisions on a sustainable farm are geared to the quality of life, either by feeding ourselves on the farm, by generating our take-home pay, by enhancing our ability to bring in that net revenue and by satisfying other personal, family and community needs. All other measures of farming success (number of acres or cows, yield, size of the tractor) are irrelevant if we cannot sustain our quality of life. Only when the farm has met our needs can we indulge ourselves in either personal luxuries or more toys on the farm.
Yield is NOT king! Net revenue, as emphasized above, is the result of yield times sale price minus operating expenses, capital expenses, overhead, etc. The seed and agro-chemical companies advertize yield; various prizes reward yield; the farmers impress each other with yield. But did anyone ask what was left at the end of the day? Most of the time, the answer is "not much". Farms are getting bigger so that the farmer can multiply "not much" by lots of acres or cows to try to earn a living at the cost of great indebtedness and the loss of independence.
The sustainable farm focuses on the net revenue and develops its whole approach to maximize returns. True, the sustainable farm needs a reasonable yield, but we know that yield has a price in terms of fertility and input costs. The task is to balance yield and cost to maximize the net revenue. The sustainable farm uses on-farm resources (manure, crop rotation, cover crops) to obtain an optimal yield-cost ratio.
Maximize the net revenue. There are two ways to increase your net revenue: 1) increase your gross revenues faster than your costs; or 2) decrease your costs faster than your gross revenues. Popular thinking always suggests that bigger is better but doing more of the same low-margin product is rarely advantageous. The sustainable farm takes the first approach by increasing the value of the product with niche markets, special attributes, packaging, direct marketing. Examples are certified organic producers, seed producers, on-farm processors and vendors.
But the other approach deserves some study before going to the bank to borrow more money. The arithmetic is simple: I now spend 8$ to earn 10$ and I take home 2$. Maybe I could reduce the size of my farm by spending 5$ to earn $8 and take home 3$. I would increase my take-home pay by 50%! A successful businessman recently shared his secret for profitability with me: "stop growing!" Instead of re-investing his profits, he stopped taking on new customers, optimized his operating costs, maximized customer retention and satisfaction, avoided costly capital and marketing expenses. A sustainable farm seeks the optimal size that produces the best return for the least effort and the least damage to the farm’s resources and environment.
Don’t follow the pack. When the price of corn was up last year, you could bet that lots of followers would plant corn this year. An over-supply of corn and a price drop are thus predictable. The majority of crop farms are into a small number of crops; the commodity market, the suppliers and the buyers can squeeze the margins very low. The sustainable farm (at least partially) avoids the pack and ventures into niche products where the margins are higher: edible beans, flax, hemp, herbs, dairy, etc.
Minimize your exposure to risk. Life teaches us to count on Murphy’s Law, and farmers know that they face so many unknowns. A sustainable farm deals with risk through diversity. With a proper crop rotation and the presence of various livestock, the farmer minimizes the impact of a problem by relying on many other products. Therefore, a disease, seed failure, weather problem, will only affect a part of the operation.
Minimize outside controls. As we all know, farmers appreciate their independence. But modern agriculture places farmers at the mercy of banks, marketing boards, large buyers, machinery manufacturers, seed producers, and agro-chemical companies. When times get tough, a farmer needs to make decisions without all the other hands in the pie. A sustainable farm minimizes outside inputs, such as avoiding the use of synthetic fertilizers and pesticides, to maximize the freedom of choice and reduce external expenses.
optimize your capital resources. Any small or large business maximizes the use of capital resources: shift work, multiple product lines, reduced inventory, high turnover, etc. Only in agriculture do we allow expensive machines to sit idle most of the time. The sustainable farm uses crop rotation and staggered crops to stretch out the planting and harvesting season. Instead of handling hundreds of acres of corn in the same week, smaller equipment can plant several crops during 3 months and then harvest them for 3 months. Spreading out the workload through crop rotation also saves on labour costs. Leasing, hiring and equipment sharing are also other ways that a sustainable farmer uses to reduce the debt load and to favour variable costs over fixed costs.
A contribution by Tom Manley
President of Homestead Organics