By Paul Kuntz
When you spend a lifetime in the ag banking industry, farmers often pose this question to me: Why can’t I have the lifestyle and purchasing ability of my neighbour?
It is human nature to have envy. We see our neighbours operate their farms and we have a basic idea of their financial position. We know how many acres they farm or how many cows they have. We know their production. We can do the math to determine their estimated income. We compare that to ours and that is when the questions begin. Why does my neighbor have a newer combine than mine? Why is their livestock handling facility much nicer than mine?
Let’s start with one answer to this question: maybe your neighbor is just a better farmer than you are. That is a harsh statement, but it may be the truth. With my consulting business and also with my advising regarding Global Ag Risk, we look at a financial parameter called gross margin. In the grain world it is your gross revenue per acre less fertilizer, chemical and seed. There are consultants and accountants that may include a few other items, but this simple calculation can tell us a lot about your farm. This calculation measures your ability to manage your production, marketing and crop expenses. What is most important about this calculation is what is does not account for: if you own your land or lease it, if you have your own equipment or get custom work, if you no employees or 10 employees, if your parents gave you the farm or if you had to buy every square inch of your operation. This calculation does not care about those things, it just measures you. We can take your numbers and compare them to farmers in your area through benchmarking.
Having a good gross margin does not ensure success on your farm. You can still have many financial issues with a good gross margin. If your strategy is to purchase land at today’s prices rather that rent, you will have issues. If your strategy is to have very new equipment, you will still struggle. If you want to have a lavish lifestyle, your farm will still have trouble paying the bills. But I can say with certainty, that if you want your farm to be successful, you must have a strong gross margin.
So, one answer to the question of your neighbour’s wealth: maybe they are. They have a better gross margin and at the end of the day they have more money.
Here is another potential answer to this question. I once visited a farmer in the early 2000s to solicit his banking business. He was a relatively small farmer with about 800 acres farmed and nearing retirement. I could see that his equipment was well maintained, but a bit older. We discussed banking and I could tell that this farmer was quite risk averse. He was a very cautious operator. Eventually it came out that he had no debt. This was something that he was very proud of. He said to me that he was quite puzzled why so many of his neighbours had newer equipment than him. He felt all his neighbours were richer than he was.
I politely explained that maybe his neighbours were OK with debt and he was not. I reasoned that he did not have a newer combine because he was unwilling to take on debt.
Often times, the farmer who is complaining why his neighbour has a newer tractor than they do, has the ability to go get the same type of tractor. The issue is they would have to take out a loan and that may make them feel uncomfortable.
Many farmers (this goes for all people), feel that other people treat money the way they do. If a farmer insists on paying cash for tractor, they assume that this is the same practice for their neighbour. What they may not know is that their neighbour is perfectly fine taking out a loan for a tractor. Their neighbour may feel comfortable with debt in their operation. They may even feel comfortable enough taking debt right into retirement.
For most farms today, debt is a regular part of their operation. It is necessary in order to grow and expand.
One unfortunate aspect of comparing your equipment with your neighbour’s equipment purchases is that it may not answer the most important business question and that is: Are we profitable? The level of actual profit does not always show up publicly on a farm. In fact, the opposite can be true. I have had financially troubled clients who insist on parking their ill-advised new equipment purchase near the road so all can see it. Other farmers who are relatively affluent may hide their wealth and not flaunt it.
I believe that pride is an essential value to possess if you are a business owner. You want your cows to be strong and have calves that are vigorous. You want your wheat field to be thick and bountiful. If you had a restaurant you would want it to appear clean and well kept. It is pride that drives this and all successful businesspeople possess this value. Pride can turn into envy and that is not a good character trait. You cannot be focused on trying to prove to your neighbours that you are more successful than they are.
I believe it is important to have quiet pride when it comes to your financial success. Pursue a strong gross margin and from that gross margin, spend wisely so there is a good chunk left over. This will allow your farm to prosper through all scenarios. This will allow your farm to replace machinery when it is necessary. This will allow your operation to take advantage of growth opportunities. It will increase marketing opportunities and also expense reduction opportunities. Your operation will be in a much better place, but your neighbour may not know about it.
If you are a grain farmer and want access to some great benchmarking, you should get in contact with your local Global Ag Risk advisor in your area. Depending on where you are, there may be some excellent data that has been put together. In the livestock world, it is a bit more difficult, but I would suggest reaching out to your provincial agriculture departments to see what they have for cattle benchmarks.
Focus on your operation and how profitable it is. You need not worry about your neighbour. If it turns out your neighbour is richer than you, congratulate them on their success. Maybe ask for tips. If it turns out that you are the rich one, provide help to those who need it. At the end of the day, there are a lot of other aspects to life that will bring us happiness that have nothing to do with money.
