NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

October 29, 1998

[Editor's Note: This is part one in the series, "Assessing Your Farm or Ranch Business For Today's Market And Beyond."]

The Market Advisor: Agriculture Is Requiring More And More Business Management Skills

Harlan Hughes, Extension Livestock Economist
NDSU Extension Service

Clearly, farmers and ranchers need to upgrade and integrate business management skills into their production management skills. Profitability in 1999 and beyond will require that careful consideration be given to the integration of production, resource utilization and financial performance. In 1999 and beyond, everything must count and everything must pay.

North Dakota farmers and ranchers entered this decade facing generally increasing financial risks, greater financial risks associated with specialization, increasing production costs, and steadily increasing family living expenses. Couple this with five years of low beef prices, five years of crop diseases and, now, low commodity prices, and things are getting serious for many of the state's producers.

Market driven price volatility, unlike what we experienced under our past government programs, are projected to be a way of life under Freedom To Farm. North Dakota farmers and ranchers will need to combat these economic forces in 1999 and beyond through enhanced business management skills.

Those closest to farming in North Dakota sense that farming and ranching are undergoing a pronounced transformation. Once characterized by enterprise diversification, reliance on family labor, and integration of family and business goals, North Dakota's farming and ranching seems to be becoming more specialized and business oriented. The transformation and emphasis on business management is not a new phenomenon, but probably has accelerated as a lesson learned from the flawed farm business practices of the mid-1980s. An appropriate on-farm management information system sends early signals when things are not going right. In many cases, the proper business management information systems just are not in placeeven now in the late l990s.

Many producers are making the same mistakes today that farmers and ranchers made in the 1980s. They are once again waiting for their banker to give them the bad news. By that time, it is often too late. Adequate on-farm management information systems are needed to give early warning signals of potential financial problems. These early financial problems need to be corrected before they deteriorate into irreversible situations.

The same business management flaws that were present in the 1980s are still present in the late 1990sonly the actors have changed. For example, many producers are still using cash flow as the primary measure of profitability. Cash flow accounting can actually disguise true business profitability for several years in a row. Very few producers are generating accrual adjusted income statements measuring the true profitability of the farm or ranch business.

Heavier use also needs to be made of financial statements and the business management signals sent by a time-series of financial statements. Farm or ranch financial ratios and production and financial benchmarking need to be fully employed. With the exceptions of the Farm Business Management Associations, IRM Financial and Reproductive Management System (IRM-FARMS), and Cow Herd Analysis Performance System (CHAPS), benchmarking is almost completely ignored in North Dakota's production agriculture.

In general, the U.S. economy has been and still is restructuring in a major attempt to compete in a world market by reducing costs of production. The world economy's extremely strong economic drive for lowering costs of production is now impacting U.S. animal agriculture. It is becoming evident that there are extreme economic pressures to reduce costs of producing livestock. These economic pressures are building, and this economic drive toward being a low-cost livestock producer may well lead to a new order of animal production in the United States.

The battle lines between commercial family farm livestock production and the large scale, professionally managed livestock factories, have been drawn. The fundamental issue is over how the new management skills will be injected into agriculture to reduce costs of production. The lowest-cost production system will be the livestock production system that prevails in the next decade.

In response to the tough times in agriculture, the NDSU Extension Service is sponsoring a series of "Changing The Way That You Farm"educational meetings this winter. The key debate at these meetings, in my opinion, will be on how the new enhanced business management skills needed to capitalize on the new production technologies will be injected into North Dakota's commercial agriculture. The key to financial survival in 1999 and beyond is having the management skills to operate under lower and lower costs of production.

A similar management-skills question came up in the 1960s in the Midwest farmer/feeder cattle feeding sector. The new technology was the feed wagon and the management skills need to blend rations under a highly managed system. Farmer/feeders, in general, elected to not adopt the new management skills associated with this more capitalized ration formulation process. Since that time, farmer/feeders have lost considerable ground to the larger, professionally managed feedlots that hired the needed management skills through professional managers and/or consultants.

Swine production has advanced to the point where genetics, nutrition, and capital are fully integrated into one highly coordinated management system. The genetics program dictates the nutritional program which, in turn, dictates the facility layout which, in turn, dictates the marketing program. The production system is all linked together in a highly coordinated system requiring considerable management detail. More and more swine producers are electing to let someone else put the management package together and they are becoming "contract swine producers" focusing their energies on executing the production recipe prescribed by contracted management.

It will be critical to see how the business management skills needed to combat today's low commodity prices and beyond will be injected to North Dakota's agriculture. Will these new business management skills be injected through professionally managed, large, concentrated livestock production units or will these business management skills be injected into agriculture by commercial livestock producers electing to upgrade their business management skills? Today, both of these options are still viable in North Dakota. Just how North Dakota operations elect to gain these management skills will determine the future structure of North Dakota's livestock industry.

If you decide that you are going to be one of those commercial livestock producers who upgrades their business management skills, we at NDSU would like to be a partner in your effort. NDSU wants to be one of the primary providers of your business-management skill training. Watch for more information on the "Changing the Way that You Farm" meetings.

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Source: Harlan Hughes (701) 231-7380 hhughes@ndsuext.nodak.edu

Editor: Tom Jirik (701) 231-9629