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

April 15, 1999

The Market Advisor: Lack of Management Power Threatens Survival of Mid-Sized Family Farms and Ranches

Harlan Hughes, Extension Livestock Economist
NDSU Extension Service

The maximum production philosophy instilled in agriculture during the last 50 years has conditioned the nation's farmers and ranchers to believe that the answer to today's low prices is to increase production—farm a few more acres, run a few more cows and you'll make it. As a result, many farmers and ranchers are focusing on getting bigger rather than on getting better. I am going to try to make the case in this Market Advisor that the economic payoff in today's agriculture is in getting better before you get bigger.

These two business strategies—getting bigger verses getting better—represent quite different philosophies, but both are targeted toward increasing business profits. Getting bigger focuses on expanding your capital base to gain control over more resources. Getting better focuses on expanding your on-farm information base to enhance control over existing resources. In the first philosophy you spend investment capital. In the second philosophy you spend management time. Spending management time enhancing control over existing resources gives a manager more management power. It's my observation that management power leads to increased net incomes.

Production agriculture, somehow, keeps perpetuating the myth that one can farm or ranch without business or financial management practices. As a result, many mid-sized farmers and ranchers are trying to survive without adequate management power. But, they are finding that farming or ranching without adequate management power is getting harder and harder to do. By adding financial management practices and business management practices to their management arsenal, they can add management power.

Enhancing your management power starts with compiling on-farm data like herd performance data and business financial data and then analyzing that data. But on-farm data itself provides little or no management power. The management power comes from the conversion of on-farm data, through analysis, to management information that can be used to enhance decision making.

The first step to enhancing your management power is to identify and measure some key financial indicators for your farm or ranch business. A recent Market Advisor was devoted to the identification of four key cash flow indicators. In that article's example, it took the rancher 47 cents of direct operating expenses to produce each dollar of cash income produced. Once determined, the cost to produce a dollar's worth of gross income represents the first indicator.

Second, by adding in principal and interest payments on all money borrowed, it cost the rancher 71 cents to produce a dollar's worth of cash income. Third, when family living was also taken into account, it cost 97 cents cash expense to produce each dollar of cash income. This left only three cents out of every dollar as earned net cash income, the fourth key indicator.

This is an excellent example of a ranch that needs to get better before it gets bigger.

Expanding gross income another $10,000 by farming a few more acres or running a few more cows is not going to make much difference in the overall net cash income with this kind of a cash-cost structure. The big payment for enhancing net cash income would be from reduced overhead, not from expanded output. Expanding a business with low net cash flow margins just ensures that the operator works harder. It typically does very little to ease the cash flow crisis.

To me, it just makes more economic sense to expand management power by getting better—increase the profit per dollar of gross income generated with this kind of cost structure. My Integrated Resource Management database suggests that astute family ranchers are using management power to enhance their business profits. They are the low unit-cost producers.

A co-worker of mine suggests that today's farm or ranch manager has to manage four resources to farm profitably: land, labor, capital and information. The financial rewards to these four resources are rent, labor and management wage (typically taken in the form of a family living draw), interest earned on equity capital, and royalties—respectively.

Livestock alliances are examples of collecting royalties from cattle information. In alliances, management power comes from knowing your herd's carcass data.

Farmers and ranchers have long been good stewards of the land and are certainly hard workers. Many have not, however, focused much energy on managing their investment capital and their on-farm management information. The farm or ranch's information management is often limited to off-farm information because little or no on-farm production data or financial management data are maintained or analyzed.

Managing without on-farm production data and on-farm financial management data greatly reduces that operator's management power. This limitation is not so serious during times of high prices, but it has taken its toll in the last five years of low prices. Those managing without on-farm production data tend to be the high-cost producers.

Now with the "freedom to farm" legislation, farmers are free to grow for the market. Couple this freedom with today's biotechnology explosion and the Internet's instant access to data (not necessarily information), and the farm legislation puts a large premium on information management. Yet, the mid-size family farmer or rancher is too busy to compile and analyze on-farm management information.

Operations researchers tell us that we collect management data. It only becomes management information when it is changed into a form that affects decision making. Management power comes from this conversion of data to information. In many cases, mid-size family farmers and ranchers are not taking the time to convert their limited on-farm data into management power. They are just too busy farming a few more acres and running a few more cows. The mid-sized farmer or rancher hardly has time to even post his business transactions to his accounting system—let along convert the accounting data to management information.

I suspect that a lot of my readers can identify with the mid-sized family farmers and ranchers that are too busy to manage. As mid-sized family farmers and ranchers respond to the cost/price squeeze by farming more acres and running more cows, they have less and less time to manage. Yet, management is what is going to ensure the survival of these mid-sized farms and ranch businesses. It appears to me that mid-sized family farms and ranches are in a catch-22 position: too busy to manage but management is absolutely necessary to survive. This suggests that something is going to change on mid-sized family farms and ranches. Stay tuned.

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

Editor: Tom Jirik (701) 231-9629