Market Advisor

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

April 29, 1999

The Market Advisor: Lack of Management Power is Threatening the Survival of the
Mid-Sized Family Farm or Ranch (Part II)

Harlan Hughes, Extension Livestock Economist
NDSU Extension Service

A national farm management consultant recently told a National Beef Database think tank that his firm worked with three sizes of farm businesses. The largest farms were those large enough to have an office. The middle-sized farms were those farmers who were too busy to manage. His smallest size farmers were "wannabes," part-time farmers who wanted to be full-time farms. I think that this consultant's size classification is quite perceptive and emphasizes what I consider to be a big, big challenge to mid-sized family farms and ranches—they are just too busy to manage.

This "too busy to manage" concept was emphasized recently by a farmer member of an NDSU Extension Service advisory committee. He said that he had to do his bookkeeping on Sunday morning before church. He asked the Extension Service to look into how farmers might join forces to farm more efficiently. The catch is that the profit margin on many mid-sized family farms and ranches is not large enough to meet today's needed family living draw, let alone pay for added hired labor. The problem for mid-sized family farms and ranches is that any increased labor workload has to be done with family labor.

Family living shortfalls on many mid-sized family farms or ranches are causing more spouses to seek off-farm employment to generate adequate income for family living. This, in turn, results in the on-farm labor force being reduced even more. Many mid-sized family farmers or ranchers are becoming part-time "family" farmers as someone in the family is going off-farm to work. So once again, the farm or ranch operator remaining on the farm has to put in even more labor time.

Another nationally known financial consultant tells farmers and ranchers that there are four stages of growth in a farm business. Stage one is "85 percent doing and 15 percent management." Stage two is "66 percent doing and 34 percent management." As the business grows, stage three is "34 percent doing and 66 percent management." Finally, stage four is "15 percent doing and 85 percent management." It is my observation that many mid-sized family farmers and ranchers in the Northern Plains are experiencing considerable frustrations in making the transition from doing to managing.

Thirty years ago, the major resources employed in farming or ranching were land and labor. These two resources were utilized best by "doing" and they required relatively little management information. Narrower profit margins are forcing farmers and ranchers to not only manage for positive net returns from their land and labor, but they must now manage for positive returns from their equity capital and on-farm information. Without comprehensive financial management and information management skills, it is going to be difficult for the mid-sized family farms or ranches to thrive.

Profit margins can be widened by collecting the royalties from on-farm information; therefore, information management skills are now surfacing in importance. With Freedom to Farm legislation, farmers and ranchers are free to grow for the market—a world market. World markets, however, put a premium on information management. Yet the mid-sized family farmer and rancher are too busy to compile and analyze world information.

Today's biotechnology explosion, coupled with the Internet's instant access to data (not necessarily information), makes technologies instantaneously available to farmers and ranchers worldwide.

Two immediate problems surface with instantaneous technology transfer in a world market. First, world markets change rapidly, requiring constantly updated information analysis and continuous reanalysis. Second, the United States is not automatically the low-cost producing region, so production costs have to continuously be measured and monitored.

Freedom to Farm suggests that U.S. farmers are now in direct competition with the world's farmers all selling into the same world market. Competition is extremely keen. Examples are soybean production in Brazil and beef production in Canada.

I find most family farmers and ranchers with little management power focused toward financial management or information management. Yet the collection and analysis of this on-farm information could pay a substantial royalty. They just do not have enough hours in the day to collect and analyze on-farm data and to turn that data into management power.

So what is management power? I define management power as paying attention to details. It is my observation that the higher the management level, the more details that a manager monitors. Top managers seem to monitor so many details that they have to rely on production and financial records to keep track of the details. The problem with mid-sized family farmers and ranchers is that by farming more acres and running more cows, management time starts being reduced, bookkeeping slips (maybe to Sundays before church) and overall management power is reduced. They end up running in place faster and faster.

Let me carry this argument to its final fruition. I believe that somehow North Dakota's mid-sized family agriculture will have to increase its business management skills and its management power to thrive in this world market today and beyond. Let me suggest that North Dakota's agriculture still has three choices with respect to the generation of this needed management power.

First, mid-sized family farmers and ranchers could learn the necessary business management skills and use these skills to generate this management power. This would involve attending intensive, multi-day business management workshops requiring considerable educational time on the part of both spouses. If North Dakota's family farmers and ranchers do decide to upgrade their business management skills, the NDSU Extension Service would like to be a major provider of this management education.

The second alternative for generating the management power needed to compete in this world market is for large farms to come in with their professional management staffs. Mega-cattle feedlots came into being (outside of North Dakota) in the 1960s and 1970s with their professional managers. Mega-hog farms also came into being (outside of North Dakota) in the 1980s and 1990s with their professional managers. While it has not been discussed much, mega-crop farms also exist with their professional managers. These mega operations are hiring professional mangers to generate the management power needed to thrive in a world market.

The third way of generating the management power needed to compete in a world market would be for input suppliers to provide seed, chemicals and fertilizer in a contractual management package. Farmers would provide the land, labor and machinery. The input supplier would specify the production system and retain ownership of the commodity produced. The input supplier would collect all royalties from the management power and risk associated with that tightly managed production system.

All three of these alternatives are in existence today in varying degrees. It seems to me, however, that the future of North Dakota's agriculture is still undecided and that it could go in any one of these three directions. I personally vote for option one—upgrading the business management skills of our mid-sized family farmers and ranchers.

How about you?

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

Editor: Tom Jirik (701) 231-9629

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