Competitive edge

Agriculture.com Staff 12/04/2007 @ 11:00pm

It was 2002 when John Frey of Crawfordsville, Indiana, realized that his business practices might not measure up to the job ahead.

"I had been on the county committee at our FSA (Farm Service Agency) office for several years, and in 2002 the new farm program came out. We started having meetings at the county 4-H building to explain the program," he recalls.

At one meeting, he looked at the 400 farmers in the room and saw that most were near 60 years old. "There was just a handful of us that weren't," he remembers.

At that moment he realized that someone would have to farm much of that land as farmers retired.

"I also knew I wasn't educated enough to handle a 5,000-, 8,000-, or 10,000-acre farm," he recalls. "That's when we actively started seeking knowledge." At the time, he and his family were farming 4,000 acres.

John and the rest of his family kept detailed field records of crop inputs. His mother kept the books.

"We always had very good tax records," he recalls.

"It was very good, but it does not let you make management decisions," he says.

So they began looking for better ways to keep financial records. That year they chose an accrual accounting system, Ag Manager, offered by AgriSolutions of Brighton, Illinois.

(Unlike cash accounting, which is like a checkbook, accrual accounting records revenue when it's received and expenses when they are incurred.) They also pay for monthly meetings with an AgriSolutions service provider who acts an adviser.

To make the transition to managerial accounting, John's wife, Lori, stepped in as the farm's bookkeeper. She had worked at a bank for eight years and worked for Farm Credit Services part time for two years after their son, Nick, was born.

Even with that experience, the change wasn't easy.

"It was double entry, but you don't know the results of your double work right away," Lori says. "You wonder if it's worth it when you first start. Until you sit down at the end of the first year with your adviser and go over reports, then you get really excited about the process."

(With double entry accounting, every transaction is posted twice, on both sides of the equation, assets = liabilities + owner equity. A seed purchase is a credit under the cash account on the asset side. It's also a debit in the expense account on the equity side.)

John agrees all this paid off. "The lightbulb came on. All that extra effort was worth it," he says.

They immediately made some changes in their farm business. At the time, John owned one-fourth interest in a cow-calf herd that was also owned by his parents and his brother, Joe, who also has a successful hay business.

The first year's report showed that the cattle, while profitable, represented only about 1% of John and Lori's farm's profit. Most came from their corn, soybeans, and wheat.

But the cattle were a lot of work.

"I was spending 20% of my time on 1% of my revenue," John says. So the family culled the herd to a smaller size, and John's dad, who is retired, bought out John's interest.

His mother, who also has good business sense, was a little concerned, John recalls with a chuckle. "My mom calls me one day and says, 'Tell me, if your computer tells you to sell your cows, why am I buying them?' "

He explained that the cattle business wasn't losing money, it was just taking too much time.

They also decided that their four semis used for hauling grain were too costly and sold them.

"By the time I paid for repairs, fuel, and the labor, I could hire my trucking done for less," John says.

"Unless we were running the trucks as a profit center," Lori adds.

That approach has worked for some farmers, but with their elevator and an ethanol plant nearly within sight of the farm, making money on the back haul wasn't likely.

Their AgriSolutions adviser, Harold Birch, agrees with the decision. "It takes roughly 100,000 miles a year to break even with a truck," he says. The cost of owning and operating the four semis was nearly twice as much as hiring trucking.

Downsizing some activities has, in fact, helped the family expand their grain business. The Freys own only 500 acres of farmland and rent the rest. John believes that his detailed records have given him a competitive edge with landowners and lenders.

The staff at their lender, Farm Credit Services, told Lori that they don't normally see such detailed year-end reports as they provide.

"If we need additional operating money throughout the year for new growth, the information is there," Lori says. "We are able to run reports at the push of a button at any given time." That includes balance sheets, budgets, and cash flows.

Their financial records have also helped John maintain good relations with landowners who lease land on shares. John is able to show landowners their exact cost per acre and what the farm makes.

In addition to financial records for a farm, each landlord has access to copies of the Freys' crop consultant's soil tests and fertilizer recommendations. John provides maps of fertilizer applications and yield maps.

Detailed, accurate records of their farming business have also helped John gain land to rent.

An outside landowner once asked a local co-op for the names of potential renters. The landowner stopped at the Freys' farm. After seeing their financial and field records, he rented them the farm on the spot.

Of course, there's no panacea for keeping land in today's market, even with good records. Frey lost 1,000 acres of rented land this year, including a farm that was sold for about $6,000 an acre. He could have bid on it but considered the price too high.

"That's no big deal," he says. "You rent big chunks of land, and you loose big chunks."

Retiring farmers aren't retiring quite as fast as you might expect.

"Everybody wants to farm one more year," John says."Everybody is talking $4 corn. I haven't seen anybody sell $4 corn [all year] yet. I've sold some for $4.12 a bushel, but across the board, my average is a lot closer to $3.50."

"Marketing is another way we use Ag Manager, to take some of the emotion out of marketing," he says.

Over the past five years he has managed to net over $3 a bushel on corn, including LDPs, hedging, and basis improvement.

They used their software to analyze potential return from improving postharvest marketing strategy. That includes benefiting from the carry in futures by storing grain.

"We decided to update grain facilities due to the 30¢ and 40¢ basis improvement and carry in the market, which will pay for the bins in approximately three years in real dollars," Lori says. "The added harvest efficiency is hard to calculate."

The Freys' lean production practices also fit into their marketing. For the past three years, John, his family, and hired help have done most of the fieldwork with only two tractors and one combine.

In order to get most efficient use of that combine, some of his soybeans are early-maturing group II beans planted in early April.

"We treat soybeans like they're as important a crop as corn," John says. He's gotten yields as good as 65 bushels on early beans, and he often picks up a 50¢ to 60¢ premium for selling ahead of normal harvest.

Son Nick, a sophomore at Purdue University, runs his own spraying business and is paid by his family's farm. "I keep my own records for the spraying I do and keep track of my own personal accounts," he says.

The farm is organized into several other businesses. The cropping business is run by a general partnership of John, his brother, Joe, and Nick. The machinery is leased to the farm by a separate limited liability company.

For accounting, "our management intent is to make corn and soybeans our revenue source and, therefore, they become the profit centers. After identifying the profit centers, the intent is for everything else that supports the profit centers to become a cost center," Lori says.

To learn more about managerial accounting, plan on attending one of a series of meetings sponsored by Successful Farming magazine, Asgrow, and the Farm Financial Standards Council.

Two farmers who are past presidents of the Council will highlight the meetings:

1. Ron Swanson, a corn and soybean farmer from Galt, Iowa, will describe how managerial accounting has worked on his operation.

2. Dick Wittman will conduct a longer demonstration of managerial accounting. Wittman is an owner of a grain, cattle, and timber operation near Culdesac, Idaho.

Here are the meeting locations:

  • Augustana College, Sioux Falls, South Dakota, January 28, 2008.
  • i wireless Center, Moline, Illinois, January 29, 2008.
  • Purdue Agriculture, West Lafayette, Indiana, January 30, 2008.

For further details, call 800/678-8386 or visit the Web at www. agriculture.com/SPP.

It was 2002 when John Frey of Crawfordsville, Indiana, realized that his business practices might not measure up to the job ahead.

CancelPost Comment
MORE FROM AGRICULTURE.COM STAFF more +

Farm and ranch risk management resources By: 07/07/2010 @ 9:10am Government resources USDA Risk Management Agency Download free insurance program and…

Major types of crop insurance policies By: 07/07/2010 @ 9:10am Crop insurance for major field crops comes in two types: yield-based coverage that pays an…

Marketing 101 - Are options the right tool… By: 07/07/2010 @ 9:10am "If you are looking for a low risk way to protect yourself against prices moving either higher or…

MEDIA CENTERmore +
This container should display a .swf file. If not, you may need to upgrade your Flash player.
New 6631 Sunflower Vertical Tillage System