Finding financial fuel

Agriculture.com Staff 09/06/2007 @ 11:42am

Ron Swanson of Galt, Iowa, could be called a financial Noah. He's building an ark on his 740-acre farm that might save his business in the next financial washout. You won't see it on his well-mowed farmstead. This ark is the accounting system in his computer.

He's testing a managerial accounting system that has already improved his marketing and has motivated him to cut fertilizer costs.

Swanson is a former head of the Iowa Corn Growers Association and Iowa Corn Board and a one-time National Corn Growers vice president. These days, he's president of the Farm Financial Standards Council (FFSC). It's a small group of producers, financial experts, and bankers who can talk accounting without drinking gallons of coffee.

Managerial accounting is known in the manufacturing world as cost accounting, Swanson explains.

"You're creating cost centers and profit centers. It's a lot like a manufacturing business where you're making widgets with a raw material inventory," he says. Costs accrue to a widget as it moves through the system. With cost accounting, "you can stop the assembly at any point in time and you know the cost of your widget."

Swanson is trying to do the same thing with corn, sometimes starting with the cost of applying anhydrous ammonia the fall before it's planted. Because he knows his costs more accurately, he has felt more comfortable pricing crops more aggressively, when that makes sense in the market.

"Each field on my farm is what I call a project," Swanson explains. He has 11 of them. All are cost centers. When he harvests corn, it's commingled into one marketing center, or profit center.

An advantage to what he admits is a lot of work is that he has a better understanding of his true costs than with older enterprise accounting. That tracked only the value of his entire farm's corn as one enterprise and its soybeans as another. Managerial accounting "segregates out those segments of your business that need attention," he says.

Swanson, who has a son farming another 1,240 acres that he shares machinery with, has a business that's barely big enough to gain from managerial accounting. "If a farm is a one-man shop and only grains, then there's going to be limited advantage to doing this," he says.

Nor is it cheap. Software is in the $5,000 range. Larger operations using this have their own accountants or at least one on retainer. And potential efficiencies won't jump out at you. "It will probably take two or three years to establish a baseline so that you know what you’re working from," he says.

But some larger operations have improved their return on equity significantly, says Dick Wittman, an Idaho farmer and rancher and past FFSC president. Wittman has four partners in a business that raises small grains, legumes, oilseeds, grass seed, cattle and timber. And he consults on financial management.

One customer with a large hay operation saved up to $20,000 a year when a cost analysis showed him that owning a square baler was more optimal than paying custom rates, Wittman says.

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