2015 Decision Points: Be Strategic
Farmers make dozens of decisions – both large and small – every day. It goes with the territory. Each decision sets in motion a more or less predictable chain of events. Some significant fork-in-the-road strategic decisions, however, will irrevocably impact the future direction of their businesses.
In 2015, Deb and Kriss Lightner will mark two milestones. They’ll turn 60 years old, and they’ll celebrate their 40th year of married life on their Lohrville, Iowa, farm. After completing a “very challenging” harvest, they see their retirement and business transition just over the horizon.
It’s the culmination of a series of decisions that they approached eight years ago with careful and thorough planning. “We’re gradually unwinding ourselves,” she says. “Last year, Kriss and I spent five weeks in Alaska. It gave our son, Zac, and daughter-in-law Darci latitude to flex their wings and to make decisions on their own. We still have a few more decisions to make, but our comfort level is increasing.”
At the same time, the Lightners are facing the prospects of lower grain prices in 2015 and beyond. Making decisions that position their business to navigate these risky, turbulent waters will be critical to the operation’s bottom line and long-term strategic success.
The Lightners aren’t alone. What decisions are confronting you today and keeping you awake at night? How do you identify the most critical variables and manage to choose from an array of competing alternatives?
“All entrepreneurs and managers face uncertainties and challenges,” says Michael Boehlje, Purdue University ag economist. “Decision-making for farmers isn’t any more complex than for other business owners, but it’s becoming more challenging, in part, because of the accelerated pace of change. Greater business climate fluctuations – including commodity price swings, along with the rapid adoption of new technology, and extreme weather events and growing conditions – are converging at a time when there’s a reduced public sector safety net from the farm program and crop insurance. The downside risk of poor decisions is less protected. This compounds the stakes.”
Decision-making is a science that requires a broad skill set, reinforced by a local knowledge base.
“I have a host of decisions that need to be made this winter,” says Roy Wendte, Altamont, Illinois. “Things just keep moving forward and never seem to stop.”
No Crystal Ball
What detours and roadblocks do farmers encounter along the route to effective decision-making?
“I’ve spent many hours with farmers as they discuss decisions,” says Don Jonovic, Family Business Management Services, Cleveland, Ohio. “Often, the problem is that they never make a decision, or the decision that they make conflicts, confounds, or weakens the business and partnership.”
Strategic decisions – the kind that influence the direction of the business – are more risky because of future unknowns. Boehlje helped lead a three-day seminar on structuring strategic decisions last fall at Purdue University’s Center for Food and Agribusiness.
“Many farmers spend a lot of time trying to predict the future,” he says. “That’s very hard, and it’s why we talk about black swans (events we never anticipated). This includes the commodity prices we’ve seen over the past 10 years, new disease outbreaks, and the social media outcry about lean, textured beef.
“Farmers have to be careful not to spend too much time trying to predict the future. Instead, they should focus on positioning for alternate futures that may occur,” he says. He suggests adopting this systematic framework for making decisions:
• Define the problem.
• Set objectives.
• Consider alternatives (brainstorm).
• Describe consequences (what could go wrong).
• Identify trade-offs.
• Finalize the decision and implement it.
Scenario planning (see 7 Steps to Scenario Planning) is a key decision-making tool.
“Scenarios aren’t predictions; they’re sets of logically derived connected futures,” Boehlje says. “The process helps to identify key early warning signals of the underlying fundamental drivers shaping the future. Monitoring global demand and production capacity, biofuels policy, and interest rates for the direction they’re heading allows farmers to take advantage of opportunities and to protect downside risks.”
It also helps to rehearse responses to those possible futures. “If your scenario is strong economic growth, then your strategy is more aggressive, such as taking on more debt,” he says. For example, livestock producers, especially cattle producers, are on track for exceptional profits.
Strategic decisions pose more risks than operational ones because they deal with the future.
Decisions about production practices and technologies, farm program participation, crop insurance, and specific marketing plans all are based on information derived from the fundamental business management tools of enterprise analysis, income and cash flow statements, and balance sheets. Operational decisions should be consistent with strategic decisions.
“Many farmers focus on short-term operational risks like weather, price volatility, and input costs,” Boehlje says. “These are important, but you need to position your business for long-term fundamental changes in the economic climate or government policy. Your business needs the resilience to handle short-term problems and the agility to capture long-term opportunities, even in an economic downturn. Volatility may mean moving in a different direction, buying land, or expanding. Be careful not to destroy resiliency in pursuit of opportunity.”
Watch Out for Mind Games
Adopting a decision-making regimen doesn’t always guarantee success. Human psychology plays a key role.
“There’s a trifecta of causes of decision failure,” Jonovic says. “One is the failure to make a decision out of fear of making the wrong decision. A second is indecision out of fear of how others will react. The third, procrastination, arises out of the first two. It’s based on the false hope that if you wait long enough and think long enough, the right answer will appear. Very few important decisions manage to please everyone.”
The remedy for this syndrome? “It starts with a strong dose of information – accounting data, documentation, and excellent advisers – to reduce fear and confusion,” he says. “Next, a flexibility regimen is needed. Most decisions can be made in ways that aren’t irrevocable. The risks can be mitigated by breaking down decisions into stages and time frames.
“Finally, truth-in-labeling is essential,” he says. “The more your decision-making partners know about the ingredients (financial data, tax implications, and alternatives) and the side effects (the risks), the more they’ll be able to focus on the benefits of various choices. So, get the facts from the best specialists, keep decisions as flexible as possible, and communicate openly.”
Unconscious biases also set psychological traps. Anchoring bias is when you look at the future and see similar patterns in the past. “Do a deeper dive into the data and make sure history is repeating,” Boehlje says. Sunk cost bias is another bias. “It could be you need to cut your losses,” he says. Status quo bias leans toward options closely resembling the current situation.
Communicate Your Purpose
“Logically, once you have all of the right information, you should be off and running,” Jonovic says.
However, making decisions with multiple partners adds another layer of challenge.
“In my 40-plus years of sitting across the kitchen table with families, once emotions get involved, then the shouting starts,” Jonovic says. “It’s no longer a decision-making meeting; it’s a rugby scrum. Once in a while, the ball goes through the net and everyone yells, ‘Yea, we scored,’ but it’s not a deliberate win.”
“The more off-farm heirs you have when you’re making decisions, the more important it becomes to structure your communication process,” he says. “Without an environment of trust and respect, it’s very difficult, with little probability of success.”
Sometimes a faulty decision stems from insufficient information gathering and communication. “Collecting the right information and communicating the purpose of the discussion helps to reach a decision everyone can go along with,” Jonovic says.
Deb Lightner agrees. “I’ve learned to do my homework first and get all the numbers and facts together,” she says. “It’s hard when a meeting is interrupted by 50 calls and 49 texts. The window of opportunity is small. Darci, Kriss, and I put information in a concise form to help Zac make decisions.”
Even though partners have successfully worked together for years, Jonovic says they often run into problems making decisions as the business becomes more complex. “The bigger they get, the less likely it is they see how the parts fit together or even understand what they each do everyday,” he says.
Sound operational decisions have measurable results, including higher profits and productivity.
“If the farm owners haven’t changed from tax-based to operational-based accounting, there’s no way to measure success,” he says.
Although today’s falling commodity prices, rising input costs, and dynamic global drivers may require farmers to execute decisions in a more structured format, the good news is that there are more practical tools than ever before to ease the process. (See the list of online decision-making tools below.)
Business structures, operating practices, procedures, policies, and strategies change and evolve over time. Building a solid framework for making sound decisions is based on bedrock values that reflect the business owners as individuals and their personal values.
Aligning business decisions with core values remains a last bastion for a go-with-your-gut choice.
When the Lightners researched their retirement and transition plans, they had to do some soul-searching.
“As we worked with advisers, they asked us to describe our business and what was most important to us,” Deb says.
“We decided that integrity is very important,” she says. “Maintaining our integrity is a fundamental value. We use this as a guiding light when making decisions.”
Need help making your next move?
- farmbilltoolbox.farmdoc.illinois.edu: Features seven ARC-PLC Decision Steps; includes a video.
- extension.iastate.edu/agdm/decisionaids.html: Ag Decision Maker. Crop, livestock, whole farm decisions, calculators, and more.
- agecon.purdue.edu: Crop Machinery Benchmarks, investments, and cost per acre.
- landstewardshipproject.org/morefarmers/farmtransitiontools/farmtransitionstoolkit: The Farm Transitions Toolkit, Minnesota Land Stewardship Project. Get a hard copy at a cost of $10. Call 800/909-6472.
- fsa.usda.gov/mpptool: Helps with key decisions for the Margin Protection Program for Dairy Producers and Livestock Gross Margin-Dairy insurance program.
- cffm.umn.edu: FINBIN Farm Financial Database. Center for Farm Financial Management, University of Minnesota. Financial and benchmark information.
- mygeohub.org: “Corn Split N” covers risks and benefits of postplanting nitrogen application. “Useful to Usable” for producers in Illinois, Iowa, Indiana, Missouri, and Kansas.
- plantcovercrops.com: Midwest Cover Crops Council. Benefits of planting cover crops.