Management Practices of Successful Canadian Farmers Larry Martin, PhD

Partner, Agri-Food Management Excellence

Agri-Food Management Excellence , Inc

• Enabling people and organizations to aspire and achieve

• Heather Broughton and Larry Martin, supported by a set of great instructors

• Our focus is to enable people to be excellent managers

• CTEAM, CFAME, Advanced CTEAM, Risk management with futures and options, coaching futures and options, CTEAM/CFAME Alumni Programs

Background

• CTEAM and CFAME give us access to over 300 successful Canadian farmers, Futures and Options many more

• Randomly surveyed some of them in depth about what they learned from our program that helped them when they applied it.

• Working with them closely over the two years of a CTEAM program (and often beyond) also gives the opportunity to observe changes, progress and success

Objectives

• Explain what we see, and are told, as common practices of successful farm managers

• Give a little depth of explanation about a few of them

Practice 1 – Attitude and Approach • They treat their business as a business

• They don’t focus on why they can’t, rather on why they have done and will do

• Most farmers have extremely strong values around farming, family and community • One way to manifest these values is to have a

successful rural business that contributes to all of these and makes it attractive for family to come back

• That’s often why they adopt the business practices below

Practice 2: Have a Written Plan

• They have a plan, especially written, with measurement – ie goals and performance against goals

• Gives focus

• Writing it makes you decide what’s important

• Being clear on what’s important focuses your work

• Being clear on what’s important keeps you from wasting time on what’s not

• We Subscribe to Covey (Seven Habits of Highly Effective People)

Time Management / Resource Allocation

Urgent

Not Urgent

Important

I (Crises, Pressing

Problems, Deadline-driven projects)

II (Planning, Prevention,

Preparation, Values Clarification,

Relationship Building, Empowerment)

Not Important

III (Interruptions, some phone calls, some

mail, some meetings)

IV (Trivia, busywork,

junk mail, some phone calls, time wasters, “escape” activities)

Practice 2: Have a Written Plan

• They have a plan, especially written, with measurement

• Written plan gives focus

• Writing it makes you decide what’s important

• Being clear on what’s important focuses your work

• Being clear on what’s important keeps you from wasting time on what’s not

• Measuring and understanding actual performance on what’s important invariably helps improve performance – it’s an axiom of performance management

Practice 2: Have a Written Plan

• We provide a strategy and plan framework

• Largely follows Harvard’s Michael Porter

• But goes farther into implementation (Practice 3)

Strategy Defined • “The set of integrated choices that define how you

will achieve superior performance in the face of competition” – Magretta/Porter

• Strategy is organizing and focusing a firm’s internal value chain to deliver a unique value proposition to its target customers

• LM Paraphrasing Magretta

Eternal Environment Internal Environment

Value Proposition

Strategic Intents

Mission

Operating plans and Implementation:

•Actions, Accountabilities, Timelines, Resources

Required, Measures

Feedback/Management Systems

•Management, Supervision, Coaching, Incentives, Rewards

Vision Core Values

Practice 3: Implement Their Plan • They use their plan to make decisions and

manage – it’s not a tome that’s bound on six sides!

• Have a direct link between strategic intents and operations

• Use plan as basis for daily, weekly, monthly and/or quarterly meetings

Company Name

Strategic and Operating Plan &

Review

Name:

Planning

Period:

Value Proposition

Vision

Strategic Intents

1

2

3

4

5

Major Action(s) Who is

Responsible

Due Date Resource Requirement(s) Measures

Intent 1

Intent #2

Intent #3

Intent #4

Intent #5

Quarter 1

Practice 4: Understand and Use Their Financial Statements • They use their financial statements/data for

more than managing tax! – ie they understand financial management

• Use financial data to make strategic and operational decisions in their plans, to measure performance, and to assess and manage risk

• Frequently makes a huge difference in access to capital

• Can be the basis for a standardized income statement that would be a huge contribution to Canadian agriculture!

16

P&L Framework + Sales/Revenue from Farming

(-) Crop and Livestock Expenses

= Gross Margin

(-) Direct Operating Expense

= Contribution Margin

(-) Operating Overhead

= EBITDA

(-) Depreciation & amortization

= EBIT

(-) Interest expense

= EBT

(+/-) Dividends & Other income

= Net Income

Financial Ratios – Five That Are Really Important in Management

• Gross Margin % • Gross Margin/Gross Revenue • > 65% (probably 75% for most hort operations)

• Contribution Margin % • Contribution Margin/Gross revenue • > 45%

• Operating Efficiency – Operating returns per dollar of sales • EBITDA/Gross Revenue.

• Measures efficiency of the operation in generating cash

• Higher is good > 35% for most types of farm

Financial Ratios – Five That Are Really Important in Management • Current ratio • Liquidity, ie ability to meet current obligations

• Current assets/current liabilities

• ~>2.0

• Debt/EBITDA • Solvency, risk of being unable to service debt

• Debt (Bank Debt)/ EBITDA

• Outside agriculture, covenants < 3.5:1

• In Agriculture, average is ~ 5.0:1; >6.5 is risky

• FI’s will lend more than they should if you have off-balance sheet equity in land or quota

19

Bench Marks + Sales/Revenue from Farming

(-) <35% Crop and Livestock Expenses

= Gross Margin >65%

(-) <20% Direct Operating Expense

= Contribution Margin > 45%

(-) <10% Operating Overhead

= EBITDA >35%

(-) Depreciation & amortization

= EBIT

(-) Interest expense

= EBT

(-) Taxes

(+/-) Dividends & Other income

= Net Income

Three Farms

Farm 1 Farm 2 Farm 3 Benchmark

Gr Mar 79% 71% 55% > 65%

Cont Mar 51% 37 40 > 45%

Op Effic 44% 20.5% 24 > 35%

Current 7.1 1.1 2.1 > 2.0

D/EBITDA 2.2 8.1 6.8 < 3.5

Practice 5: People Are Assets, Not Just Costs • They treat their people as strategic assets, not as

costs

• Understand and practice the elements of strategic HR management • Recruiting, Retention, Compensation

• Find creative ways to keep (part of risk management) and improve good people • Training

• Performance bonuses

• Equity or

• Phantom shares

Practice 6: Disciplined Marketing • They understand and benefit from good marketing

management – both differentiated and “commodity” products

• “Value proposition” is increasingly important - • Starts with listening to customers (“Farmers Need

Cities”!), deciding: • What “needs” you will provide – ie what products and

services you will supply • To what set of customers in the supply chain • At what relative price

• How, for whom and for what in the value chain can we create the most value and profit from it?

• How can we turn a risk into an opportunity? – eg. Off-grade fruit

Practice 6: Disciplined Marketing • Those in commodities with futures and options

develop disciplined pricing and risk management plans

• Clear, written objectives - eg: • Lock in profit target – cost + margin

• Highest possible price

• Protect against disaster – defined specifically

• Understand pricing instruments – cash, forward, futures, options

• Understand basic fundamental and technical tools

Practice 6: Disciplined Marketing • I see different product mixes - getting away from

“commodities”, providing more services – even for commodities

• Alberta grain producer and delivery

• CSA producers

• Hort producer with premium, not a discount for large and consistent deliveries

• Livestock with ABF or organic, sometimes going downstream

Practice 6: Disciplined Marketing • Commodity producers using discipline;

• Learning to read charts

• Developing clear objectives, with disciplined trading rules

• Using combination of instruments to their advantage

• Canola example, next page

• When was the best time to sell (basis was most favorable just before and during harvest this year?

• Why didn’t they?

• What could they have done with the information at hand?

March 2017 Canola

Practice 7

• They deal with succession before they have to • Succession has three components: • Management • Ownership • Financing the transfer

• More family anguish is created, more family farms are lost, and more needless tax is paid because this is not dealt with than any other cause

• Farms that address the issues head on and have each of the three elements in their plan avoid needless distraction, cost and loss

• Also, have a leg up on preparing the next generation for both ownership and management

Final Comments

• Didn’t intend for the number of habits to be 7, like Covey’s

• There are probably more, but these are the ones we hear about and see

• Like Covey’s they follow the fundamental challenge of senior management to simultaneously be searching for breakthroughs while engaging in continuous improvement

• They aren’t sexy or magic. They are a result of focus and discipline

Larry Martin

larry@agrifoodtraining.com

519 841 1698

www.agrifoodtraining.com