by George Looby, DVM
The title of this meeting might sound a bit intimidating but when the speakers broke it down it all began to come together. This workshop was held in September at the Tolland County Extension Center in Vernon, CT, co-sponsored by the UConn College of Agriculture, Health and Natural Resources, Farm Credit East and the USDA.
The leadoff speaker was Rick Hermonot, vice president and business consultant for Farm Credit East. Rick is also the owner of Econk Hill Turkey Farm in Sterling, CT where over 3,000 turkeys are raised every year on range. One of the cardinal tenets of economics has long been the point of diminishing returns and here Rick presented a classic curve to illustrate the point. The first one-third of the curve is the most productive. Early in an operation it pays to put in more time and effort. The next phase is marked by a point of diminishing return in which additional time and effort tends to be less productive. The final phase is marked by negative return. Never allow your business reach this point.
The speaker suggested that there are “five fives” to success in business. The first of which was effective focus. To achieve this, one needs to be able to work hard, a trait that almost all farmers have. Next one needs to have passion for the task at hand. These two are followed by discipline, perhaps the hardest of all to achieve. A realistic business plan is one way in which to remain focused and a good one will include the following: mission statement, objectives, realistic goals and an action plan.
In every good business plan there should be an allowance for what Rick called the “dirty five”, some components which are easily overlooked. They include depreciation, interest, repairs, taxes and insurance. They must be included as costs when building any business plan.
The dairy industry has accumulated a most comprehensive set of cost factors over many years so Rick used these to illustrate many of the points during his presentation. There are five keys to profit. The first of which is gross sales, the sum total of products sold off of the farm in a year. Next is efficiency, one measure of which might be the gross income per unit of production. Efficiency is followed by capacity. Is the operation utilizing every resource available in the most efficient possible way? A factor called industry skills is another measure that needs to be considered. In the dairy industry, there are benchmarks that have been established over the years by which a given farm can measure their operation against an industry standard.
In conclusion Rick used the numbers he worked with in the start-up phase of his turkey operation as a case study. In his case he decided he wanted a profit of $30,000 per year. By doing a step by step analysis of the many factors that needed to be considered the final figure was that the farm needed to sell 3,289 20 lb. turkeys at $3.20/lb. to cover their overhead costs. The price per pound figure was arrived at by the price a neighboring farm was asking for their turkeys.
Chris Laughton, director of Knowledge Exchange at Farm Credit East, spoke on “Benchmarking for Success.” Benchmarking can be defined as comparing your results to a reference point. That reference can be your own farm over time, peer businesses in your industry or even different kinds of businesses and investments. Benchmarks are an average for a particular situation. This being the case it should help an individual to know where he is doing better than average and at the same time know where he could do better. Benchmarks are available from several sources including Farm Credit East, University Extension and the USDA ERS.
A new member of the Extension Staff, Dr. John Bovy, discussed risk management and crop insurance. John is assistant professor and extension economist in the Department of Agricultural and Resource Economics at UConn. The 2014 Farm Bill has provisions for crop insurance. It should be noted that 80 percent of the Farm Bill is devoted to nutritional programs which includes school lunch programs and SNAP (formerly food stamps). The remaining 20 percent goes to run all of the other programs that the department oversees including crop insurance. The USDA Risk Management Agency (RMA) oversees the federal crop insurance program. The FCIC approves all policies, modifications to policies and sets rates. Traditional crop insurance reimburses farmers when the quantity produced decreases because of some natural event such as drought, floods, extremes of weather or disease. Crop famers have a variety of options available to them allowing for considerable latitude in the cost of the program.
For apple producers there are a couple of options available to help recover losses incurred from a number of natural causes. One is based on Actual Production History (APH). The other is the Supplemental Coverage Option (SCO). Each of these coverages has a number of options and choices with enough percentages and subsets to be well beyond the scope of this report.
For those in the dairy sector insuring oneself against the vagaries of the market is something akin to playing the future market. You can guess what the price of class III milk will be and what the price of feed will be in a given time period. If the milk price is low and the feed price is high you will be protected by your insurance to the degree you have chosen.
For those in the nursery business insurance protection is available with certain plants. Degrees of protection are also available for those who have pasture, rangeland and forage as well as those engaged in apiculture.
The afternoon’s second presentation centered on assessing the profitability of growing different crops or raising different livestock, titled “Look Before You Leap”. The presenter was Dr. Bovay. When a producer is contemplating embarking on a new crop or livestock venture there are several questions that must be considered before making the leap. One question is what are the expectations for the new enterprise? One must look at real numbers that relate to startup costs and anticipated revenues. Oftentimes it is difficult to find such information especially for some of the more uncommon crops.
Dr. Bovay presented a case study relating to start-up costs for a new orchard in California. The detail that went into the report is intensive. If such data were available for Connecticut producers it would be of considerable value and it is Bovay’s intent to begin the accumulation on such data for a variety of crops and livestock activities in Connecticut starting next year. Currently price information collected at shipping points appears to be more useful to growers as compared to that collected at terminal. In market lingo it is closer to farm gate prices than terminal markets.
This meeting left everyone with new information.