• TABLE OF CONTENTS
HIDE
 Front Cover
 Foreword
 Preface
 Table of Contents
 Part I. Farm managers: Who are...
 Part II. Strategic management:...
 Part III. Tools: Techniques farm...
 Part IV. Resources: Land, labor,...
 Part V. The environment: Maintaining...
 Part VI. For more information:...
 Part VII. Management services:...
 Part VIII. The future: Challenges...






Group Title: Farm management: how to achive your farm business goals
Title: Farm management
CITATION PAGE IMAGE ZOOMABLE PAGE TEXT
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00053787/00001
 Material Information
Title: Farm management how to achieve your farm business goals
Series Title: Yearbook of agriculture
Physical Description: ix, 326 p. : ill. ; 23 cm.
Language: English
Creator: United States -- Dept. of Agriculture
Publisher: Dept. of Agriculture :
For sale by the Supt. of Docs., U.S. G.P.O.
Place of Publication: Washington D.C
Publication Date: 1989
 Subjects
Subject: Farm management -- United States   ( lcsh )
Farm managers -- United States   ( lcsh )
Genre: federal government publication   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Includes bibliographical references (p. 249-250).
General Note: Cover title.
General Note: Shipping list no.: 89-832-P.
 Record Information
Bibliographic ID: UF00053787
Volume ID: VID00001
Source Institution: Marston Science Library, George A. Smathers Libraries, University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: aleph - 001526773
oclc - 20848786
notis - AHE0078
lccn - 89600748

Table of Contents
    Front Cover
        Front Cover
    Foreword
        Page i
    Preface
        Page ii
        Page iii
        Page iv
    Table of Contents
        Page v
        Page vi
        Page vii
        Page viii
        Page ix
    Part I. Farm managers: Who are they and what do they do?
        Page 1
        What do farm managers do?
            Page 2
            Page 3
            Page 4
            Page 5
            Page 6
        What makes a successful farm manager?
            Page 7
            Page 8
            Page 9
            Page 10
            Page 11
        Characteristics of U.S. farm managers
            Page 12
            Page 13
            Page 14
    Part II. Strategic management: How farmers make decisions about the big issues
        Page 15
        Using strategic planning to prepare for the future
            Page 16
            Page 17
            Page 18
            Page 19
            Page 20
            Page 21
            Page 22
        Setting goals to guide management decisions
            Page 23
            Page 24
            Page 25
            Page 26
            Page 27
        Managing family and business conflicts
            Page 28
            Page 29
            Page 30
            Page 31
            Page 32
            Page 33
            Page 34
        How farm managers make risky decisions
            Page 35
            Page 36
            Page 37
            Page 38
            Page 39
        Entering farming in the 1990's
            Page 40
            Page 41
            Page 42
            Page 43
            Page 44
        Planning for farm expansion
            Page 45
            Page 46
            Page 47
            Page 48
            Page 49
            Page 50
            Page 51
        Choosing enterprises for your farm
            Page 52
            Page 53
            Page 54
            Page 55
            Page 56
        The ABC's of alternative agriculture
            Page 57
            Page 58
            Page 59
            Page 60
            Page 61
        Determining your competitive advantage
            Page 62
            Page 63
            Page 64
            Page 65
            Page 66
        Integrating production and marketing management on a beef ranch
            Page 67
            Page 68
            Page 69
            Page 70
            Page 71
            Page 72
            Page 73
        Choosing a business structure for your farm
            Page 74
            Page 75
            Page 76
            Page 77
            Page 78
        The Flickerville mountain farm and groundhog ranch: An apprenticeship
            Page 79
            Page 80
            Page 81
            Page 82
            Page 83
        Operating a pick-your-own strawberry and pumpkin farm
            Page 84
            Page 85
            Page 86
            Page 87
            Page 88
        Aquaculture: The fastest growing farm industry
            Page 89
            Page 90
            Page 91
            Page 92
            Page 93
        The Pendletons of Kansas: Doing better with asparagus and tomatoes
            Page 94
            Page 95
            Page 96
            Page 97
            Page 98
        Profile of a successful manager: From beef, eggs, and grain to a dairy
            Page 99
            Page 100
    Part III. Tools: Techniques farm managers use to run farm businesses
        Page 101
        Farm records can improve profitability
            Page 102
            Page 103
            Page 104
            Page 105
            Page 106
            Page 107
            Page 108
            Page 109
            Page 110
            Page 111
            Page 112
        Evaluating computerized farm accounting systems
            Page 113
            Page 114
            Page 115
            Page 116
            Page 117
            Page 118
        How to use a farm accounting system to help analyze your finances
            Page 119
            Page 120
            Page 121
            Page 122
        Comparative analysis
            Page 123
            Page 124
            Page 125
            Page 126
            Page 127
        Enterprise budgeting
            Page 128
            Page 129
            Page 130
            Page 131
            Page 132
            Page 133
        Partial budgeting: Looking at the small picture
            Page 134
            Page 135
            Page 136
            Page 137
        The whole farm plan: Looking at the big pcture
            Page 138
            Page 139
            Page 140
            Page 141
            Page 142
        Using computers to improve farm management decisions
            Page 143
            Page 144
            Page 145
            Page 146
        Computer assisted management: The case of Jim and Kathy Moseley
            Page 147
            Page 148
            Page 149
            Page 150
        Strategies for risk management
            Page 151
            Page 152
            Page 153
            Page 154
            Page 155
        Tax management: Taking taxes into account
            Page 156
            Page 157
            Page 158
            Page 159
        Expert systems: Potential management aids
            Page 160
            Page 161
            Page 162
            Page 163
            Page 164
        From boom to bust and back again: A farm family rebuilds
            Page 165
            Page 166
    Part IV. Resources: Land, labor, capital, and management
        Page 167
        Land purchase and lease decisions - Taking the long view
            Page 168
            Page 169
            Page 170
            Page 171
            Page 172
        Managing water: Economics of complex systems
            Page 173
            Page 174
            Page 175
            Page 176
        How to obtain and use agricultural credit in the 1990's
            Page 177
            Page 178
            Page 179
            Page 180
            Page 181
            Page 182
            Page 183
            Page 184
            Page 185
        Managing human resources on the farm
            Page 186
            Page 187
            Page 188
            Page 189
            Page 190
        Machinery management
            Page 191
            Page 192
            Page 193
            Page 194
            Page 195
        Investing in dairy livestock facilities
            Page 196
            Page 197
            Page 198
            Page 199
            Page 200
        Managing the manager: The professional farm manager
            Page 201
            Page 202
            Page 203
            Page 204
        Managing assets on small or limited-resource farms
            Page 205
            Page 206
            Page 207
        Making it work
            Page 208
    Part V. The environment: Maintaining environmental quality while succeeding in business
        Page 209
        Farmers and the environment
            Page 210
            Page 211
            Page 212
        Incorporating conservation and wildlife practices in a farm management plan
            Page 213
            Page 214
            Page 215
        Low-input sustainable agriculture
            Page 216
            Page 217
            Page 218
            Page 219
        Farms that succeed using LISA
            Page 220
            Page 221
            Page 222
            Page 223
            Page 224
            Page 225
        Integrated pest management systems: Protecting profits and the environment
            Page 226
            Page 227
            Page 228
            Page 229
            Page 230
    Part VI. For more information: How and where to get information you need
        Page 231
        Where and how do farm managers get useful information?
            Page 232
            Page 233
            Page 234
            Page 235
        Filtering information for decisionmaking
            Page 236
            Page 237
            Page 238
            Page 239
            Page 240
        Learning financial management by interactive videodisc
            Page 241
            Page 242
            Page 243
            Page 244
        Where to go for information
            Page 245
            Page 246
            Page 247
            Page 248
            Page 249
            Page 250
    Part VII. Management services: Resources you can tap
        Page 251
        Farm lenders offer management assistance
            Page 252
            Page 253
            Page 254
            Page 255
            Page 256
        The professional farm manager
            Page 257
            Page 258
            Page 259
        How extension programs help farm managers
            Page 260
            Page 261
            Page 262
            Page 263
        A day in the life of a district farm management agent
            Page 264
            Page 265
            Page 266
            Page 267
        Farm business management associations provide decision-making help
            Page 268
            Page 269
            Page 270
            Page 271
            Page 272
        Management needs ao small-scale agriculture
            Page 273
            Page 274
            Page 275
            Page 276
        Integrated resource management for Colorado beef and sheep producers
            Page 277
            Page 278
            Page 279
            Page 280
            Page 281
        State government works with farmers to "grow up" Florida agriculture
            Page 282
            Page 283
            Page 284
    Part VIII. The future: Challenges for farm managers
        Page 285
        Challenges facing farm managers
            Page 286
            Page 287
            Page 288
        The changing financial environment
            Page 289
            Page 290
            Page 291
            Page 292
            Page 293
            Page 294
            Page 295
        Staying competitive in the global market
            Page 296
            Page 297
            Page 298
            Page 299
            Page 300
        Farm managers evaluate biotechnology
            Page 301
            Page 302
            Page 303
            Page 304
        Rural development: A farm manager's perspective
            Page 305
            Page 306
            Page 307
        Farming in the shadow of the city
            Page 308
            Page 309
            Page 310
            Page 311
            Page 312
            Page 313
        Tomorrow's farm managers: Who will they be and how will they learn
            Page 314
            Page 315
            Page 316
            Page 317
            Page 318
        Index
            Page 319
            Page 320
            Page 321
            Page 322
            Page 323
            Page 324
            Page 325
            Page 326
Full Text



Wi.\
J





- ~p


'\ ">!







Fore] wordL] .


Clayton Yeutter, Secretary ofAgriculture

Farming has never been easy. But sophisticated farm management
skills are imperative today.
I've been a farmer all my life, and I've learned from personal
experience that seemingly small farm management steps can make a big differ-
ence in profits. That in turn affects a family's quality of life, and maybe even
economic survival. Actions like keeping better records, doing a cash-flow
analysis, taking an Extension course, attending a seminar, and running com-
puter analyses of alternative enterprises--all can contribute to a farm's success.
Management does make a difference. It is one of the reasons Ameri-
can agriculture is so competitive internationally. Only talented managers can
succeed in today's tough business environment, where our farmers must face
not only the competition of their neighbors, but often that of the government
treasuries ofothernations. Skillful farm management is vital if we are to prosper
in such a demanding, and often even hostile, environment. A yearbook on farm
management is long overdue.
Farmers work with four principal resources: Land, labor, capital, and
management. This book is designed to enhance one of the essential resources-
the skills of those who manage American farms. In this book the authors offer
American farmers the most up-to-date information on farm management that
is available.
Farmers don'tjust "grow things." They run businesses. They must be
concerned about the bottom line. But farming is notjust business; farming adds
up to more than profits. Farm management means the sum total of activities-
planning, implementation, and control-that are necessary to accomplish the
farm family's goals; whatever they may be.
I believe that American farmers will always be equal to the challenges
facing them, and this book is dedicated to helping them survive and succeed.


Foreword








Preface


Deborah Takiff Smith, Yearbook Editor

This yearbook aims to help farmers and farm managers make
better business decisions.
FARM MANAGEMENT: How To Achieve Your Farm Business
Goals offers practical information from university teachers and Extension
System experts, as well as from farmers and other business people.
To be successful, operators of America's 2.1 million farms need
to employ the very latest and best business management principles and
techniques. Business management skills are crucial. That is true whether
the farmer is controlling over $1 million in business assets and has more
than $250,000 in annual sales, or whether he or she sells less than $40,000
in products and must rely on nonfarm earnings to keep the family on the
land.
The book was written primarily for:
Owner-operators, renters, and professional farm managers,
Managers with sophisticated experience, beginners, and those
still planning their entry into farming
The ideas in it can be used anywhere in the country, and they ap-
ply to any farm enterprise.
For other readers, this yearbook may help provide a better under-
standing of the challenges that farming entrepreneurs and managers face.
Is farming a business or is it a way of life? Usually it is both. For
most farm families, profit is a farm business goal, but farm managers
each have their own additional goals-which may include maintaining a
lifestyle, passing the farm on to family members, or protecting the land
under their care.
The focus throughout the book is on individual farmers making
decisions. Case studies reveal real farm managers solving real problems.
As farming changes dramatically, so does farm management. In
this yearbook, each chapter contains state-of-the-art information on how
today's farm managers make decisions on the use of their resources-
land, labor, capital, and management skill.
/


Farm Management






Part I describes what farm managers do, who they are, and what
makes them successful.
Part II examines strategic farm management-how the big deci-
sions are made about such issues as setting goals, evaluating risk, choos-
ing enterprises, starting or expanding the farm, and incorporating the
business. It looks at five farm families who have made major strategic
changes.
Part III turns to tactical management-the specific business tools
that farm managers use every day in controlling the purse strings of their
operations. These tools include computer programs for keeping records
and evaluating alternative actions; tax management approaches; account-
ing methods; comparative analysis; and whole-farm budgets, enterprise
budgets, and comparative budgets.
In Part IV, experts recommend how to use the key resources of
farming-land, water, credit, labor, machinery, livestock facilities, and
the managers' time. One chapter focuses specifically on the management
of small or limited-resource farms.
Part V considers the relationship of farming to the physical envi-
ronment. It takes a special look at low-input sustainable agriculture (LISA).
Where do farmers get information to help them make decisions,
and how do they select what they can really use from the barrage of mate-
rial available? Part VI offers some answers. It points the way to informa-
tion sources in print, broadcast outlets, computer programs, on-line data
bases, and other media.
Ongoing education and access to state-of-the-art expertise are es-
sential to successful farmers today. Part VII describes public and private
institutions at community, State, and national levels that offer learning
opportunities.
Part VIII looks toward the future. It suggests reasons that today's
farmers need to farm smart, or manage well, in order to survive in the
changing world. Increased competition, environmental concerns, the need
to diversify, new production technologies, low-input farming approaches-
all call for heightened management skills as farmers constantly respond to
change.
Marketing is an important aspect of management, and the 1988
Yearbook, Marketing U.S. Agriculture, is a suggested companion piece to
this volume.
Many people offered their resources of talent and energy to make
this book. Buel F. Lanpher, National Program Leader for Farm Manage-
ment in USDA's Extension Service, was co-chair with me of the 1989
Yearbook Committee. He located key experts to serve on the committee


Preface






and to write many of the chapters. Other committee members who helped
select the topics and find the authors include:
William H. Briscoe, Farmers Home Administration
Howard W. (Bud) Kerr, Cooperative State Research Service
Earl I. Fuller, Minnesota Extension Service
A. Gene Nelson, Oregon State University
Jane Ross, Cooperative State Research Service
Daniel B. Smith, Clemson University
W. Fred Woods, Extension Service
In addition, Ben Blankenship (Economics Management Staff),
Judith Bowers (Extension Service), Neill Schaller (Cooperative State Re-
search Service), Bob Norton (Agricultural Research Service), Bill Hanson
(Federal Crop Insurance Service), Ray Waggoner (Agricultural Stabiliza-
tion and Conservation Service), and Stan Prochaska (Office of Informa-
tion) helped plan the book.
The production team members take the authors' first drafts and
turn them into a book. They include:
Art Director: Vincent Hughes,
Design Division, Office of Information
Designer: Richard Barnes,
formerly Design Division, Office of Information
Copy Editor: Kotler Editorial Associates,
on contract to Special Programs Division, Office of Information
Composition Coordinator: Joseph Stanton,
Electronic Publishing Branch, Printing Division,
Office of Information
Typesetter: Carolyn Evans,
Electronic Publishing Branch, Printing Division,
Office of Information
Photo Coordinator: Larry Rana,
Photography Division, Office of Information
Printers: Warren Bell and Jim Cecil,
Printing Division, Office of Information
Layout: The Publishing Group, Inc.,
on contract to Design Division, Office of Information


Mention of commercial products and organizations in this publication is solely to provide specific
information. It does not constitute endorsement by the U.S. Department ofAgriculture over other products
and organizations not mentioned.


Farm Management















Foreword
Clayton Yeutter, Secretary ofAgriculture i

Preface ii
Deborah Takiff Smith, Yearbook Editor

Part I. Farm Managers:
Who Are They and What Do They Do?

1. What Do Farm Managers Do? 2
Robert A. Milligan and Bernard F. Stanton

2. What Makes a Successful Farm Manager? 7
Earl I. Fuller

3. Characteristics of U.S. Farm Managers 12
Robert A. Leuning and Bruce L. Jones

Part II. Strategic Management:
How Farmers Make Decisions about the Big Issues

1. Using Strategic Planning To Prepare for the Future 16
Gerald B. White

2. Setting Goals To Guide Management Decisions 23
Paul H. Gessaman

3. Managing Family and Business Conflicts 28
Jerry W. Robinson, Jr.

4. How Farm Managers Make Risky Decisions 35
A. Gene Nelson

5. Entering Farming in the 1990's 40
Kenneth H. Thomas and Michael Boehlje

6. Planning for Farm Expansion 45
Gayle S. Willett

7. Choosing Enterprises for Your Farm 52
Richard W. Carkner


Contents


ContentsF






8. The ABC's of Alternative Agriculture 57
Richard A. Levins and Daniel J. Donnelly

9. Determining Your Competitive Advantage 62
John E. Ikerd

10. Integrating Production and Marketing Management on a 67
Beef Ranch
Paul H. Gutierrez and Norman L. Dalsted

11. Choosing a Business Structure for Your Farm 74
Ralph E. Hepp

12. The Flickerville Mountain Farm and Groundhog Ranch: 79
An Apprenticeship
Ward Sinclair

13. Operating a Pick-Your-Own Strawberry and Pumpkin Farm 84
Edward A. Schaefer

14. Aquaculture: The Fastest Growing Farm Industry 89
Jerry R. Crews and John W. Jensen

15. The Pendletons of Kansas: Doing Better with Asparagus 94
and Tomatoes
Carole Jordan

16. Profile of a Successful Manager: From Beef, Eggs, and 99
Grain to a Dairy
Kevin W. Ferguson

Part III. Tools:
Techniques Farm Managers Use To Run Farm Businesses

1. Farm Records Can Improve Profitability 102
Robert A. Luening

2. Evaluating Computerized Farm Accounting Systems 113
Ashley C. Lovell, Lawrence A. Lippke, and Jeffrey W. Johnson

3. How to Use a Farm Accounting System to Help Analyze 119
Your Finances
Thomas L. Frey and James D. Libbin

4. Comparative Analysis 123
Larry N. Langemeier and Frederick D. DeLano

5. Enterprise Budgeting 128
Karen Klonsky

6. Partial Budgeting: Looking at the Small Picture 134
Bart Eleveld


Farm Management






7. The Whole Farm Plan: Looking at the Big Picture 138
Estel H. Hudson

8. Using Computers To Improve Farm Management Decisions 143
Richard O. Hawkins

9. Computer Assisted Management: The Case of Jim and 147
Kathy Moseley.
D. Howard Doster

10. Strategies for Risk Management 151
Gerald Schwab, G. A. Barnaby, Jr., andJ. Roy Black

11. Tax Management: Taking Taxes into Account 156
Philip E. Harris and W. A. Tinsley

12. Expert Systems: Potential Management Aids 160
James M. McGrann

13. From Boom to Bust and Back Again: A Farm Family Rebuilds 165
Extension Agent

Part IV. Resources:
Land, Labor, Capital, and Management

1. Land Purchase and Lease Decisions-Taking the Long View 168
John T. Scott, Jr.

2. Managing Water: Economics of Complex Systems 173
James C. Wade

3. How To Obtain and Use Agricultural Credit in the 1990's 177
David M. Kohl and Alan Tubbs

4. Managing Human Resources on the Farm 186
Bernard L. Erven and Kenneth H. Thomas

5. Machinery Management 191
David A. Lins

6. Investing in Dairy Livestock Facilities 196
Wayne A. Knoblauch

7. Managing the Manager: The Professional Farm Manager 201
Eldon Greenwood and J. R. Hutchinson

8. Managing Assets on Small or Limited-Resource Farms 205
John W. Wysong and Thomas S. Handwerker

9. Making It Work 208
Jim Looft


Contents







Part V. The Environment:
Maintaining Environmental Quality While Succeeding in Business

1. Farmers and the Environment 210
W. Fred Woods

2. Incorporating Conservation and Wildlife Practices in a 213
Farm Management Plan
Bill Holstine

3. Low-Input Sustainable Agriculture 216
Neill Schaller

4. Farms that Succeed Using LISA 220
J. Patrick Madden

5. Integrated Pest Management Systems: Protecting Profits 226
and the Environment
Raymond E. Frisbie and John M. Luna

Part VI. For More Information:
How and Where To Get Information You Need

1. Where and How Do Farm Managers Get Useful Information? 232
Tom Brown

2. Filtering Information for Decisionmaking 236
Clark D. Garland

3. Learning Financial Management by Interactive Videodisc 241
Larry Bitney and Gail Blankenau

4. Where To Go for Information 245
Bill Braden

Part VII. Management Services:
Resources You Can Tap

1. Farm Lenders Offer Management Assistance 252
William H. Briscoe, Leslie S. Miller, and Jeffrey D. Oates

2. The Professional Farm Manager 257
The American Society of Farm Managers and Rural Appraisers

3. How Extension Education Programs Help Farm Managers 260
Daniel B. Smith and Charles L. Moore, Sr.

4. A Day in the Life of a District Farm Management Agent 264
W. Conard Search


Farm Management






5. Farm Business Management Associations Provide 268
Decisionmaking Help
George J. Young and Buel F. Lanpher

6. Management Needs of Small-Scale Agriculture 273
Howard W. (Bud) Kerr, Jr.

7. Integrated Resource Management for Colorado Beef and 277
Sheep Producers
Norman L. Dalsted and Paul H. Gutierrez

8. State Government Works with Farmers To "Grow Up" 282
Florida Agriculture
Clifton Savoy

Part VIII. The Future:
Challenges for Farm Managers

1. Challenges Facing Farm Managers 286
John Holt

2. The Changing Financial Environment 289
Danny A. Klinefelter

3. Staying Competitive in the Global Market 296
C. Parr Rosson, III

4. Farm Managers Evaluate Biotechnology 301
James B. Kliebenstein

5. Rural Development: A Farm Manager's Perspective 305
Ronald L. Plain

6. Farming in the Shadow of the City 308
Kent Fleming

7. Tomorrow's Farm Managers: Who Will They Be and How 314
Will They Learn?
Robert H. Hornbaker and Michael A. Hudson

Index 319


Contents




- i1iIIII l,1111111 -
iiiII11i li-ii- ~
-----------------

-- -- -- --












What Do Farm

Managers Do?


Whether you run a part-time crop
farm with 150 acres of corn and soy-
beans or a 2,000-acre spread with a
large cattle feeding operation grossing
more than $1 million each year, your
management determines how effectively
your land, labor, and capital resources
are used. Two farms, side by side with
the same physical resources, markets,
labor availability, and equity situation,
can generate very different profits and
losses at the end of the same year. The
difference in large measure can be at-
tributed to management.
In many farm businesses, the owner-
operator is the manager as well as one
of the principal laborers. These two
major resources, management and la-
bor, are tied together in one person.
While the labor activities are always
more imminent, owner-operators must
recognize and give priority to manage-
ment time. Statements such as "I don't
have time to analyze my books" or "All
markets have about the same prices"
indicate that management is not getting
the attention it deserves. Management
time is of primary importance to the
success of any farm.


What Managers Do
When the cows get out and the fence
is down, there is not much question
about what needs to be done: Find the
cows, get help if needed, and fix the
fence.
If you are the manager and the prin-
cipal worker on this farm where the
cows got out, some mixture of man-
agement and labor is required to get
the job done. Yet no time was wasted
in deciding which was which. Priority
was established to get the job done in a
hurry and resources were mobilized to
do it.
It is not hard to recognize that mak-
ing decisions is part of management.
Getting the cows back into the pasture
and fixing the fence is mostly labor.
Deciding how to fix the fence and what
to use, mobilizing the labor, and deter-
mining why the cows got the fence
down to begin with are all management.
Recognizing that something may have
been amiss, such as not checking the
fence recently or not having enough
feed for the cows in the pasture, is part
of management as well.


Robert A. Milligan and Bernard F. Stanton, Professors of Agricultural
Economics, Cornell University, Ithaca, NY


Farm Management






Here are some of the things farm
managers do:
Set goals and objectives
Recognize and identify problems
Respond and act when problems
occur
Seek, compile, and utilize relevant
information
Consider and analyze alternative
courses of action
Make specific decisions
Carry out decisions or take action
Accept responsibility for these de-
cisions
Evaluate the results of these deci-
sions
Develop training programs for fam-
ily members and employees
Direct and evaluate family mem-
bers and employees
Make buy and sell decisions
Control financial operations
Organize the use of resources
Establish the timing of operations
Monitor operations and check up
on everything
While there is overlap in this list, it
could easily be expanded. The list does
indicate, however, that there are a lot
of things that managers do. That is why
good full-time managers are crucial to
most sizable businesses and why time
must be set aside for management in
any business--even if the principal la-
borer is also the manager.

Management Functions
Textbooks on farm and general busi-
ness management discuss management
functions early and often. Different
terms may be used, but the concepts
remain the same. At the core of these
concepts is a set of goals and objec-
tives for the business, developed and
understood with clarity by the owner,
by management, and by labor. Expec-
tations about levels of annual earnings


and production, maintenance of farm
buildings and grounds, tradeoffs be-
tween capital appreciation and current
earnings, long-term growth, and
achievements must be established.
While these goals and objectives are not
always formalized in writing, they need
to be thought out and discussed.
The figure suggests there are five
basic management functions or activi-
ties used to achieve the goals and ob-
jectives of a business.
Planning. While all five of the basic
functions are important, planning is cru-
cial because a good plan involves all
the other functions. Planning involves:
Setting daily priorities and sched-
ules: What should be included in to-
day's "To Do" list? Who should com-
plete each priority activity?
Recognizing problem areas and
looking for alternative solutions: Why
did milk production drop last month?
Did we have the protein level right in
the feed? Was there a change in the
quality of the forage we fed? Should I
get a consultant to look at my ration
balancing program?
Making a financial plan and cash-
flow statement for the year, knowing
when and how much credit must be ob-
tained and where the cash will come
from to meet the regular obligations.
Looking at alternative cropping
plans for this year; examining Govern-
ment programs to see whether a spe-
cific program, such as USDA's Con-
servation Reserve Program, is useful to
the operation; working with USDA's
Agricultural Stabilization and Conser-
vation Service to know program yields
and the current alternatives before sign-
ing up for programs or deciding to stay
out.
Establishing the overall enterprises
for the business: Which fields will be
planted in row crops this year? What


Part I / Who Are Farm Managers and What Do They Do?







ar"nGIoa. and I [jtv


cropping sequence will be used in the
fields with the most erosive soils?
Should part of the crop sales be con-
tracted? Should the wheat be sold or
stored after harvest?
Developing the business: How fast
should the business grow? Is new staff
needed? What professional development
is needed for each manager?
Planning cannot be done just once a
year; it is an ongoing process. Plans get
revised when established checks or
measures determine that goals are not
being attained. While some planning
can be done while driving to town in


the pickup, most planning deserves un-
divided attention without interruptions.
A well spent hour with a banker, with
your computer, or in discussion with a
trusted neighbor or your partner may
save a lot of money, time, and energy
later.
Organizing. Organizing is establish-
ing an internal structure of the roles and
activities required to meet the farm's
goals. The manager must decide the
positions to be filled and the duties, re-
sponsibilities, and authority attached to
each. Organizing also includes the co-
ordination of efforts among people.


Farm Management






Organizing includes:
Deciding who reports to whom; this
is often referred to as the chain of com-
mand.
Determining the functions in each
position (job design), including the de-
gree of authority.
Establishing the work routines and
standard operating procedures for each
production enterprise.
Staffing. Staffing is as crucial a man-
agement function to a small or part-time
business as it is to a much larger one.
Often, the need to figure out how to get
all the jobs done on time is even more
critical because there is so little flexi-
bility in the labor supply. No business
should try to operate without the possi-
bility of hiring assistance when needed.
Assistance can range from hiring a teen-
ager after school to help with a few
livestock operations to contracting with
an accountant to prepare tax records.
Staffing activities include:
Recruiting and hiring workers.
Whether a business needs one full-time
worker, two or three part-time helpers
on a regular basis, or hourly help for
seasonal work, maintaining a compe-
tent labor force is essential. Labor man-
agement starts with obtaining qualified
workers who understand what is ex-
pected of them. Written job descriptions
may not be essential when there is only
one employee other than the manager,
but they can do no harm; often such
descriptions ensure that the manager has
thought through what is expected.
Terms of compensation and benefits
must be established, another reason for
having something in writing.
Training and evaluating workers.
Managing a business means that some-
one takes responsibility for assigning
tasks and making sure that workers
understand how to do their jobs and


what is expected of them. It helps to
have some incentives for high levels of
achievement. Telling people when they
did something well may be even more
important than telling them when they
did something wrong. Both are neces-
sary. This is even more important when
all the workers are family members.
Directing. Directing is closely related
to staffing. The smaller the business,
the more the two are interlocked. Dele-
gation of authority is often one of the
most difficult things for the manager of
a small business to accomplish. All the
workers need to know their responsi-
bilities and have a sense of when they
can make decisions and when the boss
must be involved. If a milking cow is
down, each employee should know
whether or not he or she can call the
vet. The larger the number of employ-
ees, the more crucial the lines of au-
thority.
Motivation is part of directing.
Knowing what is going on and listen-
ing to employee concerns help build
communication and confidence. Creat-
ing a team spirit where every worker
feels some responsibility for the suc-
cess or failure of the operation is desir-
able. Openness and understanding by a
manager are respected in close work-
ing relationships, and thus common on
farms.
Controlling. Controlling is another
key function. Control is the part of busi-
ness management that determines that
new methods are needed to turn out
positive results when an investment de-
cision is proven to be less profitable
than planned. Control requires keeping
track of expenses and income. It forces
a manager to monitor what is happen-
ing every day; it is one of the good
reasons to make the rounds of the fields
in your pickup on a regular basis, to


Part I / Who Are Farm Managers and What Do They Do?






look in on operations where you are
not working.
Some of the important activities that
are a part of controlling include:
Monitoring the records and ac-
counts of the operations. These records
can always be kept by someone besides
the manager, but the work must be done
on a regular basis; and it is the man-
ager who has to analyze these records
to know what is going on.
Comparing rates of production and
levels of performance or productivity
against established goals or generally
accepted standards. Control ensures that
these comparisons are made in a sys-
tematic manner and discussed with the
people directly involved; problems in
production arising from natural causes
need to be recognized and allowed for
in good management.
Monitoring production processes
and making changes as necessary. Ad-
justing when to plant, when to spray,
when to pick, and when to start and
stop harvest are all results of control.
Keeping track of the work routines and
making sure that plans are accomplished
(or revised) will make a difference.


Making Management Work
Organizing and operating a farm busi-
ness requires a manager to make and
carry out a lot of decisions. Some deci-
sions take time and study; others can-
not wait until tomorrow. Part of the sat-
isfaction of operating a farm business
is seeing a major change in enterprises
work better than expected, solving a
livestock nutrition problem that was fi-
nally recognized, or knowing that you
got started planting corn when field
conditions were best. Good manage-
ment allows the other farm resources to
be used effectively. Understanding the
functions of management is one step in
becoming a better manager.


Farm Management











What Makes a

Successful Farm

Manager?


Unless you can judge success for
yourself, success will be fickle and elu-
sive. Real success depends on setting
and achieving our goals. If we reach
them, we can say we've succeeded, and
we may set higher ones. When we don't
reach some of our goals, we usually
change them.
Effective farm managers don't just
"go with the flow." They set goals.
That's how they make a difference.
That's how they get things done. Sim-
ply reacting to change won't do.
Our values, beliefs, upbringing, eth-
ics, morality, and experience influence
how we set our goals. So do our family
and friends. Others often try to give us
goals to strive for. For many, wealth is
a way of "keeping score" in the suc-
cess game.
But another person's view of success
is always suspect. There are many
gauges of success in life besides the
financial measures so frequently asso-
ciated with being a successful business
manager.
Still the views of others can help us
look objectively at our own accomplish-
ments. Objectivity is important in es-


tablishing goals and setting priorities
among sometimes conflicting goals. Ob-
jectivity can also help you recognize
real success when it happens.
One must pursue success in life or
business in a dynamic and always
changing social, economic, and politi-
cal environment. In fact without change,
there would be no need for goal setting
or good management and no call for
problem definition or problem solving.
The stresses of conflict in human rela-
tionships and in family or social respon-
sibilities would not occur.

Five Motivating Objectives
People have broad objectives that
usually include earning a good income;
achieving security, including personal
health and safety; personal growth and
increased understanding; acceptance by
others; and recognition as an individ-
ual. The first three-income, security,
and growth-often have some economic
value. The others may not. But they are
still important.
We also have goals, by which I mean
something relatively specific and hav-
ing a time schedule for attainment.


Earl I. Fuller, Professor and Extension Economist-Farm Management,
University of Minnesota, St. Paul, MN

Part I / Who Are Farm Managers and What Do They Do?






Goals are are stepping stones to broader
objectives, and most goals contribute
to more than one objective. However,
setting goals requires making tradeoffs.
For example, there is sometimes a trade-
off between increasing income and
maintaining financial security, or be-
tween increasing income and meeting
family responsibilities. Individuals
weigh the five objectives differently. If
they did not, most of the conflicts be-
tween members of a farm management
team or within a nuclear or extended
farm family would cease to exist. Re-
solving these conflicts and the emo-
tional stress they cause takes time, ef-
fort, and skill.

Acceptance and Recognition
We care what others think. We all
want acceptance from people in the
groups that we belong to-or aspire to
belong to. We behave accordingly. We
also seek and need recognition. To be
recognized as a successful person by
one's peers and colleagues is a major
motivating force not only in the man-
agement team but also in the work team.
No one wants to be chastised or
shunned. Even those who say they don't
care what other people think sometimes
behave as if they do. We should recog-
nize how our needs for acceptance and
recognition influence the way we think
and act.
If we are tossed about by the judg-
ments of others, we cannot be effective
managers. But if we are unaware of how
others view us and our behavior, we
cannot provide the necessary leadership
to guide an organization or to attain the
goals we have set for the organization
or ourselves. If we set unrealistic
goals-in view of the motivations and
capabilities of those we work with-
we may doom ourselves to failure. Goal
setting requires realism. We need to be


able to express our goals and "sell"
them to others. The success of the en-
terprise and of ourselves as managers
depends on that ability.

Components of Success
A wide variety of management styles
and attitudes can lead to management
success. But there are some attributes
that many effective managers share. It
helps to have a positive, creative atti-
tude that turns problems into opportu-
nities. And it is important to set aside
time to think and to manage. Being will-
ing and able to delegate responsibility
is a valuable trait. Other important ele-
ments include the ability to set specific,
written goals, to make decisions based
on those goals, and to modify decisions
and goals as conditions change. It is
also helpful to have a talent for, and
skills in, communicating effectively
with family members, colleagues, em-
ployees, and those in the business com-
munity.
There are strategies that can help a
farm manager be more successful. One
is to develop and regularly review a set
of well specified goals. Written goals
are easier to review and clarify when
discussing them with family members,
others in the management team, and
lenders.
It is also important to have a clear
understanding of risk and how to man-
age it. How much risk exposure is ap-
propriate given your set of business and
personal goals?
Keep an eye on what goes on be-
yond the farm fence. Farm businesses
are part of a complex and dynamic
world economy, and it is important to
monitor national and international trends
in order to avoid problems and identify
opportunities.
Stress is a normal part of life-on
the farm or off-but stress must be man-


Farm Management






aged in order for it to be a creative force
and to avoid the difficulties of distress-
which comes from too much financial
or personal stress.
All managers have their limits. But
the successful ones find ways to over-
come them by building a management
team of family members, colleagues,
consultants, and others. The knowledge
limitations of managing in a "post in-
dustrial era" and a "global village" are
real. Success, in part, is a matter of get-
ting others to "buy into" your agenda
or business plan.
Image. To the realist, success is more
than an image. It's great to have the
tallest silo, the biggest tractor, the most
picturesque farm, or the highest yield.
There is nothing wrong with striving
for goals of this nature; they are not
much different from the goals success-
ful managers outside of agriculture
strive for. Gaining acceptance and rec-
ognition in this manner is fine as long
as you can afford it. Rising profits and
net worth, and improved debt-to-asset
ratios are not the sole measure of suc-
cess. But when image goals come into
conflict with effective management, an
objective analyst would have to ques-
tion them.

Risk Management
If risk taking is a normal part of busi-
ness, so is risk management. (See Part
II, Chapter 4 and Part III, Chapter 10
on risk management.) Buying an insur-
ance policy against a potential finan-
cial disaster makes sense. If an entire
farm enterprise could fail in the event
of some disaster, it is worthwhile to buy
insurance. However, self-insuring by in-
vesting in more farm equipment than
you might ordinarily need may make
sense in order to reduce the stress that
would arise from having machinery
break down as a result of overuse or


adverse weather conditions. Yet farm-
ers make risky commitments at plant-
ing time when the eventual outcome is
uncertain. A prudent manager some-
times takes a flyer even if the odds are
against a payoff-if the potential gain
seems worth the risk of a relatively
small loss.
Successful business managers cannot
be easily classified by their willingness
to take risk or to insure against risk.
Successful managers often have an in-
tuitive sense of the odds. At times they
seem to seek risk; at others they shy
away. For many farm managers, the
greater their net worth, the less moti-
vation they have to accept risk and the
more they are inclined to protect what
they have.
Differences in attitude toward risk
may lead to conflicts between different
generations in a family partnership. The
younger generation often has less con-
cern about risk taking. They may have
less to lose if a risky enterprise turns
out poorly, and they may have substan-
tial income needs that motivate them to
"see what they can do." However, the
parents, approaching the end of their
business years, are likely to question
any business plan that exposes them to
a potential loss in health or net worth.
They are often willing to sacrifice cur-
rent or future income in order to main-
tain their financial security and posi-
tion.

New Technologies
Is always having the latest farm tech-
nology an indication of success? Not
necessarily. Many farmers -do adopt
some new technologies the moment
they are available. They are called "in-
novators." Others wait until they learn
something about how the technology
works and wfiether it fits their situations.
They are called "early adopters." Many


Part I / Who Are Farm Managers and What Do They Do?






successful farm managers are early
adopters of some technologies-but few
have all the newest technologies. Suc-
cessful managers tend to set priorities
for their time and other resources. This
may lead them to reject new ways early
on. It is simply not worth it to be on
the "cutting edge" all the time, even if
this means you sometimes fall into the
late adopter category. The key is the
economic adaptation to new technolo-
gies and periodic evaluation of the risk
and potential payoffs of making a
change. As the old saying goes, "Be
not the first on which the new is tried
nor the last to lay the old aside."
Computers are becoming standard
equipment on many farms, along with
tractors and other more traditional farm
machinery. In many intensively man-
aged, high-technology farm businesses,
a computer can make the manager's job
simpler and more manageable. But it is
important to identify the computer sys-
tem that best fits your needs. (See Part
III for more information on using com-
puters to improve farm management.)

The Financial Part of
Success
Meeting financial objectives is only
one aspect of success. But it is a neces-
sary part of business survival. It is also
the area that others tend to focus on.
Some even view financial success as
the "bottom line measure." Achieving
financial success means reaching some
level of three conditions: controlling
enough financial resources to operate a
profitable business; having adequate fi-
nancial security to survive inevitable
economic adversity; and having the fi-
nancial independence to maintain that
control and security.
Financial success is usually measured
in three ways: profitability, solvency,
and liquidity. Profitability is the rate of


return to the resources owned and con-
trolled during a given time period. Sol-
vency is wealth accumulated as equity
or net worth at specific points in time.
Liquidity is the ability to meet finan-
cial obligations on time. All of these
can be assessed by examining a farm's
financial statements. (See Part III for
more information on financial state-
ments, analysis, and planning.)

Types of Managers
A recent survey grouped farmers into
five categories. "Innovators," who were
characterized as being business oriented
in their approach to achieving financial
success and managing debt, comprised
5 percent of respondents. Innovators
regularly used financial planning and
analysis tools. They managed debt as a
business tool. They used consultants to
augment their management teams and
allow them more time to concentrate
on management. The survey found that
21 percent of the innovators had spe-
cific written plans for their farm opera-
tions.
A second group, called "Gamblers,"
seemed more willing to act on hunches
and gut-level feelings. They were also
willing to accept greater risk for the
chance of "making it big." On average,
this approach didn't appear to work out
as well. Gamblers tend to be optimistic
and seek recognition through visible
growth in wealth, or recognition, or
both. The reader is reminded of the ear-
lier discussion on objectives and goals
and when to gamble and when to in-
sure.
The next group, known as "Ordinary
Joes," are what many would call pro-
duction-oriented farmers. They seemed
less concerned with marketing and fi-
nance and focused most of their atten-
tion on production and technology.


Farm Management






A group called the "Low Riders"
were older on average than those in the
other groups. Their debt was minimal,
and security seemed more important
than growth. The last group, the "Margi-
nals," were younger and heavily lever-
aged, perhaps not by choice. Stresses,
financial and otherwise, were real.
While they had less to lose, they could
easily lose everything.

Real Success
As I have attempted to point out, suc-
cess should be viewed from a broad per-
spective. There are a lot of ways to be
and feel successful. While factors such


as societal expectations, family respon-
sibilities, and financial resources may
impose certain limits, success is still
possible. But to achieve it, you have to
define success for yourself, and you
have to clarify and change your goals
and objectives as time goes on. You
have to make choices about what goals
are most important to you and resolve
conflicts about goals among family
members and colleagues.


Part I / Who Are Farm Managers and What Do They Do?












Characteristics of

U.S. Farm Managers


Total farm management can be
viewed as the "systems" approach to
running a farm. It is a complete way to
look at the farm operation. While ef-
fective and efficient farm management
has always been important for farm
families trying to meet their personal
and business objectives, it is even more
critical in these rapidly changing times.

What Is Farm Management?
Farm management can be defined as
the coordination and supervision of a
farm business in order to increase long-
term profits or to achieve other speci-
fied goals. It can be viewed as a com-
bination of production management,
business management, financial man-
agement, marketing management, and
personnel management.
There are many types of farm man-
agers, and the farms they operate have
different sizes, types, and organizational
structures. Many farm managers depend
heavily on off-farm work for part of
their income.


Tenure Arrangements
Throughout our history, some farm-
ers have operated their own farms while
others have operated farms as part own-
ers or tenants. While full owners own
all of the land that they farm, part own-
ers rent land in addition to the land they
own (see table 1).
As of 1987, the majority (59.3 per-
cent) of the country's 2,087,759 farm-
ers were full owners and 88.5 percent
were either full owners (1,238,547) or
part owners (609,012). Those renting
all of their land are classified as tenant
farmers and numbered 240,200 and
comprised 11.5 percent of the total. The
full owners controlled 32.9 percent of
the acreage while the part owners had
53.9 percent of the acreage for a total
of 519,814,523 acres. Tenants operated
13.2 percent of all acres and they rep-
resented 11.5 percent of all farms.
The full owners, who control about
33 percent of all U.S. farmland, clearly
have full management control. Part
owners have a large measure of control


Robert A. Leuning, Professor Emeritus of Agricultural Economics, and
Bruce L. Jones, Assistant Professor of Agricultural Economics, University
of Wisconsin, Madison, WI


Farm Management









Tenure of operator
Full owner


Part owner
Tenant
Total


Farms
1,238,547
609,012
240,200
2,087,759


% total
59.3
29.2
11.5
100.0


Acres
317,787,149
519,814,523
126,868,953
964,470,625


% total
32.9
53.9
13.2
100.0


Source: 1987 Census of Agriculture


over about 54 percent of all farmland;
their control is subject only to the terms
and conditions of their contracts on the
leased portion of the land. Tenant op-
erators, who oversee about 11.5 percent
of U.S. farms, also exercise significant
control, even though some control is
exercised by landlords. The vast major-
ity of landlords are retired farmers or
family members who inherited farms.
At most, 40 percent of the farms have
some management input from nonop-
erators-potentially affecting 67 percent
of the acres. In practice, nonoperators
probably exert little control over farm
operations and have little involvement
in farm management.

Type of Farm Organization
Of the 2,087,759 farms recorded in
1987, 86.6 percent are individually
owned farms, comprising 65.1 percent


of the total farm acreage (see table 2).
The next largest number of farms are
organized as partnerships, comprising
roughly 10 percent of all farms and 15.9
percent of total acreage. Family-held
corporations comprise 2.9 percent of all
farms and 11 percent of the acres, while
corporations that are not family owned
comprise .3 percent of all farms and
1.3 percent of the acres. Others types
of farm owners-including coopera-
tives, estates, and trusts-comprise .6
percent of all farms and 6.7 percent of
the acres.
The vast majority of farms are owned
and controlled by individuals who have
significant management control over
their operations. As table 2 indicates,
few farms are owned by someone other
than farm families.


S2 T efa


Type of organization
Individual or Family


Partnership
Corp. Family Held
Corp. Other
Other Coop, estate, trust, etc.
TOTALS


Farms
1,809,324
199,559
60,771
6,198
11,907
2,087,759


%total
86.6
9.6
2.9
0.3
0.6
100.0


Acres
627,559,205
153,283,239
105,946,304
13,429,082
64,252,795
964,470,625


Source: 1987 Census of Agriculture


Part I/Who Are Farm Managers and What Do They Do?


%total
65.1
15.9
11.0
1.3
6.7
100.0


`~-.`~~l~il ?T-1;C1rli


Source: 1987 Census of Agriculture






As farms grow, the basic "family"
farm structure will remain essentially
intact. However, farm managers are
likely to adopt more complex organiza-
tional structures such as partnerships,
leases, sharing arrangements, and cor-
porations. This can facilitate the entry
of beginning farmers into farming busi-
nesses and also help those who are leav-
ing farming.

Off-Farm Work
Many farmers supplement their in-
come with off-farm employment (see
table 3). For many farm families, in fact,
a large proportion of family income
comes from off-farm sources.
In 1930, some 6.3 percent of farmers
worked off the farm for 200 days or
more; by 1987, the number of farmers
who reported 200 or more days of off-
farm employment rose to 37.6 percent.
This shift clearly indicates that part-time
farms are becoming the rule rather than
the exception. Today, more than 60 per-
cent of farm-family income comes from
off-farm sources.


Farmers' Occupations
Not all farm operators view them-
selves primarily as farmers. Many have
other principal occupations and think
of farming as a sideline or avocation
(see table 4).
Those whose primary occupation was
farming managed about 62 percent of
all farms and about 80 percent of the
farm acreage. Hired managers operated
only .8 percent of all farms but 5.9 per-
cent of total farm acreage. The remain-
ing acres are farmed by the 36.7 per-
cent of farmers who do not consider
themselves specialized farmers. They
include landlords, hired managers, trus-
tees, and part-time farmers.
Farmer operators have widely differ-
ing characteristics and organize their
farms differently. An increasing num-
ber work off the farm and more than a
third of them do not consider themselves
specialized farmers. Clearly, further
changes are on the way in farming and
the rural community.


S3. Das* of Off-Far Emplo


Number of days
None
Less than 100
100-199
200 or more


1930
69.6
18.7
5.2
6.3


1950
61.1
15.5
5.8
17.5


Years
1969
45.7
14.4
8.1
31.9


1982
42.1
10.9
9.2
37.8


1987
43.1
10.2
9.1
37.6


Source: U.S. Census data


S4.' Occpatona Spe Farm O p ra o


Occupational specialty
Farming
Hired manager


% of reporting farms
62.5
0.8
36.7


% of operated acres
80.6
5.9
13.5


Source: Farm Operating and Financial Characteristics, 1986


Farm Management


---------


I

























































































































A I
--- lIR












Using Strategic

Planning To Prepare

for the Future


What separates a successful agribusi-
ness firm from an unsuccessful one?
Numerous factors--quality of the land,
managerial skill, and sufficient equity
capital-are all important. And yet,
some firms that seem to have these ba-
sics are less successful than other firms
that are not so well endowed.
An important attribute of good man-
agement is to be able to step away from
the trees and be able to see the forest.
Strategic planning is analyzing the for-
est-the business and the environment
in which it operates-in order to create
a broad plan for the future. Strategic
planning may bring to mind images of
corporate executives meeting at luxuri-
ous retreats and staff members prepar-
ing multicolored visuals and reams of
statistical and financial data. The result
may be a 2-inch thick document on the
chief executive's bookshelf.
For smaller agribusinesses and farms,
the most effective planning may take
place at the kitchen table. To establish
an appropriate atmosphere for strategic
planning, it is important to set aside
time away from the day-to-day prob-
lems and interruptions so that the key
participants-owners, managers, fam-


ily members-can reach a common
understanding about what they want to
do in the next 3-5 years, and how they
want to do it.
It is important that management takes
a broad overview of the economy and
the industry to determine the major op-
portunities and threats. Tactical plan-
ning is concerned with day-to-day and
week-to-week decisions, such as what
and how much pesticide to use, which
cows to cull next, or whether to over-
haul the old tractor or buy a new one.
The results of strategic planning could
lead to new enterprises, major capital
investments, or perhaps even an exit
from farming. This broader focus over
a longer time distinguishes strategic
planning from tactical planning.

Why Do Strategic Planning?
Strategic planning permits you to
make more profits, in the long run, by:
Establishing a clear direction for
management and employees to follow,
Defining in measurable terms what
is most important for the firm,
Anticipating problems and taking
steps to eliminate them,


Gerald B. White, Associate Professor of Agricultural Economics,
Cornell University, Ithaca, NY


Farm Management






Allocating resources (labor, ma-
chinery and equipment, buildings, and
capital) more efficiently,
Establishing a basis for evaluating
the performance of management and
key employees, and
Providing a management frame-
work which can be used to facilitate
quick response to changed conditions,
unplanned events, and deviations from
plans.

Who Should Do Strategic
Planning?
The planning should be initiated by
the operator/manager of the agricultural
business. In some cases, this process
could involve a hired manager, but for
most firms the operator/manager and
other members of the family involved
with management should be involved
in the planning. In strategic planning,
the process is as important as the final
product. Getting the whole manage-
ment team involved is critical. Strategic
planning with typically close-knit farm
families cannot be done in isolation
from other family members, particularly
when goals are set for the business. In
such operations, business and family
considerations are often so interwoven
that it becomes artificial to try to sepa-
rate the two. (See Part II, Chapter 3 on
managing family and business
conflicts.)

Steps in Strategic Planning
Strategic planning involves the first
seven steps shown in figure 1; an eighth
step-implementation-is strategic
management. This chapter focuses on
the seven steps in the planning process.
Step 1. Define the Firm's Mission.
The mission statement defines the pur-
poses of the firm and answers the ques-
tion, "What business or businesses are
we in?" Defining the firm's mission


Part II /Strategic Management


forces the operator/manager to carefully
identify the products, enterprises, and/
or services toward which the firm's pro-
duction is oriented. This statement an-
swers the question, what is our current
situation?
What markets are likely to produce
the best opportunities?
What type of agricultural commodi-
ties or services can we produce to take
advantage of these opportunities?
What, if any, other activities are
we involved in, and what are the priori-
ties of these activities?
Establishing strategic goals, however,
is the key element of the mission state-
ment.
Why are we in business?
For profits?
To provide employment/security
for other family members?
To increase wealth?
To gain community status?
Answering these questions will sug-
gest goals that will help to clarify ob-
jectives in the next step.
A mission statement is not necessar-
ily a long document. In fact, it should
contain fewer than 100 words, and two
or three sentences may be sufficient.
Here is an example of a mission state-
ment:
We operate a 70-cow dairy farm to
support a modest level of living for two
families. Our goals are to (1) build net
worth, (2) stay in farming if at all pos-
sible, (3) gainfully employ two full-time
family members (partners), (4) provide
a good environment in which to raise
our children, and (5) allow each part-
ner suitable time off to enjoy family
living, community activities, and hob-
bies. We would like to provide for the
transfer of the farm to (partner) and to
provide retirement income to (partner)
within 5 years.















































Step 2. Establish Objectives. Goals,
which are the more general, long-term
desires of operator/managers, clarify the
firm's purpose. Objectives should trans-
late the mission into concrete terms.
Objectives should be quantifiable and
straightforward statements such as the
following: increase sales by 100 per-
cent over the next 5 years, reduce labor
costs by 25 percent in the next 3 years,
increase production per acre of grapes
by 30 percent in the next 5 years, and


provide health insurance coverage and
Social Security coverage for two fam-
ily employees next year. These objec-
tives should be chosen in such a way
that they contribute to attainment of the
goals identified in Step 1. Each objec-
tive has two characteristics: (1) it can
be measured, and (2) there is a given
time in which to accomplish it. This
allows management to evaluate prog-
ress in implementing the plan.


Farm Management


I




























Strategic planning is as important to the family tarmer wno plans over the Kitchen taDie as it is in me
board rooms of large corporate farms. (USDA photo, 0986 X1092-10)


Step 3. Assess the External Envi-
ronment. Every agricultural firm faces
uncertainties, threats, and opportunities
that are beyond its control. Market
forces may cause prices to plunge, ei-
ther in the long-run or short-run. Large
crops, declining consumer demand, a
strong dollar, high interest rates, chang-
ing Government policies, and regula-
tion of labor and pesticides are external
threats that can cut profits or make busi-
ness more difficult. New market oppor-
tunities are created by demographic
changes, changing consumer lifestyles,
population growth in selected regions,
and technological breakthroughs.
It is important in this step that the
operator/manager understand the eco-
nomic, social, and technological forces
that will affect the firm. Then reason-
able expectations may be formulated
about what will happen to product
prices, interest rates, the rate of infla-
tion, labor markets, and input prices
over the next 3-5 years.


Part II/ Strategic Management


Step 4. Assess the Firm's Strengths
and Weaknesses. The quality and quan-
tity of resources within the control of
the operator/manager is the first part of
this assessment. What are the abilities
and limitations of the operator/manager?
What skills and abilities do the employ-
ees have? How modem and efficient is
the physical plant? How large is the re-
source base? What are the soils on the
farm? What is the cash position of the
firm? It is important that these resources
be compared against those of competi-
tors. Many farms have an unrealistic
view of their own resources and opera-
tion because they do not compare them-
selves to others in the same business.
The process of providing candid an-
swers to these questions forces the op-
erator/manager to recognize that every
firm is constrained in some way by the
internal environment-its physical re-
sources as well as its human skills and
abilities.


19






Step 5. Identify Opportunities and
Threats. Combine the data gathered in
Steps 3 and 4 to determine the threats
and opportunities the firm might en-
counter in the planning period. Diffi-
culties in the external environment can
present opportunities in another segment
of agriculture. For example, concern
about cholesterol in meat products has
created new markets for poultry and fish
products. Concern about carcinogens in
the environment, including some pesti-
cides, has brought about new opportu-
nities for cruciferous crops. Consumers
are rediscovering oatmeal. Some firms
have avoided problems by creatively
turning an external threat into an op-
portunity. For example, Monfort of
Colorado, a large feedlot operation,
developed leaner and less costly cuts of
meat packaged for microwave cooking.
Promotional efforts were aimed at
younger, more health-conscious con-
sumers and two-career couples.
Step 6. Develop and Evaluate Al-
ternative Strategies. Step 6, along with
Step 7, is at the heart of the strategic
planning process. This is the point at
which the firm develops the alternative
plans that describe the methods for at-
taining objectives and obtaining greater
long-run profits.
In what ways can production agri-
culture firms gain a competitive advan-
tage?
The answer to this question depends
to a great extent on whether or not the
farmer is a price-taker. Farmers are tra-
ditionally price-takers. An individual
farmer has little, if any, power in the
market to influence the price of com-
modities such as milk, grain, eggs,
grapes, and potatoes because there is a
very large number of producers and a
homogeneous product is produced. Each
quart of milk, bushel of grain, or dozen
eggs is very similar to that produced by


thousands of other farmers. These farm-
ers have no "market power" because
buyers can obtain the commodity at a
price dictated by supply and demand
considerations, after adjusting for trans-
portation costs. High cost regions or
firms are at a distinct disadvantage in
these markets.
Some agricultural firms, such as land-
scape contractors or small wineries sell-
ing premium wines, are in less com-
petitive markets where there are only a
few smaller firms in the surrounding
area and products or services can be
differentiated. While these producers are
also conscious of their competitors'
prices, there is no clear "market price"
for each product or service. In less com-
petitive markets, the operator/manager
is faced with the problem of pricing his
or her product.
What types of strategies can opera-
tor/managers in price-taking firms em-
ploy to attain a competitive advantage?
1. Become More Efficient. Increase
profits by:
Reducing input use, holding
product and price (quality)
constant,
Using more, or higher quality,
inputs, increasing revenue more
than costs.
2. Seek Out Alternative Enterprises.
3. Exploit Quality Differences. Ob-
tain price premiums for quality that
more than offset the additional costs in-
volved in producing higher quality com-
modities.
4. Integrate Horizontally. Farm more
units, or add enterprises, enlarge enter-
prises to gain more complete use of ex-
isting unused resources; acquire addi-
tional resources. Spread fixed costs over
more units of output.
5. Integrate Vertically. Obtain more
profit by moving higher or lower into
the marketing and distribution chan-


Farm Management






nels-add storage or packing facilities,
trucks to haul products, and direct mar-
keting; acquire resources to produce
inputs that formerly were purchased.
6. Reduce Risks Through Diversifi-
cation and Hedging.
7. Identify New Markets.
Firms that have some degree of con-
trol in the market, because there are
fewer competitors or because there is
the possibility for differentiation of
products and services, have the poten-
tial for additional strategies to gain a
competitive advantage, including these:
A differentiation strategy emphasizes
high quality, excellent service, innova-
tive design of products or services, or
an unusually positive brand image. The
key element in this strategy is that the
attribute to be emphasized must be dif-
ferent from those offered by rival firms;
in addition, the differences must be sig-
nificant enough so that the price pre-
mium exceeds the additional cost of dif-
ferentiating. The Monfort emphasis on
leaner cuts of beef is one such success-
ful strategy. Ben and Jerry's ice cream
is another. (See the 1988 Yearbook of
Agriculture, Marketing U.S. Agricul-
ture, for more information on innova-
tive marketing strategies.)
A focus strategy aims at a cost ad-
vantage or differentiation by focusing
on a narrow segment of the market-a
niche. In this strategy, the operator/
manager selects a segment or group of
segments (such as product variety, type
of end buyer, distribution channel, or
geographic location of buyer) for which
to tailor a product or service and ex-
cludes other markets. The goal is to
exploit a narrow segment of the mar-
ket. Again, the feasibility of this strat-
egy depends upon the size of the seg-
ment and whether or not it can support
the additional cost of focusing.




Part II/Strategic Management


Swedish Hill Vineyard and Winery
of Romulus, NY, has successfully used
a focus strategy. The owners, Dick and
Cynthia Peterson, have established an
image with the Scandinavian commu-
nity in Upstate New York by holding
an annual Scandinavian Festival that
features food and entertainment that
appeal to people of Swedish, Danish,
Norwegian, and Finnish descent. To re-
inforce this image, the Petersons have
developed two wine labels, Svenska
Blush and Svenska White. Even though
none of the Scandinavian countries has
a significant wine industry, identifica-
tion with the ethnic group has been an
important part of Swedish Hill's recent
growth in sales. Swedish Hill is pres-
ently negotiating a contract with the al-
coholic beverage control agency in
Sweden for exporting to that country.
Farmers who are price takers do not
have the options for employing such
strategies as differentiation and focus-
ing. Of course, the option remains for
price takers to move into new areas or
businesses where they have more con-
trol over prices and more market power.
Operator/managers who consider this
option, however, should be forewarned
that it is very easy to underestimate the
difficulty or cost in attaining additional
market power.
It is possible that no identified alter-
natives will permit a particular farm
family to attain its objectives; therefore,
nonfarming alternatives may need con-
sideration. It may be possible, for ex-
ample, to sell some farm assets, keep-
ing part or all of the land and residence,
and to seek off-farm employment. Non-
farming alternatives should not be ne-
glected in selecting alternatives.
Once alternatives are developed, Step
6 is only half completed. These alter-
native strategies must be evaluated. In






practice, management may come up
with a long list of possible alternatives.
These can usually be whittled down
with reasoning and logic. Once the ob-
vious losers are eliminated, "pencil-
pushing" is in order. There is no single
or preferred method for evaluating al-
ternatives, but some combination of the
following may be used:
1. Budgeting alternatives-both
profitability and cash flow.
Enterprise
Whole farm
Nonfarm alternatives
2. Break-even analysis.
3. Projections of income, cash flow,
and balance sheet statements.
4. Computerized decision aids.
(See Part III for more information on
budgeting, financial analysis, record-
keeping, and computerized systems that
assist in farm management.)
Step 7. Select a Strategy. From the
analysis in Step 6, the firm selects a
strategy (an alternative or a combina-
tion of alternatives) that will enable the
operator/manager to achieve the desired
objectives. After evaluating alternatives,
it may be discovered that the original
objectives are not feasible. Therefore,
the operator/manager may have to move
back to Step 2 and select new objec-
tives or reformulate combinations of al-
ternatives. Selection of a final strategy
may involve tradeoffs among goals. An
alternative is seldom likely to be supe-
rior to all other alternatives for attain-
ment of each of the goals of the opera-
tor/manager and his or her family. In
this sense, the process of strategic plan-
ning should be recognized more as an
art than a science.
Step 8. Implementation. The em-
phasis here has been on planning; how-
ever, the eighth step-implementa-
tion-is a crucial link in the strategic
management chain. It is essential that


management periodically looks back on
the plan and assesses how well the firm
is doing toward reaching its objectives.
Assessing implementation will point to
mid-course corrections. Assessment
enables planners to better understand the
planning process. Perhaps objectives
were set too optimistically or perhaps
critical threats or opportunities were not
recognized. Recognizing and correcting
the plan's weaknesses will improve stra-
tegic planning the next time the proc-
ess is undertaken.

Looking Ahead
Strategic planning should not be
viewed as a formidable task resulting
in detailed plans. It should be written,
but a few pages will suffice. The proc-
ess should include all the key players
participating in the strategic manage-
ment discussion. It is essential that all
individuals involved in managing the
farm or ranch understand where the firm
is going, how it plans to get there, and
what problems or opportunities lie
ahead.


Farm Management












Setting Goals To

Guide Management

Decisions


Goals! Goals! Goals! Almost every-
one is enthusiastic about goals. Most
people like to discuss goals; some boast
of having goals. If you ask a friend or
business associate about goals, almost
certainly you'll get an affirmative re-
sponse-one that implies goals are de-
finitively known and are important. You
also may receive a spontaneous goal at-
tainment report. If so, it's likely to be
an exultant report of goals that have
been attained and a progress report on
those where attainment still lies in the
future.
People who teach management also
attest to the importance of goals. Listen
to almost any management guru, and
you'll hear ideas like these:
Identify your goals. Manage to at-
tain them.
Management is goal-directed.
Take charge of your life and work-
set goals and attain them.
Without goals, you can't be a man-
ager because you won't know what you
want to achieve through your manage-
ment decisions.
Virtually everyone agrees on the im-
portance of goals. Most find satisfac-


tion in asserting that they have goals,
and in declaring that they use goals as
guides for their management decisions.
Without doubt, goals are important.

The Goals Paradox
Despite almost universal recognition
that goals are important, few people
have written records of their goals. If
you ask a farmer, a rancher, a fruit pro-
ducer, an extension economist, or a
chance acquaintance for a list of goals,
you're likely to get a guarded response.
That response-polite or not-will im-
ply that your request is not really ap-
propriate.
If you insist, you may receive a
"goals list," but it's likely to have only
nebulous or simplistic entries. Some
entries may be both nebulous and sim-
plistic. Indefinite statements of desired
results ("to make a profit") or short-
term task goals ("to finish harvest by
November 1") are typical entries in a
"goals list" produced in response to an
insistent request.
Not everyone will respond with nebu-
lous and simplistic goals. A small pro-
portion of people you might ask for a


Paul H. Gessaman, Extension Agricultural Finance Economist and
Professor of Agricultural Economics, University of Nebraska,
Lincoln, NE


Part II/Strategic Management






"goals list" will have carefully identi-
fied goals that have been written down.
These people may or may not want to
share their goals with you. As personal
statements, goals may be too private to
release for public examination.
Most people with a goals list iden-
tify only business goals. It's rare to
find people with written goals for their
personal and family life. Their actions
with respect to family, friends, and or-
ganizations indicate definite commit-
ments to these personal and family life
involvements. However, their visions of
desired outcomes for these aspects of
life are usually intangibles-mental con-
structs-not coherently written goal
statements.
The paradox of goals is this: Many
people will publicly affirm that they
have identified their goals-and that
goals are important. But, most cannot
or will not record and communicate
their vision of desired outcomes in the
form of a goal statement that can be
communicated to others and used to
guide their management decisions.

Why the Paradox?
The paradox that there are many
"goal talkers" but few "goal writers" is
an intriguing aspect of human behav-
ior. We know very little about why
some people identify goals and many
others do not. Perhaps differing expec-
tations among those associated with a
farm or other business cause them to
avoid identifying goals. We do know
that many people who verbalize the
importance of goals-goal talkers-do
not invest time and effort in systematic
goal identification. Perhaps they do not
recognize that clearly identifying goals
can help them increase their manage-
ment capability, personal satisfaction,
and quality of life.


Identifying Goals
For many years, management work-
shop instructors have encouraged clients
to put their goals in writing. For many
participants, quickly developing a vi-
sion of the near and distant future to
which they are willing to commit them-
selves seems as difficult as developing
in 5 minutes an answer to the question,
"What is the meaning of life?" When
participants are unable to respond, the
instructor often assumes that profit
maximization is the principal goal of
all participants and continues with the
workshop.
This approach-which assumes that
more profits will ensure the outcomes
the participants seek in life-generally
does not work very well. Even casual
observation of human behavior indicates
there is more to life than maximizing
profits. Profits can't be ignored-they
are vital to continuation of a business-
but managers have goals for their per-
sonal and family lives, as well as for
their businesses. The complex, often
conflicting, demands of family and busi-
ness goals can limit a manager's desire
and ability to maximize profits.
For every manager and every busi-
ness, the ultimate question is, "What
am I managing to attain?" If goals have
been identified that adequately describe
desired conditions and outcomes, the
obvious answer is: "Manage to attain
goals." Thus, the quality of goal identi-
fication is a primary determinant of
management effectiveness.
In several States, purposive goal iden-
tification has been included in financial
management education programs dur-
ing the past 4 years. Individuals, fami-
lies, and business associates involved
in farm operations have had the oppor-
tunity to identify family and produc-
tion unit goals. They usually have been


Farm Management






successful and committed to goal at-
tainment when they have taken active
roles in goal identification and when
the privacy of each group has been
maintained. Participants in most of the
management units identified goals and
used them to guide management deci-
sions. Participants reported these posi-
tive outcomes from the experience:
Communication among family
members improved.
Management decisions and work
activities were more effectively focused
on priority concerns; management ef-
fectiveness increased.
Cash-flow management in the pro-
duction unit and household improved
as impulse buying of production inputs
and household items was reduced.
Borrowing, risk, and interest ex-
pense were reduced.
Conflict was reduced, and work-
ing relationships improved.
Expenses were kept under control,
and profits increased.
Anxiety and concern over the pres-
ent and future were reduced.
There was a better balance between
production activities and family life.
The communication, negotiation, and
compromise required for goal identifi-
cation yield additional important bene-
fits. When goals are selected in a way
that ensures that each person does work
that he or she enjoys, motivation in-
creases and management performance
improves. Perceptions of reality are
modified as participants gain a greater
understanding of each other's roles,
interests, and activities. Identifying
goals has both immediate and long-term
payoffs-the quality of daily manage-
ment outcomes and the focus of long-
term decisions are improved.


Goals Change
Goals are personal descriptions of
conditions and outcomes to be attained.
They originate in response to fundamen-
tal questions:
What do I (we) really want in life?
What can I (we) do that will be
most productive and worthwhile?
What am I (are we) really trying to
achieve by investing time, effort,
money, and management skills?
When will I (we) be able to attain
life conditions and outcomes that are
most important and worthwhile?
What is the appropriate balance be-
tween personal (family) claims and pro-
duction unit claims on time and re-
sources?
As implied by these questions, iden-
tifying goals is a dynamic activity. Re-
sponses to the fundamental questions
of life-and the goals of each family
and management unit-evolve over
time. The social and economic context
of agricultural production changes, and
the life cycle of each generation moves
ahead. Periodic updates are vitally im-
portant.
In updating goals, as in initial goal
identification, it's important to under-
stand the current thinking of each per-
son in the family or management unit.
Current interests and motivations can
be expressed, appropriate goals identi-
fied, and effective management ensured
through systematic self-examination,
discussion, creative thinking, negotia-
tion, and compromise.

Does It Work?
Production activities in agricultural
units-especially in large multi-enter-
prise units where two or more families
participate-present formidable chal-


Part II/Strategic Management






lenges. With a few people providing the
labor, management, and capital inputs
for complex farm production and mar-
keting processes, it's easy for daily work
activity to consume all available time
and energy.
When this happens, the quality of
daily decisionmaking may decline and
longer-term planning and coordinating
functions may be neglected. Periodic ap-
praisals and purposive decisions about
the whats, where, whens, and hows of
the farm operation and family can be
endlessly deferred. When this happens,
it's easy for small problems to snow-
ball into major disasters.
It's not easy to invest the time and
effort that's required to keep manage-
ment decisionmaking current and ap-
propriate. Livestock must be cared for,
crop production sustained, machinery
and physical facilities maintained, in-
puts purchased, products marketed, and
myriad other activities must be carried
out. In the midst of this plethora of work
and management responsibilities, cher-
ished family life privileges and respon-
sibilities must be fulfilled.
The results of systematically identi-
fying goals are specific to each farm
operation and too varied and complex
to summarize. But the experiences of
three Nebraska farm families illustrate
several of the effects of purposeful goal
identification:
Increased Communication and
Mutual Support. A middle-aged
couple and their two adult sons who
operated a farm together enrolled in a
series of four financial management
workshops. A year later, the father re-
called the experience:
Mom and I had assumed for several
years that we and the boys really were
headed in different directions. It seemed
like they were against everything we


wanted to do, and when they made a
suggestion, we sort'a automatically
said, "No." Then we enrolled in your
workshops.
I went to the first workshop to do fi-
nancial analysis, and you said we were
going to use part of the first day to
work on goals. I almost got in the car
and went home. When I found out that
you were going to have us do more with
goals in the second workshop, I didn't
want to go back, but my wife talked me
into it.
The same thing happened after the
second workshop, except I started lis-
tening to what the boys were saying. It
ended up that we learned some things
from the financial analysis, but the main
thing we learned was that the boys
wanted the same things from the farm
that we did. We quit fighting. Around
our place, it's been the quietest sum-
merfor a long time.
Improved Balance in Life. The ex-
perience of parents in another multi-
family farm operation had a humorous
outcome. This family-operated farm was
moderately large, complex, and very
well managed. The early middle-aged
parents, two sons, and a daughter-in-
law ran the operation. In the four-
workshop sequence, all five adults came
to the first and second workshops. When
the third workshop started, only the sons
were present. When asked about the
parents' absence, they responded with
this story:
Mom and Dad are in Hawaii. When
we identified goals in last week's work-
shop, we discovered that both parents
had written down a goal of taking a
vacation. And each of us had written
down as a goal that they should take a
vacation. After the workshop, Mom told
Dad, "We've been married 28 years
and never taken a vacation. Let's go to


Farm Management






Hawaii." So they called for reserva-
tions. Now they're in Hawaii, and for
the first time we're the only ones on the
farm.
Action Taken. The parents in this
family were in their late 30's when they
enrolled in a series of goal-identifica-
tion workshops. They had two small
children at home and a teenager about
to leave for college. They had rented
their present farm throughout their 18-
year marriage. They said their delay in
purchasing a farm was due to their own
lack of resolve.
Six months after the workshops, they
called for assistance in projecting cash-
flows if they purchased a farm adjacent
to their present rented land. They com-
mented on the decision to purchase:
When we worked our way through
the goal identification, we discovered
that we really were committed to pur-
chasing a farm. Previously, it had
seemed like a wish-list dream. Now it's
a real goal, and we're going to buy if


the numbers come out looking okay.
The numbers did look okay, they
made the purchase, and now they are
up-to-date on their payments and have
a substantial financial reserve and an
excellent credit rating. Goals they be-
lieve in and commitment to action guide
their management.

Goals and Commitment
Goals and commitment-this is a
combination that can't be beaten. It is a
combination that helps to ensure that
this family and others like them will
stay among the ranks of Nebraska's
farm owner-operators. With their con-
temporaries across the Nation, they form
the backbone of modem agricultural
production.


Part II/Strategic Management












Managing Family and

Business Conflicts


A Conflict Scenario
Paul and Sarah Cochran farm 1,500
acres and finish hogs on their farm.
They've worked hard to free themselves
of debt and feel confident about the sta-
bility of their business. But now they
face a major problem. Their youngest
child, Susan-recently graduated from
college and married-wants to form a
partnership with them. Paul wants to
borrow money, expand the acreage, and
add a large farrow-to-finish hog facil-
ity. He would bring Susan and her hus-
band in as junior partners. He even
spoke with an attorney about the idea.
However, Sarah objects. She is
pleased that Susan is ready to go out on
her own, but she thinks Susan and her
husband should start independently-
as she and Paul did-farming and work-
ing odd jobs to get started. Now that
the farm is debt free, she sees no need
to go heavily into debt again. She knows
hogs are an around-the-clock responsi-
bility. She loves their children as much
as Paul does, but she is not interested
in building the Cochran farm into a
Little Southfork.


Becoming a Conflict
Negotiator
To be a good negotiator you must
begin with a perspective on manage-
ment styles which influence the way
you approach others in a conflict. Con-
flict negotiators often use the following
principles for negotiation:
Focus on unacceptable behavior,
not on "bad" attitudes. You cannot ne-
gotiate attitude change, but you can ne-
gotiate behavior change.
Try to fully understand your ad-
versaries' attitudes and values, because
attitudes support behavior.
Demonstrate respect for the atti-
tudes, values, and feelings of everyone
in the conflict-even if you do not agree
with them.
Negotiate behavior change first; do
not demand changes in attitudes or val-
ues.
Listen and ask questions. Be open
to new ideas, remain flexible, and keep
talking, keep talking, keep talking.
If the-dispute escalates, call in a
mediator or counselor to act as referee.


Jerry W. Robinson, Jr., Professor of Sociology and Rural Sociology,
University of Illinois, Urbana-Champaign, Urbana, IL


Farm Management






These basic principles of conflict
management assume that adversaries in
a dispute are more likely to support so-
lutions which they help develop.

Direct and Indirect
Persuasion
Direct and indirect persuasion can be
used when conflicts require negotiation.
The differences between direct and in-
direct persuasion follow:

Direct persuasion Indirect persuasion
Self centered Other centered

Power focused Process focused

Telling behavior Questioning and lis-
tening behavior

Value centered Idea and behavior
centered


Solutions given
or imposed

You responsible
for success


Solutions developed


Others responsible
for success


Typically, indirect persuasion is more
effective in settling disputes, as indi-
rect persuasion shifts the focus from the
issues of the conflict to focus on the
communication process-the way ad-
versaries discuss and manage the dis-
pute. Every member of the farm family
team has duties and responsibilities.
Every family member must help de-
velop a solution if a dispute arises.
There are six steps or techniques for
managing a family/business dispute: (1)
initiate dialogue, (2) involve everyone
in the dialogue, (3) assimilate informa-
tion about the conflict, (4) reinforce
agreements, (5) negotiate disagree-
ments, and (6) solidify agreements.
Initiate Dialogue. Initiate conversa-
tion objectively. Call the family together
and establish the fact that you will be
open, honest, and attentive to every-


Part II/Strategic Management


one's needs in what is likely to be a
sensitive situation. Begin by develop-
ing ground rules for the communica-
tion session, and seek the group's con-
sensus. A good set of communication
ground rules should include six basic
rules:
1. Everyone has the right to talk, to
express his or her feelings, to be
heard-and not to be interrupted.
2. Repeat what you heard a person
say before you express your opinion
about the issue. Ask people what they
heard you say to be sure they were lis-
tening.
3. Agree to discuss one problem at a
time. Too many issues confuse and stall
negotiations.
4. Discuss present problems only.
You have no control over the past, and
previous problems often stall negotia-
tions.
5. Use common courtesy-no name
calling, yelling, or cursing allowed.
6. Everyone agrees to follow the
ground rules. Point out that it is impor-
tant to understand every person's posi-
tion.
It may be helpful for you to point
out that you are trying to be a conver-
sation referee. Most people are familiar
with the role of a referee in sporting
events. The referee must be fair and
objective, and insist that everyone plays
by the rules. If you are in charge of the
discussion, point out to the group that
this is the role you want to follow, too.
Ask, "What's the problem?" and lis-
ten. Assure the person by your behav-
ior that you care. Be gentle and demon-
strate concern for the other person's
position. This arouses everyone's inter-
est because you will listen to their po-
sition, and they will be heard even
though they may not agree with each
other. If it is an intense dispute, ask
that all parties talk through you and not
to each other. This will help you con-






trol the communication process at the
first stages. However, you are not to
control the outcome.
Being courteous to everyone builds
trust. Be flexible and open to sugges-
tions and ideas from all family mem-
bers as you initiate dialogue. Ask ev-
eryone to communicate concern for
adversaries by listening and by using
nonjudgmental behavior. Everyone
should have respect for others and be
responsible for his or her own feelings,
perceptions, and actions. No one has to
lose patience or temper-even in con-
flict.
Involve All Parties. The second
phase of indirect persuasion is to in-
volve all parties in the communication
process. Involvement continues through
all phases of conflict management dis-
cussion. (The Cochran family needs
several family meetings with everyone
participating in open and fair discus-
sion.) Involvement begins by asking
questions and encouraging others to
answer. Listen as people respond to
your questions. Seek the opinions, feel-
ings, suggestions, and input of all ad-
versaries. Indirect persuasion assumes
that people support what they help cre-
ate. Encourage members of the family
team to help work out lasting solutions,
and use involvement to get ideas and
support for agreement on what the is-
sues of the conflict are.
Develop empathy by listening for (1)
the message content-what facts are
stated? How do they relate to the con-
flict? (2) the feelings that underscore
the message-is the person angry, frus-
trated, or sad? and (3) the values that
influence the person's perception of
facts and behavior in the conflict.
Good conflict managers ask probing
questions in a nonthreatening way.
Questions help you discover the inter-
ests, concerns, knowledge, skills, and


goals of others. By listening carefully,
a skilled questioner can control or navi-
gate the course of a conversation, even
though others may be doing most of
the talking. Asking questions allows you
to explore alternatives with the other
party in the conflict. You can gently
force another person to consider an idea
or option they have not considered by
asking them questions about that idea.
(For example, you might ask Sarah
Cochran, "How did you feel about your
husband's behavior when he spoke with
an attorney before discussing the idea
of a farm partnership with you?" and
"What caused you to feel that way?"
These are nonthreatening questions
which yield information on a sensitive
subject.)
Accept the credibility of others' feel-
ings. Feelings about the conflict are real.
Information may not be-it can be
imagined. Many times those involved
in a conflict have a right to be mad,
frustrated, or disappointed. Explore-
probe gently about what causes feel-
ings. How and why did they develop?
Encourage involvement.
Assimilate Information. The third
phase of conflict management is to as-
similate all this information. Develop a
system for structuring and organizing
all of the messages communicated. Ev-
eryone must consider all the feelings
and the facts-both are important to
manage conflict. Family members may
not understand their major agreements
and disagreements. Clarify every posi-
tion expressed and its cause. Strive to
get everyone to simply understand what
is happening-what is causing the con-
flict. You are not negotiating; at least,
not yet.
Assimilating is difficult because (1)
adversaries tend not to listen to each
other when they argue; they may agree,
but they may not hear facts and feeling


Farm Management






messages from each other; (2) adver-
saries lack the courage to confront some
of the reasons for disagreements, and
they do not want to look stupid or evil;
and (3) adversaries must work together
during assimilation, but they may not
want to because they would rather fight.
Make a large worksheet similar to
figure 1. During assimilating, use in-
formation discussed and get everyone
to help you develop the information to
be placed on the worksheet. When you
finish writing an agreement or disagree-
ment on the worksheet ask, "Is this cor-
rect? Did I get it right? Is this what you
said? Are these your true feelings?" The
family can practice working together
while they help each other pick the facts
of the conflict apart.


Reinforce Agreements. The fourth
step of the indirect persuasion approach
to conflict management is to reinforce
agreements. Always reinforce agree-
ments before you negotiate disagree-
ments. Naturally, adversaries want to
maximize differences, and that is where
they will try to focus your attention,
but effective negotiators emphasize
agreements and use behavior to rein-
force. This process builds trust and
understanding and makes negotiating
easier.
People who disagree with one another
and experience conflict frequently share
more common goals and values than
differences. During the early stages of
conflict communications, help everyone
discover and highlight agreements


Figure 1. ASsimi g Io A u C


Feelings


Party A and B Party A and B

Agreements










Disagreements


Part II/Strategic Management


Facts






which are relevant to the argument. (The
Cochrans probably could agree to keep-
ing the farm together and in the family,
preserving land for the future, or mak-
ing a profit.) All these agreements need
to be reinforced. Reinforcing agree-
ments is a powerful psychological tool.
Use it. Reinforcement techniques en-
courage an adversary to be rational and
intelligent enough to propose tentative
solutions in the next step.
Negotiate Disagreements. Now the
adversaries are ready to negotiate dis-
agreements. Adversaries usually want
to begin negotiating disagreements long
before they are ready. You may have
difficulty getting them to slow down
and tell you their feelings and the facts.
Remind them that you cannot help ne-
gotiate disagreements until the facts and
feelings are understood by everyone.
Rarely is anyone 100 percent right and
another 100 percent wrong. All proba-
bly have sincere concerns and legiti-
mate goals which need to be discussed.


Negotiating disagreements begins by
reviewing and ranking the disagree-
ments listed in the previous step, rein-
forcing agreements. When issues are
ranked, seek adjustments from each
adversary with the most insignificant or
easiest problem first. This helps to build
a success backlog. For example, you
might ask: "What adjustments are you
willing to make?" or "What do you want
to do? If your adversary will change,
what changes will you make?"
Use the following behavior tech-
niques to temper parties discussing dis-
agreements:
1. Listen for all disagreements; is it
a feeling, policy, or goal?
2. Communicate understanding for
everyone's position; say, "That's one
opinion," or "I understand your point
of view."
3. Restate objections as fair or open
questions so the parties will explore all
the issues, then ask, "What solutions
will you accept to this problem?"


"According to the computer, it's your turn to
milk the cows."


Farm Management






4. Encourage adversaries to agree on
the issue they are discussing.
5. Present evidence in a logical,
nonthreatening manner.
6. Personalize benefits to adversar-
ies for changing or adopting a sugges-
tion; cite specific benefits they mention.
7. Do not rush responses; present the
case, then give people time to respond.
8. Be realistic; expect results, but
don't demand them.
9. Do not embarrass anyone; people
do not enjoy being made to look fool-
ish or inconsiderate, especially in a
group setting.
10. Do not give up too easily; wait,
then try again ... and again.
If you are having difficulty, try not
to make any threats-and try to keep
adversaries from making threats. The
only appropriate threats are issued when
ground rules are violated. Threats
should always be announced in advance.
Never make a threat unless you intend
to follow through.
Solidify Agreements. The last step
in conflict management is to solidify
agreements and confirm solutions to the
problem. Compromises are detailed.
This process is difficult if you have
rushed through earlier stages. But if you
have been thorough, this last stage
might take little time and effort.
Begin by reviewing the changes
agreed to and ask if compromises are
still okay. Compromises should be dis-
cussed and debated again, if necessary.
If an adjustment (change in behavior or
policy) cannot be reached, shelve the
issue and move on. When all issues
have been discussed, review suggested
compromises one more time. Then write
a "contract summary." It helps to actu-
ally write out agreements and specific
adjustments in precise terms. Review
proposed actions carefully. This helps
everyone check for accuracy of infor-


Part II/Strategic Management


mation, perceptions, and expectations.
Writing out contracts might seem un-
necessary, but written feedback is the
surest way to be certain everyone under-
stands the agreement. Writing proposed
adjustments or repeating them is a re-
view that gives everyone time to think
and suggest additional changes. It is
better to discuss a misunderstanding
now than later.
When the adjustments have been re-
viewed, specified, and checked for ac-
curacy, confirm the areas of agreement.
Commitment to the adjustment can be
confirmed through formal or informal
contracts, a checklist, handshake, or
even a hug.

Successful Conflict
Management
Success in almost every endeavor is
the result of hard work, and that is es-
pecially true in learning conflict man-
agement skills. My ideal conflict man-
agement training workshop is 21/2 days
long; and even then, some folks are not
very good at it. If you internalize the
goal of becoming a better manager of
conflict, you have begun the learning
process. To be successful, focus on your
behavior-not on the behavior of oth-
ers. Become more attentive to the feel-
ings and values of others. Learn to ask
questions in a nonthreatening way.
Use feedback to tell others what you
hear them say. When you have major
disagreements say, "I have a different
opinion. Would you like to hear it?" If
the answer is "yes," give it honestly,
fairly, and objectively. If "no," wait for
a later time and try again. Focus on
your behavior as a family communica-
tor; set some specific areas where you
can improve. Read some good books
on interpersonal communication and
conflict management.






Memorize the six indirect persuasion
steps and learn the rules of thumb for
negotiating disagreements. Then try to
use them. Behavior is learned. You and
your adversaries can learn to be better
managers of conflict, but you have to
work at it.
Ten rules of thumb for negotiating
disagreements:
1. Adversaries have a right to
disagree.
2. Feelings are real. Do not ignore
them. People may distort the facts, but
their feelings are important.
3. Listen to everyone's feelings. If
people are ignored, problems will proba-
bly develop later.
4. Negotiate behavior or policy first;
do not try to negotiate values.
5. Avoid threats; they are usually not
effective.
6. Seek compromise and input from
everyone. Expect some flexibility.
7. A sense of timing is important.
Learn how adversaries feel before you
make suggestions for a time-out or to
move ahead.
8. If you reach a stalemate, ask if
you can make suggestions, but do not
impose solutions. Say, "Have you


thought about... ?" or "One thing that
might work is .... What do you think?"
9. Communicate a sense of expec-
tancy toward agreement. Demonstrate
to all adversaries that you think a solu-
tion is feasible (if it is).
10. Develop a tentative set of agree-
ments, especially if the conflict is se-
vere, before you seek final agreement.
Let the tentative agreement "soak"
awhile so all parties will understand it
and be able to suggest changes, if they
are needed. You may want to break here
before a final session.
For more information on conflict
resolution, see Interpersonal Conflict by
Joyce Hocker and William W. Wilmot,
2nd edition, William C. Brown Pub-
lishers, Dubuque, Iowa, 1985; Stress
and Wellness by Jerry W. Robinson,
Jr., Wellway Publishers, Champaign, IL,
1985; and Conflict Management in Soil
and Water Conservation Districts by
Jerry W. Robinson, Jr., and Philip A.
Marcus, University of Illinois Coopera-
tive Extension Service, Urbana, IL,
1983.


Farm Management












How Farm Managers

Make Risky Decisions


Agriculture is a high-stress industry.
The management of farm and ranch
businesses is fraught with risk and un-
certainty. Agricultural managers must
consider the risks associated with the
ever-changing political, social, eco-
nomic, and ecological environment in
which they operate. Farm managers face
the risk that it will not rain-that it will
rain but at the wrong time-that the old
tractor will break down-that the new
irrigation system will become obso-
lete-that the farm program will
change-that new regulations will in-
crease costs-that the employee will
quit.

Living with Uncertainty
Uncertainty, a situation where a num-
ber of different outcomes are possible,
is what makes our lives both interest-
ing and frustrating. If it were not for
uncertainty, there would be little rea-
son to watch a football game or stay
until the end of a suspenseful movie.
The frustration associated with uncer-
tainty is because of the risk it involves.
Among the uncertain outcomes may be
some negative consequences, which we


would prefer to avoid. Risk, then, re-
fers to the chance of adverse outcomes
associated with an action. The greater
the uncertainty, the greater the risk.
Agricultural managers cannot make
decisions without considering the future,
and the uncertainty and risk that the fu-
ture holds. Because the future is unpre-
dictable, we cannot eliminate risk, even
if we wanted to. Eliminating risk would
also eliminate the potential profits. Suc-
cessful farm management depends on
taking risks that are consistent with the
goals and financial position of the busi-
ness. The key to success is to take the
right risks. Identifying these right risks
requires better understanding of the vari-
ous sources of risk, their chances of
occurrence, and their implications for
the economic performance of the busi-
ness.

Types of Risks
Identifying the different events or
sources of risk that affect the outcome
of a decision is a crucial step in the de-
cisionmaking process. The relative im-
portance of the sources of agricultural
risk differs among enterprises and


A. Gene Nelson, Professor and Head, Department of Agricultural and
Resource Economics, Oregon State University, Corvallis, OR


Part II/Strategic Management






changes over time. The following
checklist is a guide to identifying your
risks:
Market Risk. The variability and
unpredictability of the prices that farm-
ers receive for their products and that
they pay for production costs are mar-
ket risks. In short, fluctuating supply
and demand conditions result in price
variations.
Production Risk. This source of
risk is a result of the variability in pro-
duction caused by such unpredictable
factors as weather, disease, pests, ge-
netic variations, and timing of practices.
Examples include variations in crop
yields, machinery breakdowns, and feed
conversion efficiencies.
Financial Risk. Financing assets
that the business controls creates risk.
The increased use of borrowed capital
leaves the operator vulnerable to not
having enough cash to meet obligations
or of not having adequate credit. Other
examples of this source of risk include
the possibility of losing the lease on
the land and the ultimate disaster-
bankruptcy.
Obsolescence Risk. The rapid de-
velopment of new technology can make
current production methods obsolete
shortly after important investments have
been made. The possibility of adopting
new technologies too soon or too late
is a risk farmers face.
Casualty Loss Risk. This is a tra-
ditional source of risk referring to the
loss of assets as a result of such events
as fire, wind, hail, flood, and theft.
Legal Risk. Governmental laws
and regulations are a growing source of
uncertainty for farmers. Changing so-
cial attitudes have resulted in laws and
regulations governing environmental
protection, water quality, food safety,
and other farm-related matters. In addi-


tion, there is the risk of lawsuits result-
ing from accidents and other events.
Human Risk. The character,
health, and behavior of individuals are
unpredictable and contribute to the risk
in farm management. The possibility of
losing a key employee during a critical
production period is one example of this
type of risk. Dishonesty and undependa-
bility of business associates are other
examples. Also, family needs and goals
change, sometimes unpredictably.
Psychological studies have shown
that business managers tend to overlook
risk considerations as they make deci-
sions. They do not deal with risk ex-
plicitly. In fact, ignoring risk may be a
natural tendency to protect our sanity.
For example, consider your decision to
drive to town. You know there is al-
ways a chance that you will be injured
in an automobile accident on the way.
By ignoring this risk, you avoid having
to anguish over the probabilities and
consequences of this decision. However,
past good luck does not guarantee fu-
ture success. And when it comes to
making decisions in today's risky agri-
cultural climate, the wise farm manager
must explicitly consider various sources
of risk.

Profiles in Risk-Taking
Managers respond to risk in differ-
ent ways. Just as we classify people as
being optimistic or pessimistic, conser-
vative or liberal, we can also classify
people according to their attitudes about
taking risks-risk avoiders or risk tak-
ers.
Let us use two hypothetical examples
to illustrate these two types of manag-
ers.
Risk Takers. The risk takers are the
plungers, the more adventurous types
who willingly make risky decisions.


Farm Management


































Farm management is fraught with risk and uncertainty. This mature ear of drought-stricken corn from a
farm in Lamoni, 1A, reveals poor pollination and stunted growth. (USDA photo by Ron Nichols,
88BW1562-12)


They are willing to accept greater risk
in return for the small chance of a higher
income.
Roy Riggins is a risk taker. He rents
his 600-acre corn and soybean opera-
tion in western Illinois. The operation
consists of three tracts that he leases on
a 50-50 crop-share basis from two re-
tired farmers and a widow. He is single
with no family, and, as a result of a
small inheritance and a couple of fa-
vorable production years, his debt-to-
asset ratio is down to less than 10 per-
cent. He owns all of his machinery and
hires part-time labor to help with field
operations during the critical seasons.
With the crop-share lease, Roy feels
that his risk exposure in case of poor
weather and low yields is relatively low.


Part II/Strategic Management


Therefore, he does not purchase mul-
tiple-peril crop insurance. When it
comes to marketing, he uses a mix of
strategies, including cash sales and for-
ward contracting. Although he does not
speculate on the futures market, he
speculates with the grain he produces
by holding a portion of the crop in stor-
age in an attempt to get the best pos-
sible price.
Roy has analyzed his financial situ-
ation, and, based on his net worth, he
feels that he is in a strong enough fi-
nancial position to weather a few low-
income years and still stay in business.
Risk Avoiders. These managers are
the more conservative types who have
a preference for less risky decisions.
Risk avoiders are willing to sacrifice


37






the small chance of higher income for
less risk.
Bill Boyer tries to avoid risk when-
ever possible. He has a family with two
small children and is buying his farm
in eastern Oregon. He has a diversified,
irrigated operation producing potatoes,
alfalfa, wheat, and corn. To purchase
his operation, Bob had to take out a
sizable mortgage. As a result, his debt-
to-asset ratio is just above 50 percent.
He also has to borrow to meet operat-
ing capital needs; as a result, his cash-
flow situation is very tight.
Bill has concentrated on improving
the management of his irrigation sys-
tem in order to reduce production risk
and costs. He purchases crop insurance
to protect against crop failures. His mar-
keting strategies include forward con-
tracting whenever possible. Bill is more
interested in selling at a price that will
meet his cash-flow needs than he is in
receiving the highest possible price.
For these two managers to be happy
with their decisions, they have to make
choices that are consistent with their at-
titudes toward risk. Their attitudes
probably will change over time. This is
to be expected because people's goals,
as well as the financial positions of their
businesses, change over time. Their re-
action to a particular risky decision will
also depend on the possible gains and
losses associated with that decision.
Thus, as is characteristic of much hu-


man behavior, it is difficult to predict
how individuals will react to risky situ-
ations.
Classifying decisionmakers according
to their attitudes about risk is not a judg-
ment about their managerial ability.
There are successful farm managers
who tend to be risk takers, and there
are successful farm managers who are
more comfortable avoiding risk. They
each have their own management
style-proving that there is more than
one way to successfully manage a farm
business.
The Payoff Matrix
The framework for making risky de-
cisions described in this chapter is based
on the fact that farm managers must
choose among alternative actions, the
outcomes of which depend on events
which are beyond their control. The
outcomes of each combination of
choices and events is known as a pay-
off.
Constructing a table showing poten-
tial actions, events, and payoffs can help
a farm manager explicitly consider risk
in the decisionmaking process. This
table, called a payoff matrix, is helpful
when considering a number of choices,
and it can give you an idea of the range
of possible consequences of each ac-
tion.
Table 1 is an illustration of this ap-
proach. First, list the decision alterna-
tives: in this case, whether to apply 20


Decision alternatives: Amount of fertilizer to apply
Event 20 units 40 units 60 units
Net returns in dollars per acre
Low rainfall 74 70 63
Normal rainfall 116 118 117
High rainfall 134 160 168


Farm Management


abe1 h Pyf ari:NtRtun o Friie







units, 40 units, or 60 units of fertilizer.
To build the matrix, chart the decision
choices against the possible events: in
this case, whether there will be low,
normal, or high amounts of rainfall. We
estimate the crop yields in bushels per
acre for each combination of decision
alternatives and events. Then, multiply
each yield by the expected net selling
price of the crop. Since we are con-
cerned with net payoffs, it is necessary
to subtract fertilizer costs per acre from
each figure.
We now have a payoff matrix. By
itself, a payoff matrix cannot dictate the
best decision, but it does provide a con-
venient guide, summarizing the infor-
mation to be considered. By organizing
the decision in this way, it is easier to
focus on what can be controlled (the
alternative actions) and what cannot be
controlled (the possible events).
Budgeting in this framework involves
preparing budgets for each action and
event combination. With careful budg-
eting of all of the possibilities, the ac-
tual outcome should be no surprise. Po-
tential outcomes will have been con-
sidered before arriving at a decision.

Assessing Probabilities
Along with the payoff matrix, another
valuable tool for considering risk in
decisionmaking is the use of probabili-
ties. Probabilities provide a means of
summarizing what we believe and know
about the future. Although the most ex-
tensive use of probabilities has been in
the area of weather forecasting, there is
great potential for their use in business
management.
Probabilities based on a decision-
maker's personal beliefs about the
chance of an event occurring are called
personal probabilities. In estimating
these personal probabilities, decision-
makers should consider their own ex-


Part II/Strategic Management


perience, the opinions of experts, and
the available data. Personal probabili-
ties allow decisionmakers to summarize
everything known about a future event
with numbers so they can deal with risks
explicitly. Techniques have been devel-
oped to help managers estimate their
personal probabilities.

Putting It All Together
The payoff matrix guides the budg-
eting process and summarizes the com-
ponents of the decision problem, the al-
ternative actions, and the events. Per-
sonal probabilities summarize what the
manager believes about the future. By
combining personal probabilities with
the payoff matrix, the farm manager can
evaluate the risk associated with the
decision alternatives.
These steps help farm managers ex-
plicitly spell out the thought processes
that they already use intuitively in mak-
ing risky decisions. Many decisions are
too complex and important to be
handled by intuition alone. A more for-
mal approach provides the discipline to
ensure that all available information has
been utilized.
Risk analysis does not simplify deci-
sionmaking or eliminate the agony of
making difficult choices. More impor-
tantly, risk analysis does not eliminate
risk, but it can help the farm manager
select the right risks to take in the often
uncertain world of U.S. agriculture.
For further information on risk-tak-
ing in farming, see Farm Business Man-
agement: The Decision-Making Proc-
ess, third ed., Chapter 8 by Emery N.
Castle, Manning H. Becker, and A.
Gene Nelson, Macmillan Publishing
Co., New York, 1988.













Entering Farming in

the 1990's


So you think you want to farm? You
are in good company. Each year, many
people consider entering farming on the
basis of a full-time or part-time occu-
pation, or primarily to achieve a pre-
ferred way of life.
These prospective farmers or farm
employees have a variety of back-
grounds. Some are just beginning their
careers while others have had substan-
tial experience in a farm or nonfarm
occupation. Some have had no farm-
ing experience. Some choose farming
as a way of life or as a way out of their
present lifestyle. Others view farming
as an alternative occupation-either as
a farm operator, supervisor, or em-
ployee. To make a success of a farm-
ing venture, it is essential to first ana-
lyze personal goals and set a strategy
to achieve them.

Farming in the Mid-1980's
An overview of the sizes and types
of American farms can help the begin-
ning farmer target a strategy for enter-
ing farming. U.S. farms vary greatly in
size and type. In 1985, 72 percent of


U.S. farms were best characterized as a
"rural residence" or "small part-time"
farm. These farms produced only 10
percent of the total gross farm income,
with off-farm income being used to
cover $1,000 to $2,000 of average
yearly losses of these farms.
"Dual-career" farming operations rep-
resented 14 percent of farms, and pro-
duced about 16 percent of gross farm
income. For this group, off-farm in-
come represented 61 percent of the net
income of the typical family. Most of
these farms would be classed as part-
time farms, although those with gross
incomes above $75,000 could actually
have been considered small, full-time
farms.
Full-time commercial farms ranged
from moderate-sized, sole proprietor-
ships to "super firms" employing a
number of people and involving mil-
lions of dollars of capital. Although
full-time commercial farms represented
only about 14 percent of U.S. farms in
1985, they produced 74 percent of that
year's gross farm income. And while
off-farm income per full-time commer-


Kenneth H. Thomas, Professor and Extension Economist, and
Michael Boehlje, Professor and Head, Department of Agricultural and
Applied Economics, University of Minnesota, St. Paul, MN


Farm Management








Part-time farms Full-time commercial farms


Rural Small Dual Moderate Large Super
residence part-time career size size firms
Gross farm income


No. of farms (000)


Percentage of total farms
Percentage of total gross
Net farm income per farm ($)
Off-farm income per farm ($)


Un
$10,
1,



-1,
22,


Percentage of income
from off-farm sources


ider $10,000/
000 39,999
164 473
51.2 20.8
2.8 7.5
878 -1,017
091 16,625
109 106


$40,000/ $100,000/ $250,000/ $500,000
99,999 249,000 499,999 and over


323
14.2
15.7
6,566
10,347
61


221
9.7
25.2
36,660
10,551
22


66
2.9
16.6
99,661
11,447
10


27
1.2
32.2
640,010
15,448
2


Source: Economic Indicators of the Farm Sector, National Financial Summary, 1985, Economic Research
Service, USDA, ECIFS5-2. The names used to describe farms in these various income categories are
those of the authors of this chapter.


cial farm was about the same as for
part-time and dual-career farms, this
supplemental income represented only
2 to 22 percent of full-time commercial
farms' total net incomes.
Commercial farm earnings derived by
farmers from a similar resource base
also vary greatly. For example, in a
group of southwest Minnesota farms,
those with the highest 20 percent of
earnings had labor and management
earnings of $109,483 in 1988, while
the lowest 20 percent had labor and
management earnings of -$6,598. U.S.
farms also are diverse regionally in the
products they produce-from New Eng-
land's dairy farms to the Midwest's corn
and soybean farms to the Mountain
States' specialized livestock ranches to
the West Coast's specialized fruit and
vegetable farms.

Entering Farming Part-Time
In 1985, about 85 percent of the 2.3
million farms in the United States could

Part II/Strategic Management


be classified as part-time operations.
People operating these farms entered
farming while maintaining their em-
ployment in the nonfarm sector-or vice
versa.
Many people enter part-time farming
primarily to provide themselves and
their families with an alternative way
of life. Their farming enterprise is usu-
ally small, possibly inefficient, and of-
ten operated at an economic loss. The
farm family's willingness and ability to
absorb these losses often determine
whether or not their part-time farm will
remain operable. Over time, these op-
erations may disappear or make changes
to operate more efficiently.
Other part-time farmers enter farm-
ing on a more established, dual-career
basis, combining a substantial farming
enterprise and a nonfarm job. If organ-
ized and operated properly, such a farm
enterprise can add to family net income
and possibly net worth. Successful part-
time farmers often have enterprises that


Part-time farms


Full-time commercial farms


(






give high returns to scarce labor. These
enterprises must be managed efficiently,
and overhead expenses (such as machin-
ery costs) must be kept in bounds. This
dual-career approach may be maintained
over a considerable period of time.
Combining farming and off-farm em-
ployment may be a logical strategy.
However, if you are using this strategy
as a method of gaining entry into full-
time farming, you must work at becom-
ing a good manager and at becoming
known in the community as a good
farmer. Managing finances to build net
worth demonstrates to creditors an abil-
ity to manage money effectively. Rec-
ognize that taking the step to full-time
farming may never happen. Often part-
time farmers become accustomed to
good family living and hesitate to give
up the security they have acquired in
their nonfarm jobs.

Working as an Employee
When considering full-time farming
as a career, you usually think of estab-
lishing your own farm operation. But
with the wide range of sizes of com-
mercial farm businesses today, keep in
mind that there will be increased op-
portunities to enter farming as an em-
ployee of an established operation.
Depending on training and experience,
it may be feasible to enter farming as a
semiskilled or skilled employee, a
supervisor, or even a resident manager.
Any of these routes may become per-
manent employment in a large, existing
operation, or lead to establishing your
own farming operation.
Entry into farming as an employee
may be particularly appealing to those
having little farming experience, since
they can learn by becoming an em-
ployee of a large, established farm op-
eration. It may be necessary to first
start as a semiskilled worker and


progress to positions of increasing
responsibility, such as a herder for a
livestock component of a business, and
eventually the overall manager of the
entire farm business-under the
watchful eye of the ownerss.
An advantage of being an employee
of such a business is the experience
gained in using the latest farm technol-
ogy, marketing techniques, and finan-
cial strategies in farming. Therefore, it
is important to choose an operation that
is up-to-date and uses current methods.
The role of supervisor or resident
manager will be so challenging and re-
warding for some that they may decide
to remain in this role throughout their
farming careers. But for others, the
questions will eventually arise as to
when to resign and how best to estab-
lish their own farm businesses.
One approach is to accumulate suffi-
cient funds to acquire a smaller estab-
lished farming operation when the op-
portunity arises. A second alternative
is to use a phase-in approach-that is,
to use accumulated savings to purchase
land or key machinery and lease it to
the operation you manage, until it is
feasible to start your own operation.
The advantage of this approach is that
if the value of assets such as land con-
tinues to rise, it may be possible to ac-
quire some of these resources earlier at
a lower price than if purchases were
delayed until you had saved enough
money to begin a new operation.
Proper compensation is an important
issue that must be faced to successfully
start a career in farming as an employee,
supervisor, or resident manager. An in-
dividual with managerial capabilities
should expect to receive more compen-
sation than one who is a semiskilled
worker charged with carrying out day-
to-day farming activities. If the incen-
tive payments are made in cash, prob-


Farm Management






























So you are thinking about entering farming? This scene reflects a passing of the trade from one set of
hands to a younger set of hands. (USDA photo by James Karales, 055-30-5)


lems usually are not encountered when
the manager uses the cash to start his
or her own operation. However, in
some cases the incentive payment is not
made in cash. Instead, it is allocated as
shares of ownership in the farming op-
eration. In this situation, you need a
prearranged equitable agreement for
liquidating shares of ownership when
you want to begin your own farm.

Becoming a Partner
Quite often, a prospective farmer has
an opportunity to become a co-owner
of a moderate-sized to large farming
unit that is fully equipped and ready to
farm. This may involve a family op-
eration or unrelated situation, and may
offer even more opportunity for inde-
pendent decisionmaking and eventual
ownership and control. In this case,
take care to ensure that the unit is large
enough to offer a reasonable chance at



Part II/Strategic Management


financial progress, and that there will
be an opportunity to buy into the op-
eration-at least into the machinery,
equipment, and breeding stock. If, af-
ter a short testing period, it appears that
this is a good business unit and the par-
ties cooperate well, develop longer
range objectives and plans for business
development and partial transfer to the
new partner.

Full-Time Farming
on Your Own
The third alternative is to "do it on
your own"-to put all (or most) of the
resources together with the assistance
of a creditor or landlord. Under to-
day's conditions, this option is gener-
ally feasible only for the exceptional
manager with considerable equity.
For many, the more realistic way to
start is to piggy-back on someone else's
operation in a joint venture. This may


43






be an outgrowth of the preparation
stage, where you have worked for a
good farmer who is willing to help you
get started on your own. One such
piggy-back arrangement might involve
an exchange of labor for machinery or
even for the rental of some land. It
may involve starting on a part-time ba-
sis and becoming acquainted with a
neighboring farmer who is willing to
share equipment and management
know-how and get you started in a live-
stock operation.
Fundamentals. The following are
some fundamentals that a young farmer
starting mostly on his or her own should
keep in mind when developing a farm
business:
Most successful business people did
not start at the top.
Do not try to get too big too soon.
Develop your unit over time, keeping
its size consistent with your manage-
ment skills and financial position.
Establish a good track record show-
ing your ability to generate and man-
age income.
Have long-term goals that you are
striving for with plans for attaining
them.
Most beginning farmers have ade-
quate labor but limited capital.
Use your scarce capital to purchase
items that bring high returns, such as
fertilizer.
Piggy-back with an established op-
erator, when possible, to reduce pres-
sure for buying equipment and to have
access to management help.
Substitute labor for capital when
possible. Use smaller equipment and
existing buildings where feasible.
When possible, select labor-inten-
sive enterprises to make fuller, year-
round use of labor supply, for example,
a dairy or hog operation.


Gain control of resources in ways
that will give good returns and make
effective use of leverage, yet protect the
liquidity position of your business, such
as crop share rental of land.
Minimize cash-flow demands, as
well as risk of large losses.
Manage risks carefully. Employ
insurance and risk reducing marketing
strategies, and consider diversified op-
erations.
Over time, capital availability will de-
pend on your management capability.
Establish a good production and fi-
nancial record. Do not try to grow too
fast.
Spend time becoming a better man-
ager; develop your production, market-
ing, and financial skills.
Secure management help when
possible-from an Extension agent,
adult vocational agricultural course,
creditor, professional manager, or good
farmer (see Section VII, "Management
Services: Resources You Can Tap").
Keep fully employed.
While the unit is being developed,
full employment may require off-farm
work.
Keep family living costs in bounds.
Usually the starting farm family
must sacrifice its standard of living to a
substantial degree to achieve financial
progress.


Farm Management













Planning for Farm

Expansion


Expansion has been commonplace for
farm managers attempting to improve
income. In 1969, the average size of a
U.S. farm was 369 acres; in 1988, it
was 463-a 25-percent increase in 20
years. The reasons for the popularity of
expansion and the increased concentra-
tion of agricultural production into
fewer but larger farms are many.
The continuing emergence of new,
capital-intensive technology with strong
economy-of-size features has been a
principal reason. Such technology (for
example, a larger, more productive trac-
tor), once purchased, may not be fully
utilized. Through increased use, fixed
costs-including depreciation, interest,
property taxes, and insurance--can be
spread over more units, resulting in
lower per-unit costs. Additionally, lower
input prices and/or higher commodity
prices may be available if volume is
increased.
Government programs that stabilize
prices and provide benefits based on
volume of production also have encour-
aged farm expansion. Favored income


tax treatment of capital gains and de-
preciable capital assets has reduced the
cost of investing in additional land, ma-
chinery, buildings, and breeding ani-
mals.
In some cases, growth has occurred
to more effectively utilize available
management resources. Finally, if the
per-unit revenue and cost relationship
is favorable and constant at different
levels of production, net income can be
increased by producing more units.
Unfortunately, expansion has not
always resulted in higher farm income.
For some expanding farm businesses,
poor timing resulted in falling profit
margins (due to unanticipated rising
costs, falling commodity prices, and/or
crop failure). Other farm businesses
were unable to cope with the manage-
ment and labor challenges associated
with a larger business. For some farm
businesses, the debt incurred by expan-
sion was excessive, overpriced, and/or
inappropriately structured. And some
farm businesses expanded too exten-
sively or too fast.


Gayle S. Willett, Extension Economist, Farm Business Management,
Washington State University, Pullman, WA


Part II/Strategic Management







Basic Planning
Effective planning, however, can im-
prove expansion decisions.
Prerequisites for Planning. A pre-
requisite in considering farm expansion
is for all involved parties to agree that
a larger operation is a desired goal. Ex-
pansion often implies the assumption
of added financial risks, less leisure
time, and increased personal stress. If
the involved parties are not willing to
accept these challenges, no amount of
planning and analysis is likely to as-
sure a successful expansion program.
Another prerequisite for successful
expansion is the absence of major busi-
ness weaknesses. Preexpansion prob-
lems often become postexpansion crises.
A good record system is needed to iden-
tify weaknesses. A good record system
permits the timely preparation of com-
plete and accurate balance sheets, ac-
crual income statements, cash-flow
statements, and enterprise reports, as
well as income tax information. With-
out a good financial records system, a
manager is unlikely to have the under-
standing and control of the business
required to effectively manage a larger
operation. (See Part III, Chapter 1 for
more information on recordkeeping.)
With these prerequisites in mind, the
next concern is planning the proposed
expansion. Comprehensive planning is
needed to convince all involved par-
ties-inside and outside the business-
that the proposal is financially accept-
able. Planning efforts occur in two
phases: (1) long-range and (2) transi-
tional.
Long-Range Planning. The task of
long-range planning is to evaluate fi-
nancial performance when the expan-
sion program has been fully imple-
mented and is in full stride. This evalu-
ation should include a financial analy-
sis that addresses three key questions:


(1) Will the expansion be profitable?
(2) Will there be enough cash-flow?
(3) Are the risks acceptable?
The overriding concern about expan-
sion is whether acquiring control of ad-
ditional resources will generate a profit
that is sufficient to compensate for the
added risks. If expansion requires a
major capital investment, profitability
needs to be measured in terms of capi-
tal performance (for example, rate of
return on the added investment). Ex-
pansion also may require a large in-
crease in operator labor and manage-
ment; it is important to determine if suf-
ficient income will accrue to cover these
personal resources.
Although profitability and cash-flow
correlate highly, acceptable performance
for one does not necessarily imply the
same for the other; it is necessary to
analyze both. A cash-flow analysis can
determine whether the expanded busi-
ness will generate sufficient cash reve-
nue to meet its cash obligations in a
timely manner. More specifically, de-
termine if funds are available to pay
operating expenses as well as income
and Social Security taxes, to retire term
(over 1-year maturity) debts, to replace
depreciable assets as they wear out, to
maintain a contingency reserve, and to
provide an acceptable living standard.
Risk also should be addressed in a
long-range financial analysis. The busi-
ness' ability to withstand risk is referred
to as its solvency position, measured
by net worth and by the percentage of
indebtedness (total debt + total assets).
A higher net worth and a lower per-
centage of indebtedness imply stronger
solvency and an increased ability to
withstand risk. Thus, there is a need to
consider the impact of expansion on the
farmer's solvency or risk position.
Transitional Planning. If an expan-
sion proposal passes the longer range


Farm Management







profitability, cash-flow, and risk tests,
it may be appropriate to conduct a tran-
sitional analysis. Even though the busi-
ness is projected to perform satisfacto-
rily once the expansion program is fully
phased in, there may be problems in
implementing the program. For ex-
ample, a farmer who expands by add-
ing a new enterprise may experience
below-average yields until new produc-
tion and/or marketing practices are mas-
tered. Even expansion of existing en-
terprises may pose new challenges (for
example, management of hired labor)
and temporary substandard perform-
ance.
Thus, when the expansion proposal
is substantial and the expansion is likely
to involve accelerated costs and/or de-
layed income, a transitional analysis can
be crucial to the success of the expan-
sion. A transitional analysis typically
estimates monthly, quarterly, or annual
cash-flows during the period required
to phase in the expansion program. The
transitional analysis can reveal tempo-
rary cash-flow deficits and the need for
additional financing. This information
is essential to getting the right amount
of capital at the right time.
The final phase of expansion man-
agement is monitoring and controlling
the business as the expansion program
is implemented. Records and transi-
tional period cash-flow projections are
key control tools. A comparison of ac-
tual cash-flows with projected cash-
flows as the transition period unfolds
may reveal discrepancies between the
two. By comparing the two, the man-
ager is in a position to quickly address
an emerging problem before it becomes
a crisis threatening the entire expansion
program. Adopting appropriate risk
control strategies is another means of
reducing the impact of unexpected ad-
verse developments. The exact nature


Part II/Strategic Management


of these strategies will vary with the
type of farm and expansion program.

The Steins' Dairy Farm
Expansion
Mr. and Mrs. H.O. Stein own and
operate a dairy farm. The Steins have
three children-two sons, ages 22 and
16, and a daughter, age 18. The oldest
son is about to graduate from college,
is getting married, and wants to return
to the farm after graduation.
The Steins' farm includes 140 ma-
ture cows and 160 acres of cropland.
Mrs. Stein has a part-time secretarial
job which earns her about $5,000 per
year. As a result of 25 years of hard
work and good management, the Steins
are financially stable. However, the
business is not large enough to provide
adequate support for themselves, a teen-
age son at home, a daughter in college,
and the graduating son and wife. Even
though the oldest son's wife-to-be is
assured of an off-farm job earning
$15,000 per year, if the oldest son joins
the business it will have to expand.
Goals Agreement. After several
family discussions, agreement has been
reached to allow the son and his wife
to join the business, provided the pro-
posed expansion program is financially
feasible. A general partnership arrange-
ment is desired with the son commit-
ting full-time to the dairy. Also, longer
term plans are for the son to gradually
acquire a financial interest in the farm's
nonreal estate assets. The incoming son
has agreed to initially limit his living
withdrawals to $5,000 per year, recog-
nizing that his wife is earning $15,000
from her off-farm job. Mr. and Mrs.
Stein would like to have about $25,000
per year to support themselves and their
two other children.
The Current Situation. No major
weaknesses are apparent with the H. O.







Stein business. Production records in-
dicate the annual herd average is about
18,000 pounds of milk per cow. The
Steins keep good financial records. The
farm has realized a modest profit for
several years and financial obligations
have been met in a timely manner.
The Steins feel that expansion offers
the best opportunity to increase income.
An uncle who is a nearby farmer wants
to retire and is willing to sell his 60-
cow herd, plus replacement heifers, to
the Steins for $81,500. Furthermore, the
uncle has agreed to finance the sale with
a 5-year loan carrying a 10 percent in-
terest rate, to be repaid in five equal
annual payments. Discussions with con-
tractors and suppliers indicate an addi-
tional $94,440 is needed to expand
housing, milking, feed storage, and
manure handling systems. A loan offi-
cer at Farmers Bank, which has pro-
vided short- and intermediate-term fi-
nancing for the Steins over the past 20
years, indicates a loan of $94,440 would
probably have a 12-percent interest rate
and a 7-year repayment period.
The Long-Range Financial Analy-
sis. The Steins' initial concern is
whether financial performance of the
200-cow business will be acceptable
once the expansion program is fully im-
plemented and transitionary problems,
if any, have subsided. Since the expan-
sion proposal affects many areas of the
business, the Steins opt to use a com-
puterized whole-farm budgeting tool
called FINLRB (see Section III, Chap-
ter 8). This program was developed by
Professor Richard Hawkins and cowork-
ers at the University of Minnesota and
is available through the Cooperative Ex-
tension Service in many States. The
analysis addresses three important as-
pects of financial performance: profita-
bility, cash-flow, and solvency (or risk)
(see table).


As reported on line 5, expansion is
projected to increase annual net farm
income by $20,779 ($64,925-$44,146).
Also, the rate of return on total farm
capital investment rises from 4.3 per-
cent to 5.7 percent (line 10). Perhaps
the most critical profitability test is the
rate of return on the added investment
and how that rate compares to the inter-
est cost. As noted on line 13, the
$175,940 expansion investment is pro-
jected to earn an 11.8 percent return.
The average interest rate on the added
investment is 11.1 percent; thus, the
investment is marginally profitable.
The second phase of the financial
analysis compares cash inflows with
cash outflows. Net cash inflows from
both farm and nonfarm sources are pro-
jected to increase from $89,146 to
$131,925 (line 16). Included in that es-
timate is the future daughter-in-law's
$15,000 off-farm salary. These cash in-
flows must be used for family living
expenses (line 17), income and Social
Security taxes (line 18), principal pay-
ments on term (over 1 year) debt, and
replacement of depreciable capital as-
sets (line 21). After meeting these cash
needs, a cash surplus of $8,104 is pro-
jected for the preexpansion business and
$17,493 after expansion (line 23). Un-
der the adopted assumptions, the ex-
pansion proposal clearly strengthens the
farm's cash-flow position.
Solvency (or ability of the business
to assume risk) is addressed in the third
segment of the analysis. Since the en-
tire $175,940 investment is debt fi-
nanced, the debt-to-asset percentage
jumps from 24.6 to 38.3 (line 27), and
the net worth is unchanged (line 26).
Both of these solvency measures are
projected at the beginning of the ex-
pansion program. Moreover, a subse-
quent larger annual increase in net worth
is projected to occur with expansion


Farm Management








With With
current expanded
herd herd
Plan description
Number of dairy cows 140 200
Total hours of labor 7,435 9,734
Change in investment 0 $175,940
Change in debt 0 175,940
Projected profitability
1. Gross cash farm income $330,719 $471,556
2. Cash operating expense 246,573 359,631
3. Net cash farm income (1-2) 84,146 111,925
4. Depreciation 40,000 47,000
5. Net farm income (3-4) 44,146 64,925
6. Interest paid on debt 17,990 37,473
7. Value of operator & family labor & management 29,036 48,578
8. Return to total capital investment (5+6-7) 33,100 53,820
9. Total farm capital investment 761,763 937,703
10. Rate of return on total farm capital investment (8-9) 4.3% 5.7%
11. Added returns to added capital investment (line 8) 20,720
12. Added capital investment (line 9) 175,940
13. Rate of return on added capital investment (11-12) 11.8%
Projected cash-flow
14. Net cash farm income (line 3) $84,146 $111,925
15. Net nonfarm income 5,000 20,000
16. Total farm & nonfarm cash inflow (14+15) 89,146 131,925
17. Family living 25,000 45,000
18. Income tax & Social Security tax 9,874 16,265
19. Principal payments 16,925 39,635
20. Net cash available (16-17-18-19) 37,347 31,025
21. Cash needed for replacement of capital assets 45,000 52,000
22. Nonreal estate principal payments (included on line 19) 15,757 38,467
23. Cash surplus (deficit) (20-21+22) 8,104 17,493
Projected solvency (beginning of expansion)
24. Total assets (farm + nonfarm) $789,079 $965,019
25. Total debt (farm + nonfarm) 194,120 370,060
26. Net worth (24-25) 594,959 594,959
27. Debt/asset (25+24) 24.6% 38.3%
28. Change in net worth per year (5+15-17-18) 14,272 23,661


Part II/Strategic Management







($23,661) than with the smaller herd
($14,272) (line 28). These increases in
net worth result from farm and non-
farm income exceeding taxes (income
and Social Security) and family living
outflows.
Another risk dimension, not shown
in the table, is the vulnerability of the
proposed adjustment to falling commod-
ity prices or production and/or rising
production costs. For example, addi-
tional analysis indicates that a modest
10-percent decrease in commodity
prices or production results in a net farm
income of $6,193 for the 140-cow herd
and $11,681 for the 200-cow herd. Un-
der the same circumstances, the cash
surpluses shown in the table become
cash deficits of $20,325 and $21,739
for the current and expanded business,
respectively. Thus, it can be concluded


that due to an increased debt load, ex-
pansion causes a slight deterioration in
ability to withstand downside risk as
measured by cash-flow position.
In summary, the long-range analysis
indicates that the proposed expansion
is marginally profitable, strengthens
cash-flow, and does not represent a
major reduction in the ability to with-
stand risk. Additionally, the proposal
appears to make it financially feasible
for the son to return home and farm
with his parents. The Steins likely will
want to further pursue the expansion
proposal.
Transitional Planning. The Steins'
planning should now focus on the tran-
sitional period. The Steins are contem-
plating a major expansion and adjust-
ment problems can be expected. Thus,
the Steins should be encouraged to


Poultry producer Maurice Layton of Magee, MS, looks over brooder equipment on his farm One of the
area's largest poultry producers, he has faced decisions about when to expand his operation on more
than one occasion. (USDA Photo by George Robinson, 0476R416-11)


Farm Mangement






budget cash inflows and outflows over
the first 1-3 years of the expansion to
identify additional capital needs. An
estimate of cash deficits should permit
a more effective job of planning for cash
needs, thus reducing the risk of experi-
encing loan payback difficulties, fam-
ily living shortfalls, and perhaps failure
to reach long-term goals.
Lender Documentation. Once the
Steins have completed the long-range
and transitional analysis and are con-
vinced that the expansion proposal is
feasible, they should prepare the docu-
mentation needed to support a loan re-
quest. That documentation should in-
clude the long-range and transitional
analysis, plus a current balance sheet.
In addition, balance sheets, income
statements, cash-flow statements, tax
returns, and production records for the
past 3-5 years should be obtained. If
this documentation is positive and ef-
fectively communicated to the lender,
lender risk is reduced and the likeli-
hood of the Steins obtaining the desired
funds under favorable terms is in-
creased.
Expansion Control. Once the funds
needed to implement the expansion are
forthcoming on terms consistent with
the financial analysis and the investment
is made, the Steins must use whatever
good management tools are available
to control the expansion program. Keep-
ing good records-particularly cash-
flow records-and comparing actual
performance with projected perform-
ance should be a helpful control tool.
Also, the Steins should give close con-
sideration to other options they may
have for reducing risks, especially dur-
ing the transition period. These may
include an intensive herd health pro-


gram, forward contracting feed pur-
chases, forage testing, and maintaining
a higher level of financial liquidity.

Planning Payoffs
Some farm managers may be reluc-
tant to do this comprehensive planning
and analysis. Foremost among the rea-
sons for their reluctance is the time,
mental anguish, and frustration associ-
ated with predicting the future. How-
ever, as long as the payoff from plan-
ning and analysis exceeds the costs of
the time and effort involved, it is a good
investment. Given the heavily capital-
ized, highly competitive, low-margin,
and high-risk nature of today's agricul-
ture, the benefits from comprehensive
expansion planning are likely to be con-
siderable. Clearly, expansion decisions
based on thoughtful projections of prof-
itability, cash-flow, and risk will be
superior to decisions based on hunches,
hope, and availability of funds.


Part II/Strategic Management












Choosing Enterprises

for Your Farm


One of the most basic and important
decisions a farmer must make is to
choose the best combination of prod-
ucts or enterprises. This decision is one
of the key factors that determine the
farm's profitability, and whether the
goals and objectives of the farm family
will be met.
Perhaps a way to conceptualize the
enterprise selection process is to think
of developing a series of transparent
overlays with each overlay as a compo-
nent of the process. The first overlay
would contain objectives; the next an
inventory of resources including mar-
kets; a third, the relationships among
enterprises; and the next would match
the resources available with resource
requirements of alternative enterprises.
These overlays, one on top of the other,
define the possibilities that are physi-
cally feasible and that accomplish de-
sired objectives.
Beginning with the first overlay or
step, define the goals, personal and fi-
nancial, that you want to accomplish
with an agricultural enterprise. It is
important to make these goals as spe-
cific as possible. For example, your


goals may include providing a certain
amount of work for family members,
earning a particular net income, and
maintaining stewardship of the land.
(See Part II, Chapter 2 for more infor-
mation on setting goals.)
Once goals are established, the next
step is to determine whether they are
feasible.

Personal Preferences
Personal preferences can help to nar-
row the field of alternative enterprises.
Not all farmers want to raise hogs, dairy
cattle, or vegetables. Decisions are also
influenced by the length of planning
horizons. The length of time between
start-up and harvest ranges from about
40 days for radishes to over 40 years
for Douglas fir trees. The desired pe-
riod between the initial investment and
needed return is influenced by the
farmer's age and financial position. Fi-
nancial position also helps determine
ability to bear risk and whether capital-
intensive enterprises with high up-front
costs are feasible.
Past experience with similar enter-
prises may influence choice. Any new


Richard W. Carkner, Extension Economist, Puyallup Research and
Extension Center, Washington State University, Puyallup, WA


Farm Management







enterprise will require an educational
investment. How extensive this will be
depends on past experience and the
technological complexity of the enter-
prise. A related concern is the manage-
ment level required for success. An
honest self-appraisal of management
ability and willingness to learn new
skills through self-study or formal train-
ing is important.

Location, Climate, Labor
Factors such as location, climate,
available labor, and capital can be used
to narrow the range of possibilities.
It is no accident that the Midwest is
noted for corn and that citrus crops are
grown in the Deep South. Comparative
advantage provides a partial explana-
tion of why some commodities are pro-
duced where they are. Climatic condi-
tions such as rainfall, temperature, and
growing-season length influence fea-
sible crop alternatives. Some of these
factors can be controlled or altered-
but there is a cost. Irrigation may be
used to supplement rainfall in arid re-
gions or used to reduce the risk of crop
failure where growing-season rainfall is
variable.
Other factors to consider include soil,
topography, and distance to markets.
The interaction of these factors influ-
ences production possibilities and pro-
duction costs.


Sol series ne


Soil series
or capability

Class


Viewed collectively, these factors
will provide answers to a few key ques-
tions related to technical feasibility.
What commodities can be produced
given the soil, climate, and the pres-
ence or absence of certain pests?

Resource Inventory
Because resource requirements vary
widely among enterprises, the availa-
bility of resources will limit enterprise
choice and scale. Resources are tradi-
tionally thought of as land, labor, and
capital, but add to this list markets,
management, and a physical asset in-
ventory including equipment and build-
ings. Market availability is important,
but it is often neglected or assigned a
lesser role in assessing the feasibility
of an enterprise.
Market. A market assessment will
help determine what products can be
sold and at what price. In most cases,
individual producers cannot develop
markets for their products and must
work within the framework of existing
markets. An exception to this might
involve direct marketing to consumers
through pick-your-own operations,
roadside stands, or other self-market-
ing enterprises.
Land. An assessment of land might
start with a soils map that is overlaid
with field sizes, roads, drainage systems,


Soil limitations


Acres


Owned Rented


(comments)


Part II/Strategic Management






access to irrigation water, and other
important features. A study of soils will
help determine the most suitable enter-
prises-row crops, field crops, forestry,
or forage crops for livestock produc-
tion (see table 1).
Labor. Inventory labor resources by
starting with the farm family: How
many hours are available from family
members and how is their time distrib-
uted throughout the year. This is espe-
cially important because hired labor is
becoming a limiting resource. Low rates
of unemployment nationally suggest a
highly competitive labor market, and it
is expected to stay competitive for the
foreseeable future. The availability of
labor is only one aspect to be consid-
ered; skill and experience levels of po-
tential employees are also important
(see table 2).


Capital. Capital represents the pool
of dollars available for investment in
machinery, equipment, or livestock re-
quired for a new enterprise. Capital also
is required to purchase seed, fertilizer,
feed, and hired labor. Sources of capi-
tal include the farmer's personal net
worth, equity capital from off-farm in-
vestors, income from off-farm employ-
ment, and available credit. Together,
these sources represent the upper limit
of available capital (see table 3).
Management. Management is the re-
source necessary to combine all the
other required resources to achieve de-
sired results. The level of management
required varies with the complexity of
the enterprises. Some enterprises require
a high degree of technical skill and spe-
cialized knowledge. Others are less
demanding. An inventory of past man-


Expected labor availability by month:

Source Cost/hour Hours by month Year total
J F M A M J J A S 0 N D


Farmer
Family
Hired
Other
Total:


Dollars available for investment and annual operating costs:
Sources
Requirements Personal Borrowed Total
Facilities and
equipment investment
Annual operating expenses,
cash for feed, seed supplies, etc.


Farm Management






agement experiences, the willingness to
learn new skills, and the opportunities
to acquire new information are compo-
nents of a management assessment.

Relationships among
Enterprises
It is important to consider the rela-
tionships among enterprises. Some new
enterprises may compete with existing
enterprises, while others may actually
increase the production of existing en-
terprises.
Enterprises that compete for re-
sources are those that require the same
resources at the same time. An increased
use of resources in one enterprise would
require a reduction in another. Supple-
mentary enterprises are those that re-
quire the same resources but at differ-
ent times of the year. For example, add-
ing a livestock enterprise to a crop en-
terprise would take advantage of under-
utilized winter labor and, perhaps, use
byproduct feed from crop production.
Enterprises are considered comple-
mentary if one enterprise contributes
directly to another. For example, crop
rotations involving legumes and grains
can result in more grain being produced
than if land were used for continuous
grain production.
Enterprise diversification can also re-
duce risk. One model to follow in de-
veloping a diversified mix of enterprises
is to add enterprises until all supple-
mentary and complementary enterprises
have been exhausted.

Investigating Alternatives
After identifying your goals, personal
preferences, location, the availability of
markets and resources, and the relation-
ships among enterprises, the next step
is to assess alternative enterprises. Use
the information you have assembled to
compare alternatives (see table 4).


Part II/Strategic Management


This process requires assembling in-
formation on resource requirements,
which in turn requires the development
of enterprise budgets and estimates of
relative profitability. Resource require-
ments and production cost information
(budgets) can be obtained through your
County Extension Agent's office or
from the Cooperative Extension Serv-
ice at your land-grant university. Infor-
mation should be available on a wide
array of crop and livestock alternatives.
However, be prepared to supplement the
data you receive with your own infor-
mation. It is also helpful to obtain in-
formation from other sources such as
farmers who produce the commodities
of interest. (See Part III, Chapter 3 for
information on enterprise budgets and
gross margins as a tool to evaluate the
relative profitability of enterprises.)
Realize that enterprise selection is a
complicated and demanding process. It
should be considered no different than
evaluating any other business opportu-
nity. The amount of time and energy
spent in research should be directly re-
lated to the amount of capital at risk
and the potential rewards.








Enterprise requirements example
Factor/resources Crop #1 Crop #2 Crop #3
Land
Soil Required Special Fair Variable
Topography Level South facing Variable
Drainage Well Well Variable
Irrigation
Labor
Timeliness importance Some Important Little
Decision/responsibility Low Low Low
Peak season months) March, July June, July Fall
Hours per acre 50 120 275
Percentage manual 80 75 60
Capital requirements
per acre
Investment High Medium High
Annual operating High High Low
Management
Level of management Medium Medium Medium

Timing of management Periodic Periodic Periodic
requirement
Market
Limitations Possible Possible Possible
Type Local processor Local processor Multiple
Profitability
Gross margin $/acre 275 90 150
Cash-flow

Years between initial 4 2 7
investment and first
harvest


Farm Management












The ABC's

of Alternative

Agriculture


As we write this, wholesale vegetable
dealers in Minneapolis are paying $4
per pound for French beans and $2 per
pound for scallopini. This should be
enough to get the attention of any
farmer who has been fighting anemic
grain prices. How can a farmer cash in
on vegetable prices rivaling those for
choice cuts of beef? Or, for that matter,
just what is a scallopini? This is all part
of one of the big stories of farming in
the 1980's-alternative agriculture.
Alternative agriculture is difficult to
define. For some, it is as simple as
ABC: asparagus, broccoli, and cauli-
flower. For others, it might be llamas
or catfish. One farmer joked that alter-
native agriculture is any new crop he
thinks of first and then watches his
neighbor get rich from growing.
No matter what its definition, alter-
native agriculture always involves
choices among enterprises that are not
usually grown in a particular farming
area. This atypical entrepreneurial
choice, more than anything else, is what
makes alternative agriculture unique,


from a farm management point of view.
Traditionally, farmers have considered
such choices as "corn or soybeans?" or
"hogs or cattle?" But rarely have many
considered "cor or strawberries?" Al-
ternative crops offer new opportunities,
but they also provide new challenges.
Instead of choosing from a few tradi-
tional options, farmers may be faced
with dozens of alternatives-and they
may have to learn new farming prac-
tices.

Why Alternatives?
Some farmers seem to be born for
business. They see the opportunities for
marketing to well-heeled consumers. If
these consumers are willing to pay sky-
high prices for vegetables with names
most people cannot even pronounce-
much less grow successfully-these
born-for-business farmers are willing to
try to meet that demand. And, most
likely, these farmers will succeed.
Unfortunately, many farmers turn to
alternatives only when they are faced
with continual poor returns from tradi-


Richard A. Levins, Extension Farm Management Specialist,
University of Minnesota, St. Paul, MN, and
Daniel J. Donnelly, Extension Agricultural Science Agent, Maryland
Cooperative Extension Service, Leonardtown, MD


Part II/Strategic Management






tional crops. Some farmers succeed. For
example, some small farmers in south-
ern Maryland questioned the future of
tobacco production and turned to vege-
tables or hogs in time to avert disaster.
They had the skills and market access
to play the new game. But many grain
farmers in other parts of the country
found themselves without the labor,
capital, or markets necessary to do any
better with raspberries than they could
with wheat.
While the farm crisis caused farmers
to look at alternative agriculture in the
1980's, concerns about the environment
may well be the big factor in the 1990's.
Already we are seeing livestock bans
proposed for areas near critical water
supplies, and key herbicides are being
withdrawn from legal use on corn.
These changes can force the farmer to
consider new enterprises and produc-
tion practices just as $1.50 corn can.
But alternative agriculture is simply not
big enough to include all U.S. farmers.
Only those who consider it early and
study it seriously will succeed.

Headache No. 1
We visited one farmer in southern
Maryland who had a particularly large
family. We asked how he chose his
crops that year. He said he did it by
matching the jobs each of his children
could do to the jobs each crop required.
Not all of us have a labor force of chil-
dren, but we can all benefit from the
wisdom of his answer. It is essential to
have adequate labor throughout the sea-
son for whatever alternatives are con-
sidered.
Labor requirements for alternative
crops have many important dimensions.
One is obvious-if an enterprise re-
quires so many hours of labor per acre,
make sure you have that many hours
available. But there are at least three


other factors that are just as important.
First, consider the timing of the labor
requirements. Many alternatives use
most of the labor during a short period
of the season. Second, some crops re-
quire special crew sizes or work during
odd hours of the day. Hanging tobacco
is not a one-person operation no matter
how much time that person has. Min-
nesota cauliflower is best harvested in
the very early morning to keep it cool.
And third, some alternatives require
skilled labor. Unskilled harvest labor
can quickly ruin a marketing plan that
depends on delivering quality products.
When labor is in short supply, con-
sider this problem in comparing budg-
ets for enterprises. Most crop budgets,
for example, are prepared on a per-acre
basis. Comparing budgets for two simi-
lar crops such as corn and soybeans is
easier than comparing per-acre budgets
for corn and strawberries. The higher
labor requirements for one acre of
strawberries might force a farmer to
give up many acres of corn. Therefore,
an acre-for-acre comparison, as opposed
to a whole farm comparison, does not
give an accurate analysis of profits.
Always consider how the entire opera-
tion will change with alternatives. (See
Part II, Chapter 9 on opportunity costs.)
Even in an area where farm labor is
in short supply or the farm manager is
not the type to manage a large number
of workers, do not rule out agricultural
alternatives. Simply be careful about
choosing an alternative. In southern
Maryland, some tobacco farmers found
a good source of supplemental income
in hogs. The swine alternative actually
took much less labor than their main
crop of tobacco.

Machinery and Capital
Choose an enterprise that makes good
use of existing equipment, or at least


Farm Management





























County Extension Agent Dan Donnelly (/) looks over berry crop grown by James R Owens. The Owens
farm once had tobacco as a main crop but now offers a variety of vegetables and berries to southern
Maryland customers. (USDA photo by Larry Rana, 89BW1036-23)


give the matter serious thought. New
specialized equipment adds a financial
burden to an already risky venture. At
the same time, it is important to be crea-
tive about how equipment can be used
for other purposes. More than one
southern Maryland tobacco barn has
been converted inexpensively into a hog
barn.
The capital requirements for alterna-
tive agriculture also deserve close at-
tention. These types of crops are usu-
ally expensive to grow. Budgeting pe-
tunia seed at $1,000 per ounce for a
new bedding plant operation could be
difficult. Unfortunately for most farm-
ers forced into alternative agriculture,
capital is the limiting resource. That
limit, even more than labor, can put a
damper on any venture into alternatives.
While some bankers are quick to ac-
cept business plans for traditional en-
terprises, they may be skeptical of a
sure-fire asparagus plan. Asparagus will


Part II/Strategic Management


Doris Roberts finds the southern Maryland pick-
your-own strawberry farm a tasty place to spend
her morning. (USDA photo by Larry Rana,
89BW1036-31)







be new to them, and they will rightly
require solid financial documents to
convince them that the plan is sound.

Markets
Traditional enterprises have tradi-
tional markets, so farmers can concen-
trate on production. This is not the case
for alternatives. There are no futures
markets, elevators, Government pro-
grams, and other such features to make
up for a lack of attention to marketing.
The fact is, there has never yet been a
broccoli shortage, and ration lines for
shittake mushrooms are nowhere in
sight. So to be successful, you will have
to convince customers to buy from you
instead of someone else.
To do this, be creative. A farm con-
sultant in Minnesota advises farmers to
use organic methods-not for environ-
mental reasons but because the "or-
ganic" label can make a product stand
out in a crowded market.


A farm located near an urban area
has an advantage over one 40 miles
from the nearest town. Capitalize on the
urban taste for fresh, local products.
There are numerous outlets where you
can sell crops-roadside markets, farm-
ers' markets, specialty restaurants, and
food chains. In the past, many farmers
saw cities as places to be avoided at all
costs. But in today's markets, cities can
be the best sources for getting top dol-
lar for agricultural products.
Rural areas have their advantages,
too. In International Falls, MN, about
160 miles from Duluth, County Agent
Terry Nennich and a group of enter-
prising small farmers started a success-
ful venture in broccoli and cauliflower.
How did they do it? Not with roadside
markets-moose do not eat broccoli.
Nennich and the farmers did it by form-
ing an organization that could compete
with big operators shipping out of Cali-
fornia.


County Extension Agent Dan Donnelly visits with customers who had no problem finding berries to pick
at this Lexington Park, MD, strawberry farm. (USDA photo by Larry Rana, 89BW1036-34)


Farm Management







Competing for markets in the big
leagues often requires more clout than
any one farmer can muster. In Mary-
land, a cooperative hog-buying station
and tomato-packing plant created mar-
ket opportunities that no single farmer
could have built.

Likes and Dislikes
There are hundreds of alternative en-
terprises. The farm manager's job is to
decide which ones will work. An analy-
sis of labor requirements, machinery,
capital, and markets is important. But
consider individual preferences. Some
farmers simply will not raise hogs. Oth-
ers would probably sell their farms be-
fore they would raise chrysanthemums.
There are plenty of alternatives, and
farmers who are most successful seem
to choose ones that they like.
Some farmers spend more time than
others researching alternatives before
they pass judgment. There are always
local farmers with current information
on catfish, as well as good contacts in
other States on every imaginable crop.


After selecting an alternative crop,
start small. Do not plant 20 acres of
cauliflower in the first year. One or two
will give an indication of what produc-
tion problems and marketing opportu-
nities will be encountered. Develop ap-
proved production practices, line up la-
bor, and let customers see the product.
Grow one step at a time. With each
step, get help from the local Extension
Office. Oh, and scallopini is a type of
baby squash.
(See Part II, Chapters 12-16 for case
studies of farmers trying alternative
crops and marketing strategies.)


Part II/Strategic Management












Determining Your

Competitive

Advantage


To be successful, farmers must pro-
duce the commodity or combination of
commodities for which their resources
are best suited. Thus, one of the most
important choices farm managers make
is deciding what to produce.
The first step in making that deci-
sion is to make an inventory of the
available resources-land, labor, capi-
tal, and management skills. These re-
sources, along with factors such as lo-
cation, access to markets, and available
technology, will determine a farmer's
competitive advantage.
Many farmers arrive at the best mix
of products-where they have the
strongest competitive advantage-
through experience. Over time, they find
that they make more money by increas-
ing the production of commodities for
which they are more efficient in com-
parison to other farmers and by reduc-
ing production of commodities for
which they are less efficient.
However, the world is always chang-
ing and farmers compete not only with
their neighbors and farmers in adjacent
States, but also with farmers around the
world. As a result, farmers must con-


tinually reexamine their competitive
position in relation to commodities they
produce.
In evaluating alternatives, consider
two key concepts-competitive advan-
tage and comparative advantage. A
farmer's competitive advantage is re-
lated to, but not entirely determined by,
his or her comparative advantage in
producing a particular commodity.
Comparative advantage is a concept
that refers to the relative efficiency with
which resources are used and commodi-
ties produced compared to that of other
producers. Competitive advantage takes
actual market conditions into account;
it refers to relationships between the
cost at which the product can be sup-
plied and the market price.
We will examine the concept of com-
parative advantage before turning to the
more general consideration of competi-
tive advantage.

Assessing Comparative
Advantage
Economists developed the concept of
comparative advantage to help people
understand their economic niche in so-


John E. Ikerd, Visiting Professor and Extension Economist, University of
Missouri, Columbia, MO


Farm Management







city. Comparative advantage, essen-
tially, means comparative efficiency.
You have a comparative advantage in
doing those things you can do more ef-
ficiently than someone else. This may
sound simple. But assessing compara-
tive advantage involves measuring effi-
ciency differently than many farmers are
used to-not in bushels per acre or
pounds of milk per cow, but in trade-
offs.
Tradeoffs occur when you choose one
thing over another. You must give up
any benefit associated with the alterna-
tive you did not choose. In other words,
you cannot have your cake and eat it,
too. If you spend your money on one
thing, you have to give up the satisfac-
tion of whatever else you might have
bought instead. Economists refer to the
benefit foregone as the opportunity
cost-the value of the opportunity you
must forego when you choose an alter-
native.
Assessing comparative advantage in-
volves measuring efficiency in terms of
the output produced divided by the out-
put foregone:

Output produced
Efficiency ratio =
Output foregone

For example, a farmer may have to
give up the opportunity to produce 40
bushels of soybeans to produce 120
bushels of cor. The efficiency ratio for
cor would be 120 bu/40 bu, or 3. Three
bushels of corn would be gained for
each bushel of soybeans foregone. The
opportunity cost per bushel of corn
would be the value, or output, of soy-
beans (1/3 bushel) foregone for each
bushel of corn produced (40 bu/120 bu).

Output foregone
Opportunity cost =
Output produced


Part II/Strategic Management


Thus, the crop with the highest effi-
ciency ratio is also the one with the
lowest opportunity cost.
Comparative advantage is a compari-
son of the efficiency of two producers
who can produce either of two differ-
ent products. The producer who is more
efficient (has the lower opportunity cost)
has a comparative advantage in the pro-
duction of that commodity.

Farmers Andrews and Brown
Take a simple example of two farm-
ers. Farmer Andrews can produce ei-
ther 150 bushels of corn per acre or
500 pounds of beef per acre on her land
using a given dollar amount of re-
sources. Farmer Brown can produce 100
bushels of corn or 400 pounds of beef
on his land with the same dollar amount
of resources. So who has a compara-
tive advantage in producing what?
It would be easy if Brown could pro-
duce more of one thing and Andrews
could produce more of the other. But
that is not true in this case. Andrews
has a more productive complement of
resources, so she can produce more of
either beef or corn than can Brown.
Andrews is said to have an absolute
advantage in both beef and corn. Does
this mean that Brown simply cannot
compete and will be forced out of the
business?
Before we declare bankruptcy for
Farmer Brown, let us look at opportu-
nity cost. Andrews' opportunity cost of
producing 500 pounds of beef is 150
bushels of corn, the amount of corn she
would have to give up if she produces
beef instead of corn. Her opportunity
cost per 100 pounds of beef is 30 bush-
els of corn. Brown's opportunity cost
of producing 400 pounds of beef is 100
bushels of corn. This means that Brown
only gives up 25 bushels of corn for
each 100 pounds of beef he produces.







Thus, Brown's opportunity cost of pro-
ducing beef is less, and he has a com-
parative advantage in beef production.
Andrews' opportunity cost of produc-
ing 150 bushels of corn is 500 pounds
of beef or 3.33 pounds of beef per
bushel of corn. Brown's opportunity
cost for 100 bushels of corn is 400
pounds of beef or 4 pounds per bushel.
Thus, Andrews turns out to be the more
efficient producer of corn because she
gives up fewer pounds of beef per
bushel of corn produced. Therefore,
Andrews has the comparative advantage
for producing corn.
When opportunity costs are used to
compare two producers who are each
able to produce two alternative crops,
one producer will always have a com-
parative advantage in producing one


commodity and the other producer will
always have a comparative advantage
in producing the other commodity.

Comparative Advantage and
Competitiveness
As noted previously, comparative ad-
vantage and competitiveness are related
to each other, but they are not identi-
cal. A farmer's competitive advantage
reflects the ability to compete with other
farmers for a given market. Farmers are
said to be competitive if they can sup-
ply a given market at a cost below mar-
ket price. The farmer's comparative
advantage in production is an impor-
tant factor in determining competitive
advantage, but there are other factors
as well.


Should you plant corn or raise beef? Determining your comparative advantage can help you find your
economic niche.


Farm Management


64






Other factors must be considered in
order to translate the concept of com-
parative advantage into competitive ad-
vantage.
Marginality. In the previous example
of comparative advantage, we assumed
that all resources of a given farmer were
equally productive. Obviously, such an
assumption rarely holds true in real
world comparisons. Two farmers who
would consider producing corn or beef
typically would have some good crop-
land and some land that is better suited
for pasture. Thus, their comparative
advantages change as each specializes
by producing more of one commodity
and less of the other.
For example, Farmer Andrews might
have some land that will produce 200
bushels of corn per acre, but on her
less productive land, yields might drop
to 100 or fewer bushels per acre. Farmer
Brown might be able to produce 150
bushels per acre on his best land but
produce yields of 50 bushels or fewer
per acre on his less productive land.
Thus, Andrews' and Brown's com-
parative advantage in corn and beef
would be different at different levels of
specialization, even if the productivity
of land in beef was the same at all lev-
els. Brown likely would have a com-
parative advantage in using his most
productive land in corn rather than trad-
ing for corn produced from Andrews'
least productive land.
Competition for Markets. In gen-
eral, farmers' opportunity costs are re-
flected in overall market prices for ag-
ricultural commodities. The price of
soybeans, for example, reflects the price
that farmers who produce soybeans are
willing to accept. They may not be
happy with the price, but they nonethe-
less are willing to put soybeans on the
market at that price.




Part II/Strategic Management


To be competitive, farmers have to
be able to sell at prices lower than their
competition's. Thus, farmers can evalu-
ate their competitive advantage by com-
paring their opportunity costs with mar-
ket prices for alternative commodities.
Farmer Andrews has a competitive
advantage in producing corn rather than
some other crop if the opportunity costs
of producing corn, measured in terms
of the value of the crop foregone, is
less than the market price of corn. Op-
portunity cost, in this case, is the value
of the crop given up divided by the
value of the increase in corn produced.
If Farmer Andrews has to give up $2.40
for each additional bushel of corn pro-
duced, the production of corn would
have a competitive advantage only if
the price of corn is more than $2.40 per
bushel.
Cost Differences. Comparative ad-
vantage assumes that farmers use basi-
cally the same set of productive re-
sources to produce two different com-
modities, as in our examples of com-
parative and competitive advantage.
This rarely fits real world circum-
stances. However, differences in re-
sources needed for producing two dif-
ferent commodities can be accounted
for quite easily by using dollar values
rather than physical quantities as we did
in adjusting for differences in market
values.
Assume that producing 150 bushels
per acre of corn costs Farmer Andrews
$30 more per acre than producing cot-
ton, which costs $360 per acre. Then
the opportunity cost of producing a
bushel of corn would be $2.40 (see pre-
vious section) worth of cotton plus an-
other $0.20 worth of added production
cost ($30/150 bu) for corn relative to
cotton, for a total of $2.60 per bushel
($360 + $30 = $390; $390/150 bu =






$2.60/bu). In some cases, this differ-
ence in cost may be enough to change
the farmer's competitive advantage.
Nonmarket Returns. Many enter-
prises result in income or returns over
and above those that result from the sale
of the commodities produced. Govern-
ment payments are a common example
of such nonmarket returns.
Assume that Farmer Andrews could
produce either 150 bushels per acre of
corn or 600 bushels per acre of cotton
and could qualify for Government defi-
ciency payments on either corn or cot-
ton; but also assume that the expected
deficiency payment is $60 per acre for
corn but only $48 per acre for cotton.
Farmer Andrews would need to sub-
tract $12, the difference in expected
payments, from the opportunity cost for
corn ($390) and add $12 to the oppor-
tunity cost for cotton. This would re-
sult in a $2.50 opportunity cost for corn
($390 $12 = $378; $378/150 bu =
$2.52/bu) and only a $0.595 opportu-
nity cost for cotton ($345 + $12 = $357;
$357/600 bu = 0.595/bu).


The Bottom Line
Competitiveness implies profitability
when profit is defined as a return in
excess of opportunity costs. However,
a profit in this sense does not mean that
farmers will always be able to cover
their total costs of production. They may
not be able to generate sufficient re-
turns to replace buildings, machinery,
and equipment, or to meet other fixed
costs. In fact, they may not even be
able to cover the costs of inputs such as
fertilizer, seed, feed, fuel, and labor-
typically referred to as variable costs.
Profit in this sense means a return that
is higher than the costs that are not al-
ready committed to the production proc-
ess-in other words, higher than the
opportunity costs.
Farmers who produce commodities
for which they have a competitive ad-
vantage are making as much profit as
possible given the resources available
to them to produce the commodities
they view as alternatives.


Farm Management











Integrating Production

and Marketing

Management on a

Beef Ranch


The management of a ranch opera-
tion, like any other business, requires
careful consideration of the interrela-
tionships between production and mar-
keting decisions. An effective tool for
integrating the management of the two
functions is a production-marketing
plan.
A production-marketing plan begins
with the producer's goals, considers the
alternatives available, and identifies a
strategy for action that is flexible
enough to accommodate periodic review
and changes. Selling is only a small part
of the plan. The plan must consider the
entire process, from raising the replace-
ment heifer to selling the calf or year-
ling. By integrating production and
marketing into one overall plan, the
ranch manager can rationally respond,
rather than react, to market conditions.
Developing the production-marketing
plan is an ongoing process that involves
seven key steps:
1. Document production and market-
ing situation and goals.
2. Learn about and analyze current
market factors and price trends.


3. Identify and evaluate available
production and marketing alternatives.
Develop enterprise budgets and
breakeven prices for all potential pro-
duction and marketing alternatives.
4. Determine profit and price goals
or target prices.
5. Develop a pricing plan consider-
ing cash, forward contracting, futures,
hedging, and option alternatives.
6. Compare production-marketing al-
ternatives and identify the one that will
accomplish your goals and meet price
targets.
7. Monitor the plan and modify it as
necessary based on current information.
Once you have written a production-
marketing plan, you can design specific
actions (strategies) to implement the
plan. The strategy defines the mechan-
ics for production, costs of production,
marketing costs, product prices, and
other variables to determine their im-
pact on potential profits. The plan can
be altered as these factors and variables
change.


Paul H. Gutierrez, Assistant Professor and Extension Farm-Ranch
Management Economist, and
Norman L. Dalsted, Associate Professor and Extension Farm-Ranch
Management Economist, Colorado State University, Fort Collins, CO


Part II/Strategic Management







The Process
The discussion that follows develops
a production-marketing plan for a com-
mercial cow-calf ranch in northwestern
Colorado. Each step of the production-
marketing plan highlights important
points but, for the purposes here, the
example is simplified and does not in-
clude all marketing management and
production strategies that would be pos-
sible.
Step 1: Assess Production-Market-
ing Status and Goals. A production-
marketing plan is basically an outline-
a road map for the operation of the farm,
ranch, or feedlot business. The produc-
tion-marketing plan defines the busi-
ness-resources, inputs, outputs, and
management skills that are available. It
summarizes in writing what you have
to work with.
Consider, for example, a ranch in
northwestern Colorado, which we will
call the J/J Ranch. Elevation on the J/J
Ranch varies from 6,200 feet at the
south border of the ranch to 6,800 feet
on the north. The topography is flat and
rolling. Soils are composed mainly of
sands and clays. Average precipitation
is 10-12 inches. The J/J Ranch encom-
passes 1,860 deeded acres, 20,000 acres
leased privately, and 20,000 acres of
Bureau of Land Management lands. All
acres are rangeland except for 30 acres
around the headquarters and 450 acres
of irrigated alfalfa hay. Average stock-
ing rates are one animal unit per 80
acres for all rangeland.
The J/J Ranch operation includes 372
English cross-bred cattle. Performance-
tested Gelbvieh bulls are used on the
mature cow herd. Angus bulls, selected
for growth and calving ease, are used
on the replacement heifers. The long-
term objectives are to have a mature
cow that is one-half Gelbvieh and one-
half Angus. For replacements, heifers


are retained at approximately 15 per-
cent of the base herd.
The Gelbvieh-Angus crossbred cattle
on the J/J Ranch generally attain fall
calf market weights of 480-500 pounds
per animal for heifer calves and 500-
520 pounds for steer and bull calves.
Calves are either sold in the fall or re-
tained and fed under feedlot conditions
in eastern Colorado, depending on a
careful enterprise analysis-costs of
production, breakeven prices, and ask-
ing prices-and on market outlook and
forward-pricing alternatives. The J/J
Ranch's short-term production-market-
ing goal is to optimize production and
maximize net return per cow.
Step 2: Perform Market Analysis.
There are two basic approaches to price
analysis, commonly referred to as fun-
damental analysis and technical analy-
sis. Fundamental analysis is concerned
with supply and demand considerations
such as physical stocks of grain, pro-
jected crop and livestock production,
inventory reports, and federally-in-
spected slaughter of livestock for speci-
fied periods of time.
Technical analysis, on the other hand,
utilizes various types of charts, trading
volume, open interest, and mathemati-
cal formulas in forecasting the price
behavior of commodities. The bullish
or bearish bias of a pure technical analy-
sis is concerned with the psychology of
the market rather than its supply and
demand factors.
Many buyers and producers utilize
fundamental or technical concepts, or
both, with a high degree of reliability,
so that it may be worth taking the time
to learn enough to be able to "talk shop"
with buyers and sellers. Most impor-
tant, be consistent with your market
analysis and/or source of market analy-
sis information.


Farm Management







The J/J Ranch utilizes both funda-
mental and technical market analysis in-
formation. The ranch relies on private
and public sources for market analysis
information. The J/J Ranch market
analysis objective is to formulate rea-
sonable market price expectations for
the fall calf market and subsequent
feeder cattle markets. These price ex-
pectations are evaluated for production
and market risk using projected
breakeven and asking price estimates
of fall and retained ownership produc-
tion-marketing alternatives. Fundamen-
tal and technical factors are monitored
closely, as possible marketing dates or
forward-pricing alternatives approach.
Step 3: Determine Production-
Marketing Alternatives. The enterprise
budget provides the format and data
needed to assess various alternatives,
as well as the timing of the decisions.
Several budgets can and should be built
for each enterprise (commodity) to rep-
resent alternative combinations of in-
puts and outputs. The profitability of
production-marketing alternatives may
vary in time as prices of inputs and
products change. Input data, production
assumptions, market prices, and net re-
turn values used in budgets should be
changed to reflect the latest informa-
tion and producer goals.
The J/J Ranch updates enterprise
budgets quarterly to determine the
breakeven prices for steer and heifer
calves, cull cows, bulls, and yearling
cattle. The breakeven analysis is then
used to establish asking prices for live-
stock.
Table 1 illustrates a method for de-
termining breakeven prices to cover to-
tal direct cost per class of livestock for
the J/J Ranch, based on budgeted lev-
els of production, expected market
prices, and costs of production.




Part II/Strategic Management


The importance of enterprise and
breakeven price analysis in developing
a production-marketing plan cannot be
overemphasized. Determining break-
even prices for a commodity provides
important information when analyzing
profit potential for different production-
marketing strategies. Various levels of
production and cost can be evaluated
for an optimistic and pessimistic outlook
for prices. By studying various
combinations of breakeven prices, the
manager can form reasonable
expectations of the chances of obtaining
a target price and market weight
combination that will cover cost.
Step 4: Set Price and Profit Goals
and Target Prices. Price and profit
goals and necessary target prices are an
important, but often overlooked, com-
ponent of the production-marketing
plan. When and how to sell will be dif-
ficult to determine if a producer does
not know what price to ask for a com-
modity. A producer's asking price
should depend on management objec-
tives and production relative to cash
operating (variable) costs, fixed costs,
noncash costs, the amount of family
expenses, and the producer's profit goal.
In deriving an asking price, a manager
must develop the information that is
needed to calculate potential net returns
based on future price expectations.
Table 2 reports asking prices for each
cost category (per cow) and each class
of livestock in the cow-calf enterprise
on the J/J Ranch. A cumulative cost is
determined by adding the total cost per
cow for each cost category to the pre-
vious costs category. (For example, the
cumulative total for noncash costs
would be $379.58 per cow-that is,
$245.51 variable cost plus $121.98 fixed
cash costs plus $12.10 noncash cost.)
For feeder steer calves to cover their











Column 1 2 3 4 5
R
0 Enterprise: Cow/calf-J/J Ranch
W Year: 1989 Projected
I. Percent of costs allocated to each livestock class


Livestock
description
1. Steers
2. Heifers
3. Cull cows
4. Cull bulls


Number of
head
marketed
(190
115
(24
2


Average
market
wt. per hd.
5.26
5.00
10.31
17.00


Estimated
marketing
price
100.00
95.00
45.00
51.00


Total
expected
revenue
- 167,434
- 167,434
- 167,434
- 167,434


% of Costs
allocated
to each
class
= 59.69%
= 32.62%
= 6.65%
= 1.04%


II. Total costs allocated to each class of livestock


Livestock
description
5. Steers
6. Heifers
7. Cull cows
8. Cull bulls


Total Costs
per cow
(hd)
245.51
245.51
245.51
245.51


% of costs
by class
(I, Col. 5)
59.69%
32.62%
6.65%
1.04%


Total costs
per class
146.54
80.10
16.33
2.54


III. Production per cow by class of livestock


Livestock
description
9. Steers
10. Heifers
11. Cull cows
12. Cull bulls


Number of
head
marketed
190
115
24
2


Average
mkt. wt.
per hd.
5.26
5.00
10.31
17.00


Number of
cows
372
372
372
372


Production
per cow
2.69
1.55
0.67
0.09


IV. Breakeven price per class of livestock


Total cost per
class (II, Col. 3)
146.54
80.10
16.33
2.54


Production per
cow (III, Col. 4)
2.69
1.55
0.67
0.09


Breakeven price
per class
S 54.55
S 51.82
S 24.55
S 27.82


Farm Management


Livestock
description
13. Steers
14. Heifers
15. Cull cows
16. Cull bulls







ow-Calf Enterpri s 18 re d


Column 1 2 3
R
O Enterprise: Cow/calf-J/J Ranch
W Year: 1989 Projected


Cost item
I. Livestock class:


Cumulative
subtotal
Steers Expected


% of costs
allocated to Production
each class per cow
market weight: 5.26 cwt


1. Variable costs 245.51 x 59.69% + 2.69 = 54.55
2. Fixed cash costs 367.49 x 59.69% + 2.69 = 81.65
3. Noncash costs 379.58 x 59.69% + 2.69 = 84.34
4. Family living 14,400/year 418.29 x 59.69% + 2.69 = 92.94
5. Profit (30/year) (448.29 x 59.69% + 2.69 = 99.60
II. Livestock class: Heifers Expected market weight: 5.00 cwt
6. Variable costs 245.51 x 32.62% + 1.55 = 51.82
7. Fixed cash costs 367.49 x 32.62% + 1.55 = 77.57
8. Noncash costs 379.58 x 32.62% + 1.55 = 80.12
9. Family living 14,400/year 418.29 x 32.62% + 1.55 = 88.29
10. Profit (30/year) ( 448.29 x 32.62% + 1.55 = 94.62
III. Livestock class: Cull cows Expected market weight: 10.31 cwt
11. Variable costs 245.51 x 6.65% ) 0.67 = 24.55
12. Fixed cash costs 367.49 x 6.65% 0.67 = 36.74
13. Noncash costs 379.58 x 6.65% ) + 0.67 = 37.95
14. Family living 14,400/year 418.29 x 6.65% ) + 0.67 = 41.82
15. Profit (30/year) 448.29 x 6.65% ) 0.67 = 44.82
IV. Livestock class: Cull bulls Expected market weight: 17.00 cwt
16. Variable costs ( 245.51 x 1.04% ) 0.09 = 27.82
17. Fixed cash costs 367.49 x 1.04%) 0.09 = 41.64
18. Noncash costs ( 379.58 x 1.04% ) + 0.09 = 43.01
19. Family living 14,400/year ( 418.29 x 1.04%) + 0.09 = 47.45
20. Profit (30/year) ( 448.29 x 1.04% ) + 0.09 = 50.80


Part II/Strategic Management


Asking
price
($/cwt)






proportionate share of variable, fixed-
cash, and noncash costs, the asking price
must be no less than $84.34 per hun-
dredweight.
With asking prices broken down by
components, the producer is in a posi-
tion to make logical marketing and pric-
ing decisions.
Step 5: Evaluate Pricing Alterna-
tives. In addition to deciding when to
sell, many crop and livestock produc-
ers must also consider the question of
when to price livestock. The decision
to forward price is generally based on
(1) understanding of forward-pricing al-
ternatives, (2) price and profit goals, (3)
production cost data-that is, analysis
of available production-marketing alter-
natives to reach those goals-and (4)
market risk.
Hedging, options, and forward con-
tracting are three methods of forward
pricing that can be used effectively to
reduce market risk. By hedging, options,
or forward contracting, the producer can
expand the time period in which to
make the pricing decision.
Forward pricing alternatives are not
without costs and shortfalls; but a close
look at production costs and pricing
options and the appropriate alternative
can make marketing strategies more ef-
fective.
Step 6: Compare Production-Mar-
keting Alternatives. The notion of
"marketing decisions" implies that there
are at least two marketing alternatives
to select from. For example, when con-
sidering alternatives to fall calf sales,
the J/J Ranch makes a three-way com-
parison: fall sale, wintering, and back-
grounding. And in the interest of risk
management, the J/J Ranch makes the
three-way comparison for varying lev-
els of market weights and costs of pro-
duction. Such a comparison shows nine


possible outcomes for the three mar-
keting alternatives.
The asking price for wintering or
backgrounding calves reflects the sale
price necessary to cover the cost of the
feeding program to get cattle to an ex-
pected market weight.
Step 7. Monitor Your Plan. Once
the production and marketing analysis
is complete, with a decision on when to
market and when to price, some diffi-
cult decisions still remain. The pro-
ducer's production-marketing strategy
should realistically examine the proba-
bilities of price change to determine
when early marketing or delay is the
more profitable alternative.
Preliminary market analysis, devel-
oping production-marketing strategies,
and setting price and profit goals is the
fun part. The work begins when the pro-
duction-marketing decision is made and
the plan is implemented. Regardless of
the time and effort spent analyzing pro-
duction-marketing strategies, the future
rarely turns out as planned.
That is why it is essential to monitor
a production-marketing plan. The pro-
ducer should be in a position to ration-
ally respond, rather than react, to a mar-
ket situation. To be in a response posi-
tion, the J/J Ranch regularly monitors
its budget estimates to determine if the
plan is on track. The J/J Ranch utilizes
a monthly cash-flow budget that pro-
vides a useful format for monitoring the
monthly cash-operating expenses asso-
ciated with a particular production-mar-
keting plan. An actual enterprise budget
is also completed as the production year
progresses and is compared to the pre-
dicted budget. With current budget in-
formation, the producer is better able
to respond to a change in the produc-
tion, costs, or marketing situation.


Farm Management







Gaining Control
The production-marketing plan is part
of the producer's management and con-
trol process. The planning process rep-
resents the producer's integrated pro-
duction, marketing, and financial deci-
sions.
Marketing and production decisions
should not be made without consider-
ing financial goals. Production and mar-
keting decisions should be evaluated in
terms of their impact on the financial
position of the business. Production,
marketing, and financial management
decisions are integrated management
decisions and should be evaluated as
such.


Part II/Strategic Management












Choosing a Business

Structure for Your

Farm


A business entity is the legal struc-
ture under which a farm or any busi-
ness is organized and operated. Family
farm owners can establish their busi-
nesses as sole proprietorships, partner-
ships, or corporations. Whether a fam-
ily buys, inherits, or receives a farm
through gifts, the family must decide
on the type of business structure it wants
for the farm. Moreover, the selected
structure often changes as the farm
grows or new individuals enter the busi-
ness. Individuals who originally owned
and operated their business as a sole
proprietorship, for example, may choose
to shift to a corporation, a partnership,
or a multiple business organization.
The sole proprietorship is the most
common form of business organization
since most small businesses are owned
and operated by a single individual. Sole
proprietorships have a common law ori-
gin and can be easily established and
operated because the business structure
is an extension of an individual's rights
and responsibilities in property owner-
ship and commercial transactions. Part-
nerships also have a common law ori-


gin, and thus have many of the charac-
teristics of a sole proprietorship.
By contrast, incorporation has a statu-
tory origin, which means State laws
prescribe a corporation's structure, pro-
cedures, and conditions of organization
and operation. Hence, incorporating a
farm business requires a series of legal
steps, and corporate activities are
closely regulated.

Choosing an Organizational
Structure
Sole Proprietorship. Personal and
business objectives help decide the best
organization structure for a small busi-
ness. The sole proprietorship is usually
best suited for a beginning business
because it is the simplest and least regu-
lated of all business types. No legal
papers must be filed to establish and
maintain the business. Since the pro-
prietor owns and operates the business
as an individual, records and planning
are limited to those needed to reach
management objectives, to file personal
income tax returns, and to comply with
laws and regulations common to all


Ralph E. Hepp, Extension Economist, Department of Agricultural
Economics, Michigan State University, East Lansing, MI


Farm Management







business ventures. The major drawback
is that sole proprietorships, unlike some
types of corporations, do not offer pro-
tection from personal liabilities.
Although the sole proprietorship is
the simplest business structure, finan-
cial management considerations and
family objectives may make this struc-
ture inappropriate as an enterprise be-
comes larger and more complex. The
advantages of partnerships and corpo-
rations over sole proprietorship are too
complex to warrant broad generaliza-
tions. The decision to shift to a new
business structure must be made on a
case-by-case basis. Each farm owner
must decide if and when to move to a
more complex and formal organiza-
tional structure.
Multiple Ownership. Increasing
capital requirements and the economies
of scale available to large operations
led to the evolution of multiple owner-
ship of agricultural enterprises. In-
creased capital requirements make it
difficult for young people to start their
own enterprises, and many young
people enter into the ownership and
management of their parents' busi-
nesses.
However, parents usually choose not
to sell all of their assets at once to the
children. In any case, the children usu-
ally cannot afford to purchase the en-
tire farm operation at one time. The as-
sets are usually transferred gradually be-
tween generations. In these situations,
a multiple ownership structure enables
the younger generation to move slowly
into ownership and management while
the older generation gradually with-
draws.
Because a sole proprietorship is, by
definition, organized and operated by
one individual, the intergenerational
transfer of a business over time requires




Part II/Strategic Management


a business organization that accommo-
dates multiple owners-either a part-
nership or a corporation. In some cases,
separate proprietorships-with joint
ownership of equipment and labor ex-
changes-may be established between
parties. Separate proprietorships may be
more feasible for some enterprises be-
cause of their large capital investment
in facilities and equipment.

Shared Management
A large business with multiple own-
ers, whether a partnership or a corpora-
tion, offers a chance to divide manage-
ment responsibility among the partners
or stockholder employees. Joint man-
agement decisionmaking provides ex-
cellent on-the-job management training
for less experienced managers. Partner-
ship and corporate structures are equally
flexible in the development of a man-
agement team that meets the needs of
each business.

Income Sharing
Multiple ownership and management
in a partnership or corporate structure
offer many avenues for distributing in-
come among the respective parties. A
partnership pays no income tax because
the individual partners assume their own
tax liabilities; thus, income can be
shared through drawing accounts and
distribution of residual income. If part-
ners lease assets to the partnership, lease
payments can compensate owners for
their resources.
The corporate structure can distrib-
ute income among stockholder-employ-
ees in the form of salaries, dividends,
or interest on debentures. Payments to
stockholders must be reasonable and
based upon services rendered, but there
is much flexibility in sharing income
among stockholders and employees.







Capital Transfer and Estate
Planning
Capital transfer among common
property owners in a partnership or cor-
poration is a significant consideration
when family members have decided to
continue the enterprise as an operating
unit beyond the retirement of the pres-
ent owners. With proper planning, the
partnership and corporate structure can
be used to reserve resources for retire-
ment, transfer property to family mem-
bers, and minimize expenses and trans-
fer taxes.
Regardless of the business struc-
ture-be it sole proprietorship, partner-
ship, or corporation-it is possible to
develop a sound estate plan. The capi-
tal transfer through the estate can be
handled with jointly held property own-
ership, wills, and trust arrangements.
Although the partnership or corporate
structures do not in themselves solve
estate transfer problems, they can make
capital transfer somewhat easier.
The costs associated with the trans-
fer of property from one generation to
the next include Federal estate and gift
taxes and State inheritance taxes. Trans-
fer of property by gift is one way to
minimize the death tax burden. Federal
gift tax laws allow a person to make
$10,000 of outright gifts to each bene-
ficiary each year without paying a Fed-
eral gift tax. The annual gift tax exclu-
sion can be doubled to $20,000 if the
gifts are made by a married couple to a
third person even if only one member
of the couple owned the property.
Another advantage of transferring
capital as a gift is that gifts are valued
at the time they are made. If appreciat-
ing assets (such as real estate) are held
until death, the value of the asset may
have increased, causing an increased
death tax liability.


Buy-sell agreements are often used
to help transfer capital ownership of a
partnership or corporation from one
business associate to the next. Such an
agreement can establish a market for
the business assets when owners desire
to withdraw from the business either
during their lifetimes, at death, or upon
becoming disabled. This is accom-
plished by requiring the remaining part-
ners or stockholders to purchase the
ownership interest of the departing
member; likewise, the business associ-
ate or the estate is required to sell to
the remaining owners. The contract nor-
mally specifies either an actual purchase
price or a procedure to follow in deter-
mining the price.

Attracting Capital
The traditional sources of capital for
small farms are the equity provided by
family members, reinvestment of re-
tained earnings, lease agreements, and
loans. Capital sources are the same re-
gardless of the organization's structure.
The sole proprietorship may be the most
limited in terms of capital acquisition
because only one family is involved in
the operation. Multiple ownership
through a partnership or corporation al-
lows the combining of funds from more
than one family, which results in a
larger business.

Federal Income Taxes
A sole proprietor's business pays no
Federal income tax. Instead, the taxable
income of the business is included in
the proprietor's personal income, and
taxes are paid at the individual tax rates.
Federal income taxes for a partnership
are treated in a similar manner. The
partnership files an information return
showing the income and expenses, the
names of the partners, and how the part-


Farm Management






nership earnings will be divided among
the partners. The profits, losses, capital
gains and losses, and tax credits are al-
located to partners according to the
terms of the partnership agreement. The
partners pay taxes as individuals on their
respective shares of partnership income.
Federal income tax savings may oc-
cur if a business incorporates and be-
comes subject to Federal income taxa-
tion under Subchapter "C" of the Inter-
nal Revenue Code. Because a corpora-
tion is considered a separate taxpayer,
the corporation can divide income
among the corporation, owner-operator
employees, and shareholders. The cor-
poration pays individuals associated
with the corporation for their contribu-
tions-owner-employees receive a sal-
ary for their labor, and management and
shareholders receive dividends for their
capital investment. Residual income af-
ter all expenses are paid is taxed to the
corporation at corporate income tax
rates. Whether Federal income taxes
will be lower after incorporation de-
pends upon the corporation's earning
level, the tax rates for individuals ver-
sus that for corporations, and the allo-
cation of earnings.
When the corporation is owned pri-
marily by a family, the tax objective is
to minimize the family's total annual
income tax burden. This means that the
total taxes paid by the corporation, in
addition to the personal income taxes
paid on the stockholder-employee's sal-
ary, and any other personal income
should be less than the total personal
income taxes paid by the owners be-
fore incorporation.
This type of tax reduction can be ac-
complished by equalizing the rates at
which income of the corporation is
taxed versus that of the individual stock-
holder-employees. Normally this is done
by adjusting the salary of major em-


Part II/Strategic Management


ployees and/or by adjusting lease or
rental rates of assets (primarily real es-
tate) owned by stockholders.
But these adjustments cannot be
made arbitrarily. Salaries must be es-
tablished at the beginning of each cor-
porate fiscal year. They cannot be in-
creased or decreased within the year to
reflect changes in the financial success
of the business. However, considerable
flexibility can be achieved by establish-
ing a bonus or profit-sharing agreement
based on either the production or the
income.
Another tax advantage of incorpora-
tion is the increased business deductions
available because the owners who work
for the corporation become employees
of the corporation. In addition to the
employee's salary, the corporation can
take a deduction for fringe benefits such
as group life insurance plans, medical
and hospital plans, pension and profit
sharing plans, and others. It permits the
corporation to use pre-tax dollars to pay
for benefits received by a stockholder
which the same individual not in a cor-
poration would acquire by using after-
tax dollars. This results in more after-
tax total income available to the stock-
holder-employees.
A disadvantage of Subchapter "C"
corporations is that double taxation is
possible. It occurs when corporations
pay dividends to their shareholders.
Dividends are distributed from the cor-
poration's after-tax income and share-
holders must include dividends in their
taxable income. Thus, shareholders are
in effect paying taxes a second time on
the same profits.
If a corporation elects to be taxed
under the special tax option or Subchap-
ter "S" method, the corporation is not a
taxpayer for income tax purposes. That
is, the corporation itself is not taxed on
any income. The income of the corpo-







ration "flows through" to the sharehold-
ers and each shareholder pays a tax on
the individual's prorated share of the
corporation's earnings when filing an
individual income tax return. All income
is taxed the year it is earned whether or
not it is retained or distributed. Sub-
chapter "S" rules are similar to partner-
ship rules in that an information return
is filed annually on behalf of the cor-
poration.
Thus, corporate earnings in a Sub-
chapter "S" corporation are taxed only
once-to the shareholder. This avoids
the double taxation possibility present
with Subchapter "C" corporations.
However, just because Federal in-
come taxes may be reduced by incor-
poration, not all taxes and costs will
necessarily be reduced. Rather, there are
a number of increased costs and taxes
present with corporations. All of these
must be examined in arriving at the to-
tal savings possible by incorporation.

Payroll Taxes
After incorporation, the sole proprie-
tor or partner changes status from em-
ployer to employee. Therefore, after in-
corporation the business has at least one
additional employee, if not more, which
results in increased payroll taxes.
Social Security taxes are increased
since the combined employee and em-
ployer rates under the corporate struc-
ture are higher than for self-employed
individuals (partners or sole proprie-
tors).
Stockholder-employees of corpora-
tions are also subject to Worker's Com-
pensation charges on their salaries and
are entitled to benefits under the Act.
This is not true of sole proprietors or
partners in a partnership. A stockholder-
employee's salary may also be subject
to the unemployment compensation tax.


Another disadvantage to owner-op-
erators of farms after incorporation is
that personal income taxes must be paid
through quarterly estimates or withhold-
ing, rather than as a lump sum on March
1 as permitted by self-employed indi-
viduals. A farm corporation employee
is not a "farmer" for this purpose. A
farm employee must file a declaration
of estimated tax and make quarterly
payments or have Federal income taxes
withheld from the salary.

Structure Must Fit
Objectives
The initial business organizational
type for a small-scale family business
is usually a sole proprietorship. When
circumstances surrounding the operation
suggest a partnership or corporation, an
in-depth analysis needs to be made. An
analysis of the organizational charac-
teristics and the objectives of the fam-
ily is perhaps the most important, but
still the most neglected, phase of the
process.
Usually there is no need to hurry the
decision. It is a relatively easy and in-
expensive process to incorporate or
form a partnership, but it may not be so
easy and inexpensive to dissolve the
corporation or dissolve a partnership.
Thus, if you are thinking about chang-
ing business organization, be sure to
take enough time to weigh the advan-
tages and disadvantages of each struc-
ture for your particular situation.


Farm Management












The Flickerville

Mountain Farm and

Groundhog Ranch: An

Apprenticeship


All right. You've bought the farm, so
to speak, and you're ready to become
your own boss, set out to make a com-
fortable income in the inspiring solace
of the bucolic countryside. Free at last.
A good start, but you've already
bumped up against the first rule of Be-
ginning Farming 101. To wit, don't
count on making a comfortable living,
at least at the outset. The second rule:
your days of "freedom" are over, be-
cause the farm is a demanding, domi-
nating taskmaster. And the third rule:
brace yourself for failures and frustra-
tions because there will be many.
This is the story of the Flickerville
Mountain Farm and Groundhog Ranch,
a small organic fruit, vegetable, and
flower operation in south-central Penn-
sylvania-far enough from the big city
to provide the solace, yet close enough
to assure marketing possibilities.
The first three rules of beginning
farming, as well as dozens more, have
been written in bold face and learned
in painful ways by the two newspaper
reporters who started Flickerville Moun-


tain Farm in 1983. From the start, the
idea was to make the farm into a self-
supporting unit. But despite extensive
gardening experience, neither of us neo-
phyte farmers had the slightest notion
of what we were getting into.
Our knowledge was scant, our naivete
massive, our bodies unprepared for the
bone-crushing fatigue that would dog
us. Our psyches were not ready for the
hurtful shock of such vagaries of na-
ture as ongoing drought, occasional hail,
and unexpected frost. But we endured,
inspired by the example of others who
had made it and buoyed by a belief that
our farm could, in time, pay its way
and provide a modest living for its own-
ers.
Over the first 5 years, the farm ex-
panded from a large garden to 15 in-
tensively planted acres, producing more
than 70 varieties of fruits and vegetables
and several dozen kinds of flowers.
Almost all of the farm's output is sold
100 miles away in the Washington, DC,
area-at farmers' markets, in custom-
packed bags to about 100 consumers in


Ward Sinclair, former Washington Post Agriculture Reporter and
Co-owner, with Cass Peterson, of Flickerville Mountain Farm and
Groundhog Ranch, Dott, PA


Part II/Strategic Management


































7 -M
Customers at a Washington, DC, farmers' market enjoy farm fresh products from the Flickerville
Mountain Farm and Groundhog Ranch in Pennsylvania. (USDA Photo by Larry Rana, 89BW1031-17)


a large office building, and to restau-
rants and stores through a cooperative
formed with half-a-dozen other Penn-
sylvania organic growers.

Learning the Rules
The Flickerville Mountain Farm is
not yet an overwhelming success, but it
has grown with enough promise that one
of the partners gave up his city job in
1988 to work the farm full time, with
the other partner not far behind. Ours is
a story of rules being learned, then bro-
ken right and left, and learned again. It
is also a story that provides some in-
sights into the importance of "manage-
ment," a term that really means "keep-
ing an eye on the ball."
One central key to this farm's lim-
ited success is management. Texts and


treatises by experts generally are clear
enough in their cautions about begin-
ning farming. But none of these substi-
tutes for the hard-knocks knowledge
gained from hands-on experience; none
seems to adequately stress the critical
importance of daring to take risks, of
carefully allotting time to farm tasks,
and of constantly discussing every facet
of the enterprise.
At the outset, for example, it was
clear that the first problem at Flicker-
ville Mountain Farm would be time. We
lived and worked more than 100 miles
away from our property. That meant our
farming would be restricted to week-
ends, vacations, and off-days. That
meant also that while we were thinking
big, we had to farm small. And it meant
that our newspaper jobs, at least into


Farm Management







the foreseeable future, would have to
help the farm pay for itself.

The Plan
Given that dilemma, one of the first
things we beginning farmers did was
draw up a 5 year plan intended to help
us achieve our goal of a self-supporting
farm. It was an ambitious plan in some
ways, but we were realistic in under-
standing that to fulfill the plan, the farm
would have to expand each year and
the physical demands on the owners
would increase exponentially.
The plan was drafted in a way that
called for avoiding debt as much as pos-
sible, using the off-farm income to fi-
nance the gradual acquisition of equip-
ment and material. Because of our of-
ten obsessive zeal-an important ingre-
dient, by the way--each of the plan's
incremental goals was met. "The plan,"
as it became known, was the central
focus of virtually every discussion about
the farm's operation.
As the plan dictated, income from
sales doubled each year. This meant
growing more crops, tending more land,
trying more varieties, and paying greater
attention to marketing. In accordance
with this blueprint, we acquired small
equipment first-a rototiller, hand tools,
a backpack sprayer, a couple of wheel
hoes. As expansion occurred, again ac-
cording to the plan, we added larger
equipment including a diesel tractor, a
rotovator, a rotary mower, a plastic
mulch-laying machine, a commercial-
size van, a manure spreader, a tank
sprayer, and a cooler.
In hindsight, we unknowing amateurs
would make only two major revisions
in our plan. Instead of waiting until the
fourth year, we would have acted ear-
lier to erect a greenhouse and to install
a drip irrigation system. The green-
house, although it meant a whole new


Part II/Strategic Management


range of managerial details, allowed us
to save money and augment income by
growing our own transplant seedlings
and offering bedding plants for sale. The
drip system, made mandatory by
droughts in 3 of the first 4 years, quickly
paid for itself after it was installed in
time to avoid a wipeout in the Big Dry
of 1988.
Reasonably successful attainment of
"the plan" was not the end, however. A
second 5-year plan, with new goals, was
drawn up. The plan envisioned a sec-
ond greenhouse and a walk-in cooler,
both to be built by the farmers; a larger
truck to haul goods to market; and a
structure for storing and processing
dried flowers and herbs into wreaths and
other high-value decorative items. The
plan included the possibility of adding
a small kitchen that could increase earn-
ings by converting farm produce into
value-added items such as organic pesto,
pickles, herb mixes, sauces, and pre-
serves.
Although not cast in concrete, the
new plan represents goals and ideas-
concepts born mostly during endless
nocturnal discussions over the kitchen
table. The thrust is to seek enough di-
versity that the farm's fortunes will not
rely on a few crops. It looks toward a
time when perhaps the farmers can de-
vote less of their energies to marketing
activities that now require driving up-
wards of 900 miles a week during the
growing season. It envisions providing
work for a few more nearby residents
in an area in where jobs are scarce.

Down to Basics
Every farm, of course, is different.
But some of the experiences at the
Flickerville Mountain Farm and
Groundhog Ranch (a name chosen to
lure and amuse farm-market customers)
may have universal application for be-







ginning farmers, particularly those who
intend to grow specialty crops. After
Rules 1, 2, and 3, these are some of the
other basics:
Focus: If the farm is to be more
than a hobby or a retreat, decide on
your focus and don't overreach. Start
slowly, as though undertaking an ap-
prenticeship, and pay attention to de-
tails. Grow a few varieties-things that
are likely to find a ready market-and
learn to grow them well. Remember that
a cow is more demanding than a carrot.
Unless you live on the farm, are near
enough to provide regular attention, or
have hired labor, it's probably best to
not even think about livestock.
At Flickerville Mountain Farm, the
first year's crop focused on sweet basil
and a few other fresh-cut herbs that
grew well and sold quickly. That led to
a wholesale contract to expand produc-
tion and a decision to go to a weekly
farmers' market with more items.
Plan: Once you've settled on a fo-
cus, draw up a plan for the enterprise.
The plan can, and probably should, be
flexible. But it also should cover at least
several years, simply because success-
ful farming rarely happens quickly. The
plan should be reasonable, geared to
your financial reality, and yet demand-
ing in that it forces you to keep reach-
ing for the final goal.
At Flickerville Mountain Farm, the
plan covered the first 5 years, but de-
tails were changed from time to time as
events dictated. As markets and pro-
duction possibilities became apparent,
flowers-fresh-cut and for drying-
were given higher priority in the plan.
Manage: First, boss yourself mer-
cilessly. Figure out your priorities in
terms of work that must be done and
stay after yourself until the task is com-
pleted. Discuss and set priorities with a
partner, if you have one. Divide areas


of responsibility, according to who does
what best or most readily. Make regu-
lar task lists based on the priorities and
then cross off each item as it is com-
pleted-a helpful step in giving you a
sense of progress and accomplishment.
At Flickerville, I operate and repair
most of the mechanical equipment and
oversee soil preparation and improve-
ment. My partner manages the green-
house and flower operations. I main-
tain books and records; she is in charge
of fruit tree maintenance and pest con-
trol. We divide planting, harvesting, and
marketing duties, seed and plant pur-
chases, and general grunt work.
*Scrimp: Modem agriculture is
strewn with examples of farming enter-
prises that failed because of inadequate
financing or excessive debt, or lack of
fiscal conservatism. So be miserly in
the extreme-avoid debt and pay as you
go whenever possible; save everything
from lumber and nails to wire and plas-
tic jugs. They always have a use.


The Flickerville Mountain Farm greenhouse keeps
part owner Cass Peterson busy with transplant
seedlings and bedding plants. (USDA photo by
Larry Rana)


Farm Management


82






















Ward Sinclair harvests one of the many types of
lettuce offered by the Flickerville Farm. This row
shows tomatoes and lettuce being grown together.
With the lettuce harvested, the tomatoes have
plenty of room to develop on the plastic covered
rows, eliminating the need to stake the tomato
plants. (USDA photo by Larry Rana)

The Flickerville debt is limited to the
farm mortgage and payments on the
tractor and the van. All other equip-
ment, fruit and Christmas trees, and per-
ennial plants were cash purchases as
money became available. Lumber from
dismantled chicken houses was recycled
into board fences, and castoff telephone
cable spools became irrigation hose
holders. Old motor oil goes into tool-
cleaning buckets or is used to treat
fenceposts.
Clockwatch: Time, or lack of it, is
always a critical factor on the farm. It
is even more important to the part-time
farmer. So look for ways to economize
on time; look for shortcuts that make
the tasks easier and quicker; and avoid
duplication of effort.
At Flickerville, extensive use of black
plastic mulch reduces the time needed
for weeding and cultivation; some crops
are bagged or boxed in the field to avoid
travel time and double-handling; har-
vesters separate the different grades of
produce in the field to avoid an extra
step at the packing shed.



Part II/Strategic Management


Study: Knowledge is just as critical
as time, so become a relentless student
of what you are doing. Pay attention to
the ways of other farmers, visit other
farms and ask questions, and read eve-
rything you can get your hands on. Be-
tween the Extension Service, Federal
and State agriculture departments, land-
grant universities, and private presses,
a multitude of farming information is
available. Mine these sources.
We have accumulated a large library
of useful material-old horticultural
how-to books, old USDA yearbooks and
other farming bulletins, and vegetable-
growing guides. We attend winter work-
shops and pester our farming friends
with questions about growing tech-
niques and problems.
Dare: Farming is a high-risk busi-
ness to begin with, but you must dare
to challenge the conventional wisdom
from time to time. The experts, for ex-
ample, warn that you should grow noth-
ing unless you have a market for it.
Not so. As your enterprise expands,
grow a few things each year that will
be new to your customers and give you
a marketing edge on your competitors.
On a whim 4 years ago, the Flicker-
ville farmers planted purple cauliflower.
It proved so successful and so lucrative
that it is now a fall standard for us.
This year's new market introductions
included gold beets, bi-colored beets,
black Spanish radishes, and leeks-all
of which sold like hotcakes. The year
before, it was corn salad, fancy French
lettuce, and the lisianthus flower. The
results were the same.
No market surveys, no opinion polls,
no questioning of the experts. Just a
sense that something different would
sell at a farmers' market was enough to
make it work. That's what apprentice-
ships are for.


83












Operating a Pick-

Your-Own Strawberry

and Pumpkin Farm


In 1984, our family moved to the
Bellevue Berry Farm, just south of
Omaha, Nebraska. The farm covers less
than 100 acres-50 acres are irrigated
and 20 remain woodland. Over one-
third of Nebraska's population lives
within a 25-mile radius of the farm,
which makes it an ideal location for a
pick-your-own berry operation.
Before heading to Nebraska, my wife
Kathy, our sons Tyson and Zach, and I
lived on a 214-acre farm in Maryland.
Weekdays I commuted over 3 hours
round trip daily to Washington, DC,
where I worked as an agricultural
economist for the U.S. General Ac-
counting Office, analyzing food and
agriculture policy for the Congressional
Agriculture Committees. We had 65
head of beef cattle and ran a 5-acre pick-
your-own strawberry operation. I
farmed in the evenings and on week-
ends. My good-paying job helped us
weather the mistakes we made as be-
ginning farmers, economic crunches
(such as the gasoline crisis), and unpre-
dictable weather.
After much discussion, we decided
to move west to be near my family. We
put the Maryland farm up for sale, and


to my surprise, it went quickly. Then
we held an auction and sold all but our
most prized possessions-which in-
cluded our specialized strawberry equip-
ment (including one Cub and two Su-
per A International Harvester tractors
with cultivators and a mist blower).
Keeping the strawberry equipment re-
quired us to make five round trips be-
tween Maryland and Nebraska, with
friends helping us on the cross-country
treks. The hardest part about moving
was leaving our friends-and for me,
leaving my beef herd.

Our First Crop
We knew that a close-in location
would be critical to the success of a
pick-your-own operation. We formed a
family partnership and purchased prime
Nebraska bottom land near Omaha. The
soil is excellent, well-drained, and mod-
erately sloping. The climate is subhu-
mid continental, with cold winters and
summer temperatures in the 80's. The
average annual precipitation is about 30
inches. But even though the land and
the climate were close to ideal, the first
year was far from easy. With no barns,
roads, or other infrastructure, we not


Edward A. Schaefer, Bellevue Berry Farm, Omaha, NE


Farm Management






only had to plant a crop, but we also
had to build. Priorities had to be set.
Our first tasks were to plant and to es-
tablish an irrigation system. We con-
structed buildings during the off-season.
Because of our experience with
strawberries in Maryland, we had cho-
sen strawberries as the main crop on
our new farm. During one of our first
trips west in early May, my brother Jeff
rounded up a crew and we planted 30
acres of strawberries-it seemed like a
sea to us. To establish our fields, we
used certified virus-free plants, which
are winter hardy and show some resis-
tance to soil disease.
We had planned to make our final
move west in mid-June, immediately
after we finished our last strawberry
harvest in Maryland. But it took us
longer than expected to complete the
farm sale, and we did not arrive in Ne-
braska until early July. By that time,
the sea of strawberries we had planted
in early May was awash in knee-high
weeds-the result of a wetter than usual
spring. After two hard weeks of mow-
ing, cultivating, and weed pulling, we
saved our plants. The next step was to
put in an irrigation system.

Establishing an Irrigation
System
Strawberries require irrigation, not
only to promote optimal growth but also
to protect the buds, flowers, and fruit
from freezing. We use 8-inch round and
6-inch round aluminum main lines; our
lateral lines are less expensive 2'/2 inch
PVC pipe. Lateral lines are set down
each 16th strawberry row, (our straw-
berries are on 40-inch row centers) pro-
viding a sprinkler every 50 feet by 40
feet. We also use the irrigation system
for spraying fungicides and water-sol-
uble nutrients. During harvest, if the
temperature climbs above 85 degrees,


Part II/Strategic Management


we use the irrigation system to hydro-
cool our strawberries. We run the sprin-
klers for 15 minutes every hour, up to
four times each day.
I also use the irrigation system to
protect the strawberries from frost. Any
time the air temperature drops close to
33 degrees, I start my irrigation pumps
and run them until the threat of a freeze
is over. During frosts, we pump up to
1,500 gallons of water per minute onto
the fields from a nearby creek and pond
(which we dug and filled with water
from the creek). Water freezes around
the flower and bud of the strawberry
plants and protects the plant tissue from
the killing cold air. Heat is given off as
the water changes from a liquid to solid
ice.
Protecting strawberries from frost re-
quires all-night vigils between April 10
and May 20. We usually have five to
eight nights of frost during that period,
and up to an inch of ice may cover the
ground by morning. On the nights when
the temperature hovers around freezing
and our irrigation pumps are running, I
ride the fields in a 4-wheel Honda all-
terrain vehicle, making sure that the
sprinklers are operating properly.
Having an irrigation system has en-
abled us to have good crops regardless
of the amount of rain we get--even dur-
ing the 1988 drought when we had less
than 8 inches of rainfall. Irrigation is
especially important for us because we
cannot obtain crop insurance for straw-
berries.

Cultivation
Throughout our first summer, straw-
berry runners were constantly being set
through cultivation in order to form a
solid row. Cultivation and small
amounts of herbicide were used. Once
the appropriate number of plants had
been established, we cut off the extra






runners so that we created a 12-inch to
14-inch wide band of plants. This left
the pick-your-own customer with aisles
of at least 2 feet in which to pick.
We use straw mulch to protect the
strawberry plants during winter and to
keep the berries clean. We mulch the
strawberries in early December using
10 large round bales (weighing a total
of 5 tons) on each acre. The bales are
spread with a machine called a Big Bale
Buster Haybuster, which enables one
person to handle the entire operation.
We have reduced pesticide spraying by
mulching properly, keeping the fields
free of weeds, and walking the fields
every 3 days to check for pests.

Attracting Customers
Having worked all summer and into
the fall growing our strawberries, we
found ourselves faced with the prospect
of marketing our crop. One of our pri-
mary goals was to sell everything we
grow right at our own farm. But how
does one sell 30 acres of strawberries?
We focused our efforts on advertising
and, when possible, obtaining free pub-
licity. As harvest time neared, we hoped
that the magic of the marketplace would
work.
While thousands of customers found
their way to our farm that season, we
learned that trying to replicate a suc-
cessful farm enterprise is not easy. We
had tried to pattern our farm after my
brother Jeff's Roca Berry Farm, located
15 miles outside of Lincoln. But our
location near Omaha has a much dif-
ferent clientele than my brother's. Cus-
tomers who come to the Roca Berry
Farm are older, more rural people who
pick large quantities of berries for freez-
ing and canning. Our customers are
mainly younger families with working
mothers, who have little time for can-
ning or freezing. Many are Air Force


families who have little freezer space
in their homes. Our customers are more
interested in recreation and would rather
make more trips and pick small amounts
for fresh consumption.
We made a critical mistake in not
knowing our market. Even though we
had many customers that first year, not
all of the strawberries were picked. Our
yield was excellent, but we sold only
about half of the 30 acres we had
planted. Seeing all those berries go to
waste was difficult. But we refused to
get discouraged. I kept 25 acres in pro-
duction and plowed under 5 acres of
my poorest yielding variety. In their
place, we planted 5 acres of pumpkins.
Kathy began writing to schools in the
Omaha area to tell them about our farm,
and we were on our way to our next
crop.

Learning from Experience
Now, with the experience of four har-
vest seasons and a better understanding
of our customers' needs, we have
changed the focus of our farm some-
what. We now grow 20 acres of straw-
berries-15 as a pick-your-own opera-
tion and 5 that we harvest ourselves and
sell at our farm market. Even after re-
ducing our strawberry operation by one-
third, we still leave too many berries in
the field. However, our philosophy is
that it is better to have enough produce
available for our customers than to have
them go home empty-handed. In a pick-
your-own operation, you never know
how many people will show up.
We have added a walk-in cooler that
has greatly enhanced our prepicked
business. The cooler has also helped our
pick-your-own operation: When cus-
tomers fill their picking flats, we take
the flats to the cooler so the customers
can harvest more berries.


Farm Management






Pumpkins have become a bigger fo-
cus of our business. We now grow more
than 20 acres of irrigated pumpkins. All
are sold on our farm, and most are sold
right from the fields.
Over the years, we have kept con-
struction costs to a minimum by taking
down old barns in the area and reusing
the lumber. Roads and parking lots have
been constructed by using wood chips
and gravel from an abandoned railroad
track.

Goals and Philosophy
Today, our primary objectives are to
promote superior crop production and
to provide our customers with a "fam-
ily country experience." We emphasize
that our customers are not only getting
top quality produce-"quality that can't
be shipped in at any price"- but also a
day of family fun in the country.
Our family is crucial to this environ-
ment. Since our farm is small, Kathy
and I divide up most of the work. I do
most of the farming and construction.
Kathy handles the advertising, book-
keeping, hayride and school trip sched-
uling, and the thousand other things that
must be done on a pick-your-own op-
eration. Our sons work on the farm ev-
ery day throughout the summer and on
weekends during the spring and fall.
They help out in the farm market and
in the field work.

The Busy Season
The strawberry and pumpkin seasons
find our farm transformed. Our opera-
tion jumps to 20 or more workers. Sum-
mer vacation still comes early in the
farm belt, providing us with ample
strawberry pickers and field supervisors
for our May 25 opening. Tyson, 15, and
Zach, 11, along with school friends,
make up the majority of our strawberry




Part II/Strategic Management


help. By maintaining a festive atmos-
phere each weekend during the sum-
mer, we are able to recruit volunteer
assistance from friends and family
members, who help drive the tractors
and work in the farm market.
During the summer, Kathy supervises
the farm market and the marketing as-
pect of the business, while I keep 5 trac-
tors and 7 wagons rolling; oversee the
strawberry, broccoli, and pea harvest;
and plant the pumpkins and other fall
crops. We take time, though, to enjoy
the harvest and talk to our customers-
which is extremely important.
When the strawberry harvest ends in
late June, we cut back the strawberry
plants and begin preparing for the fall
harvest. As October rolls around, people
again begin arriving at our farm in
droves. Most of our strawberry custom-
ers come back for pumpkins, gourds,
squash, Indian corn, apples, cider, pop-
corn, hayrides, and just plain country
fun. Each weekend during October, I
roast a hog (one that we raised) and put
on an old-fashioned cookout for our
customers.
During the week, a seemingly end-
less line of yellow busses and vans bring
young people to the farm-more than
10,000 each season. For the price of
$2.50 for each child, school and scout
groups can enjoy an educational hay-
ride to and from our pumpkin patch,
where the children pick their own
pumpkins and gourds. The children also
play at Fort Pumpkin, made entirely of
cornstalks, visit with our farm animals
in the corral, and have a picnic. Each
child receives a coloring poster of our
farm.
On these busy summer and fall days,
the solitude of the cold, lonely nights
when I'm out in the fields protecting
the strawberries from frost seems dis-






tant. Now kids in shorts climb endlessly
over our play tree and run screaming in
delight from our geese in the animal
corral.

Using a Computer
Having a computer has greatly sim-
plified our bookkeeping and planning.
We have developed a detailed cost ac-
counting system on the computer, which
makes it easy to code our checkbooks
every quarter. In less than 2 hours of
data entry, Kathy and I can see where
all of our money went. We used to
spend more time than that hypothesiz-
ing about what happened.
The computer is also the cornerstone
of our farm advertising. During the win-
ter, we use the computer to design news-
letters and advertising materials-and
to make camera-ready copies. We have
developed a mailing list that includes
more than 12,000 previous customers-
as well as businesses, schools, and scout
troops-to promote our spring and fall
tours. Our computer program enables
us to sort the mailing list alphabetically
and by zip code, and to print mailing
labels for our spring and fall newslet-
ters.

Starting Your Own Operation
Managing and operating a pick-your-
own farm is not for everyone. But if
you have a good location, enjoy people,
want to be your own boss, and are will-
ing to work 7 days a week rain or shine,
you may want to consider it as a possi-
bility. Although many farmers and
ranchers may find themselves as I some-
times do-too busy just working to take
time out to think-it is crucial for a
prospective farm manager to take time
to think. Think about what crops will
work best for you and think about how


you can cultivate your market and then
grow from that experience.
Become more knowledgeable about
your crops. Assistance is available from
universities in your area, the Extension
System, consultants, and producer as-
sociations. We are members of the
North American Strawberry Growers
Association, and we try to attend the
association's yearly meetings to keep
up with new research and marketing
ideas. By being association members,
we have also met many other farmers
with whom we have exchanged ideas
and technical advice.
Do not expect to grow rich quickly.
There are too many variables in this
type of business. Even if there are no
other pick-your-own farms in your
area-as was the case with the Bellevue
Berry Farm-your operation will not
necessarily be an overnight success. It
takes time to inform people about your
business and spread the word about the
benefits of fresh, vine-ripened produce.


Farm Management












Aquaculture: The

Fastest Growing Farm

Industry


When settlers arrived in this country
several hundred years ago, they found
a land rich in animals that could be
hunted to supply them with food. As
more settlers arrived, the wild food sup-
ply diminished and the people either had
to turn to agriculture or move West into
unsettled regions. You know the rest of
the story: agriculture soon became our
principal source of food.
Today, an analogous situation exists
in the world's oceans. Fish have been
hunted to the point where we are un-
able to significantly increase the catch.
In fact, since 1975, the world's catch
has increased little. This is because most
commercial fishing areas have reached
their maximum sustainable yield; the
catch cannot be increased without re-
ducing the fish population's ability to
reproduce and replenish their numbers.
In addition, pollution and competition
from sport fishing interests aggravate
the situation.
Aquaculture, or fish farming, is the
only way to make up the deficit and
satisfy an increasing demand for fish
products. Aquaculture is now the fast-
est growing agricultural industry in the


United States, increasing by more than
20 percent annually in the 1980's.
Aquaculture is just beginning to have
an impact on U.S. fish supplies. In 1986,
approximately 620 million pounds of
aquacultural products were produced by
private operations. The main contribu-
tors that year were catfish (327 million
pounds), crawfish (98 million pounds),
salmon (75 million pounds), and trout
(5 million pounds), along with bait fish
and tropical fish. The catfish industry
has grown rapidly from a total of 3 mil-
lion pounds processed in 1969 to 16
million pounds in 1975 and 295 mil-
lion pounds in 1988. (Consumption
from live haulers, fee fishing, and di-
rect purchases are not included in these
catfish processing figures.)
Commercial production and process-
ing are highly concentrated in Missis-
sippi (accounting for almost 80 percent
of production), Arkansas, Alabama,
Louisiana, and other southeastern States.
In addition to catfish, there are many
more species of farm-raised aquaculture
products produced for sale in the Na-
tion.


Jerry R. Crews, Associate Professor and Extension Economist, and
John W. Jensen, Professor and Extension Fisheries Specialist, Auburn
University, Auburn, AL


Part II/Strategic Management







Case Study: The Gvillos
In 1979, Curtis and ReJeana Gvillo
of Moundville, AL, made the biggest
decision of their lives-to buy a farm.
After finishing college and working 2
years with an agribusiness firm, Curtis
had a strong desire to make his living
by farming. Having grown up on an
Illinois family farm, where the predomi-
nant enterprises were soybeans and
corn, he was optimistic about making a
go of it on the couple's newly acquired
farm.
ReJeana, a West Alabama native, had
also grown up in farming and shared
Curtis' enthusiasm and commitment to
make a go of it. The couple purchased
a farm from ReJeana's great uncle near
Moundville.
During the first couple of years, Cur-
tis tried a variety of traditional enter-
prises--cotton, soybeans, wheat, corn,
and stocker cattle. Although Curtis was
on top of his operation from a manage-
rial standpoint, he recognized that fi-
nancial distress was never far away.
ReJeana was also aware of the dilemma.
"We were both putting in long hours
and cutting living expenses, and Curtis'
mother, Dorothy Gvillo, was even pitch-
ing in, but things were not improving,"
ReJeana said. Their production and fi-
nancial records confirmed their worries.

Seeking an Alternative
Curtis reluctantly admitted that in
many of the traditional enterprises, other
regions of the country had a competi-
tive advantage. (See Part II, Chapter 9
on competitive advantage.) What could
he produce and be competitive with, he
asked himself.
Catfish production had crossed his
mind; he knew of catfish farmers in the
area. They had friends and relatives who
produced catfish or worked in the proc-


essing plants. With some skepticism,
Curtis began investigating the catfish
business. When he asked producers
about the requirements for success, it
became clear that certain basic ingredi-
ents were required: suitable sites for
ponds, adequate water supply, available
markets, access to capital, and "know-
how." The biggest difficulty would be
in making the adjustment to aquacul-
ture from the traditional enterprises that
he preferred and felt comfortable with.
"I knew this was a different ball game,"
Curtis said.

Taking the Plunge
In 1981, the Gvillos built their first
catfish pond-covering a 23-acre area.
The construction was paid for mostly
through the sale of timber from the pond
site. But being surrounded by success-
ful catfish farmers doesn't necessarily
guarantee success, as the Gvillos soon
found out. Curtis admitted that they may
not have been serious enough about cat-
fish the first year. After the first crop
was sold to a processor, the Gvillos dis-
covered that they had just broken even.
However, Curtis knew what had gone
wrong: They had started with finger-
lings that were too small. As a result,
they sold their fish too early, and many
of the smaller ones were rejected as un-
marketable. But they didn't make that
mistake again. Since then, they have
kept their catfish until a profitable price
was offered. They never sell before they
feed more than two pounds of feed for
each fish, thereby guaranteeing that all
fish are marketable.

Relationship with Lender
The catfish business, like many other
types of farming, is capital-intensive.
In addition to the costs for pond con-
struction, operating money required to


Farm Management




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