Operating A Farm Business: A Philosophy Reset

How the world has changed in recent years! However, when put into historical perspective, perhaps it has not changed as much as it did for our forefathers. The rapidly changing agricultural landscape, driven by geopolitics, trade, tariffs, technology, and global competitiveness, has shifted the management paradigm. Upon reflection, several philosophical shifts are emerging in managing the modern-day agricultural business.

Just-in-Time, Just-in-Case

Globalization in the post-World War II era emphasized just-in-time management as a competitive advantage, driven by cost efficiencies. However, disruptors and Black Swan events, such as 9/11 and COVID-19, have challenged this philosophy. Just-in-time management has increasingly been replaced by just-in-case management. Supply chain snafus involving fertilizer, fuel, parts, and technology components have become the norm.

Just-in-case management requires the modern-day manager to build more “stretch in the waistband” concerning the time and investment required to complete projects. In my experience, budgeting 25 percent more time and money for contingencies is very appropriate in today’s environment.

Budget Guardrails

In decision-making and budget forecasting, developing “but what if” scenarios is critical. Financial sensitivity analysis applied to cash flow projections or enterprise budgets can move decisions toward objective analysis rather than emotional reaction.

Technology and financial spreadsheets allow managers to establish guardrails by testing changes in prices, costs, production, and interest rates. These tools can evaluate alternatives before taking the game plan to the field.

The Era of Financial Liquidity

Early in my career, growing up on a dairy farm with regular milk checks and little price volatility, working capital and liquidity were often an afterthought. Later, working with California agricultural producers exposed to volatile global markets, I quickly learned the importance of working capital.

In my book, Weighing the Variables: A Guide to Ag Credit Management, I called this the “California Working Capital Rule.” Working capital should be at least 25 percent of annual expenses, with at least 25 percent of that working capital held in cash. Over time, this concept has been integrated into financial management practices across regions and commodities.

Ownership Versus Control of Assets

One significant change during my career has been the shift from ownership to control of assets. More assets are being rented or leased, particularly among younger, expansion-oriented businesses.

These producers require a more structured business and financial mindset. Marketing and risk management programs are not an option but a requirement to mitigate downside risk while capturing upside opportunities. Profits generated during favorable times can build working capital reserves for downturns, particularly when equity is limited because assets are controlled rather than owned.

Fail Fast, Learn Faster

Transition management is one of the top three issues facing agriculture globally. When integrating the next generation, do not let the control and rigid rules of the senior generation stifle innovation and growth. At the same time, the next generation must balance innovation with sound business and financial fundamentals.

The key for both generations is to fail fast, learn faster, and avoid repeating the same mistakes.

These philosophical shifts need to be incorporated into the management game plan as agriculture moves beyond the quarter-century mark.