Any grower can walk through an orchard, pointing out all his or her decisions to make good fruit. But can he tell you the costs? The profit? The plan to stay profitable?
If he can’t, chances are that grower won’t be around long.
Modern farming is a complex undertaking, an enterprise requiring large sums of money invested in the expectation of profit.
As a business owner, a grower must know capital costs, risk management, labor management, strategic planning, marketing and much more.
Since few growers can be an expert on all aspects of a business, a strong partnership with a money person is enormously important. That’s usually a lender.
How do bankers look at a farm? It’s no small question since bankers play an outsize role in the industry.
Bankers collectively make decisions on total farm debt that in 2015 reached $357 billion, according to the Farm Credit Administration.
One big player in ag lending is Northwest Farm Credit Services, a $12 billion cooperative serving the four northwest states.
Based in Spokane, Washington, the lender is owned by customer-members and provides loans and related services to tree fruit growers as well as fishers, timber harvesters, ranchers and others.
Northwest FCS doesn’t call its officers “bankers.” They prefer “relationship managers,” which underscores a philosophy of long-term partnerships.
In recent interviews, Ken Ballard and Tom Howard, both vice presidents and relationship managers with Northwest FCS, talked about how they viewed a farm as a business.
Howard grew up on a family farm in Dayton, Washington. Ballard grew up in the wine and olive growing area of Paso Robles, California.
Bankers look at a farm business as a three-legged stool: production, processing and marketing. If any one of those legs is weak, the stool can fall over, Howard said.
For example, on the marketing side, how does a specific variety line up with consumer demand? What price is it likely to fetch?
Ballard said bankers also look at the management of the farm, a broad category that looks at communications with workers, planning, risk management and profit on the cost curve.
As an example, replacing an orchard with Honeycrisp will generate added costs — what are all those costs and when can the grower make a profit?
To get at these questions, Ballard and Howard might have a first meeting with a grower that goes a few hours, followed up by some 15-minute conversations. “We focus on understanding and assisting customers to reach their long-term business goals. A lot of our business is sharing knowledge,” Ballard said.
What are some of the pitfalls? Growing too fast for a business’s capital position or management structure; taking on too much debt to add acreage or equipment, for example.
Failing to diversify across different varieties. Staying too long with a low-profit variety and lacking enough income to finance investment in replacement varieties.
Sometimes, bigger is not better. For certain operations, downsizing or right-sizing could put a farm on a stronger path to profitability.
“Growth is not always the right strategy,” Howard said.
There could be flaws in a plan. A grower might expect 100 bins per acre from a new block; what if it’s just 60 bins per acre? Can that shortfall be managed?
Having a clear-eyed sense of a farm’s costs and revenue has always been important, but it’s even more true today as the pace quickens for new varieties, which along with other factors, makes an orchard a capital-intensive enterprise.
Put simply, it takes more money to stay in the game. If a grower fails to keep pace with market changes, catching up is very hard.
Growers wanting to improve their business smarts can try seminars and online resources offered by lenders, federal and state agencies and extension services.
Washington State University Extension, for example, provides research papers on the costs of producing different crops. In one 2014 paper, WSU Extension provides details on how to analyze costs and likely revenue for a new Fuji block.
Based on interviews with Fuji growers, the report takes a hypothetical 21-acre plot, calculates different densities for trellis systems, assumes a land cost of $12,000, irrigation and packing costs, cost to hire a foreman, expected packout rate, and many other variables.
Full production comes in year six. Profit begins by year four for the angled trellis system and by year five for the spindle trellis system. (Differences in payback are mainly due to higher yields assumed for Fuji production under an angled trellis system.)
Growers can apply this analysis to their own farms by downloading an Excel spreadsheet template that can be adjusted to individual circumstances. The Fuji report and Excel template can be found online at bit.ly/Fujicosts.
Universities and colleges also offer courses in business management. Trent Ball of Yakima Valley College teaches a course at the campus in Grandview, Washington, using a textbook called “Farm Management” by Ronald D. Kay, William M. Edwards and Patricia A. Duffy.
Not surprisingly, Ball teaches the same fundamentals that bankers look for.
He teaches students how to develop a strategic plan for a farm that sets goals and benchmarks over a five- to seven-year period. He says growers must know their numbers by the block.
“Understand down to the penny where your costs are at,” he said in a recent interview.
An apple grower should know the profitability of each variety, based on multiple cost variables, he said. He or she should spread risks across different varieties and crops, and know too that the mix of varieties affects the cost and revenue variables.
A farm that is 90 percent cherries is a very different business than a farm that is 50 percent apples and 50 percent grapes.
Ball also stresses the people factor. Hire smart people. “Having the right team sets you up to succeed in the future,” he said.
But there are no guarantees in farming. Hail or birds can wipe out a crop. A grower can manage risk and costs, but not the weather. “We’re still at the whims of Mother Nature,” he said.
That’s advice you can take to the bank. •
— by O. Casey Corr
WSU hosts seminar on farm record keeping
Washington State University Extension is hosting a seminar called “Farm Recordkeeping for Productivity and Profit” Feb. 11 and 25 in Everett, Washington.
“Accurate and up-to-date financial records are essential to any growing business, but are especially important to farms and agricultural businesses. Without a good record keeping system in place, decisions will be made based on hunches, not reality,” said WSU Extension.
Class size is limited. The sessions include presentations by farmers and financial experts on maintaining financial records and training on the Quickbooks software. Cost is $120 per farm and includes lunch for the two-day seminar.