Again and again, managers and loan officers at Farm Credit Services Southwest observe firsthand why some agricultural businesses consistently outperform their peers.

The difference, we believe, is management. But what are the traits of good business managers?

Four Farm Credit Services Southwest loan officers - with combined experience of more than 60 years observing and advising farmers and ranchers - provide their views on what separates the best from the rest.

Craig Tyler
Position: Vice president and branch manager
Office location: Safford, Arizona
Experience: In agricultural lending since 1982
Portfolio: Range cow/calf operations, alfalfa, grain corn, pinto beans, red chili, cotton and pecans

1. Diligent planning
First and foremost, successful business owners roll up their sleeves and really get down to

Here's an example: I work with a successful grain grower who was in the market for a new combine. Before committing any money, she questioned dealers and leasing companies about loans vs. leases, warranties, resale values, trade-ins, support services, price, tax breaks, early payoffs and other features that were important for her business. When she finished her homework, she confidently purchased a combine that was the best value for her operation's needs.

Last year, her husband was concerned about the farm's reduced profits. When a red chili grower approached him to rent some of their land for $200 an acre, the husband weighed the cost to produce an acre of corn (labor, seed costs, return, interest expense, inputs, debt servicing) against $200 per acre rent. He discovered that renting offered a greater return than farming the land. This made two people happy: the landowner and the chili farmer.

2. Enthusiasm for new technology, new crops, new markets
Successful farmers and ranchers challenge themselves to rethink existing business models. If a current method still works, they continue to use it. Still, they are open to the strategic use of new technology, new crops, new markets or new ideas to achieve a competitive advantage. For example, if considering whether to grow a new crop, a successful farmer will examine the new crop with a critical eye. He will analyze the new crop's financial implications as well as its impact on resource management (labor, land, time, equipment). He will evaluate the potential of the crop by talking to neighbors, surfing the Internet and consulting with expert advisers. Savvy operators also step back for global, national and regional points of view on new ideas. They stay connected to the world beyond the farm - from Capitol Hill updates to commodity price predictions.

3. Financial strength to support change
When seeking funding for a new venture, most successful business owners bring a track record of financial stability and a well conceived and researched proposal to the table. As a lender, I am interested in not losing money for Farm Credit Services Southwest. So when I talk to a borrower, I look for financial flexibility.

A new venture is like turning a semi around in a garage. It might make sense to turn it around, but you may not have the room to do it.

When I talk to a borrower about a loan for a new venture, I want to hear how the venture makes sense for his operation, what it will cost and what will happen to the business if the venture doesn't work.

Steve Reiley
Position: Vice president and branch manager
Office location: Tempe, Arizona
Experience: In agricultural lending since 1984
Portfolio: Dairy operations, multi-crop operations, field crops, alfalfa, wheat, barley and livestock

4. Accurate and timely financial records
One of the most important reasons why some business owners make money is that they rely on accurate and up-to-date financial records to monitor the pulse of their businesses, to make effective decisions and to study the financial impact of a new venture. They rely on financial records for answers to questions: Are we making money? Is production increasing? Are expenses higher than income? What expenses are too high? How do expenses compare to budget? Can we afford to expand? Will a government program fund additional acres?

Successful business owners budget for the coming year to track progress, forecast cash needs and control expenses. During the year, they compare actual income and expenses to budgeted numbers to assess how they stack up against their plans - for borrowing, profitability, expenses, income, etc. Are feed and labor costs on target? How much are we spending on repairs and maintenance? How do our actual supply costs compare to our projected costs?

In addition, successful business owners anticipate possible downturns in the market. They follow commodity prices, and forecast prices, for the next quarter and the next year. When cash flow is strong, they set aside reserves or pay down debt. Thus, when cash flow slows, they can stay the course because they have sufficient reserves. They also adjust their spending habits during slow times, such as cutting back on family living expenses.

5. Utilization of fixed assets
Business owners who consistently make money utilize the total capacity of their fixed assets, such as buildings and land. They strive for the best yields and the highest return from those assets. For example, a dairy farm that is capable of milking 1,000 cows can probably milk 1,100 cows. The farmer will add corrals only when he can afford to fill them with replacement cows. To the farmer, additional space equals additional debt until it generates additional income.

Successful operators also plan ahead so that when an opportunity arises, they know if they can take advantage of it. For example, successful cow managers project cow numbers over six months and will buy replacement cows to prepare for a drop in numbers. That way, they have sufficient numbers available exactly when they need to be added to the string. Crop growers who work with government programs plant only what the government will support. Contract growers have contracts in hand before they plant. They don't plant a crop hoping to pick up a contract.

6. Shop for the best deal
Successful operators are frugal, but they are not tightwads. These savvy individuals know the value of their time, energy and money, and they spend these resources strategically to benefit their businesses. While most frugal entrepreneurs aren't obsessed with micromanaging every penny of their business, they do sweat the details.

That is, they use the same inputs as their peers, but they buy or lease a better product at a lower cost of production. They realize that a few dollars saved or wasted here and there can make a big difference in the operation's bottom line at the end of the year. They willingly spend money on assets with a return, because they value functionality and profitability over appearance.

For example, successful dairy operators will keep an old dairy facility in good working order if it is functional, efficient and makes a profit. They will replace the generator before it wears out, because they know that the best investments pay off over time.

Bill Collins
Position: Vice president and branch manager
Office location: El Centro, California
Experience: Started in agricultural lending in 1982
Portfolio: Multi-crop operations, field crops, alfalfa, sugar beets, wheat, Sudan and Bermuda grass. Also livestock.

7. Successful risk management
Top producers know how to assess risk and skillfully use a variety of strategies to manage it. These might include enterprise diversification, production contracts, liquidity, off-farm employment and controlled use of debt. The farmers and ranchers anticipate the changes they would make if ever faced with financial difficulty. They also compare price risk across crops and time periods.

For example, in the Imperial Valley of California - with its ideal year-round climate for agricultural production - successful growers may delay planting in down markets. If wheat prices are low, for example, they may diversify by planting Sudan grass to limit their losses.

Successful operators also use liquidity as a risk management tool. To successful operators, liquidity means maintaining a solid financial position so they can raise cash quickly to meet financial obligations during downturns in their businesses. These individuals keep debt levels low to reduce financial risk, don't increase their standard of living during profitable years and willingly tighten their belts during adverse years. They may sell surplus equipment or land with commercial development potential to raise cash, or a spouse may earn off-farm income to support a family's personal expenses when necessary.

8. Hands-on management
Some successful owners balance their time between sales and finance in the office and supervising operations in the field. They plan the strategic direction of their operations one day and drive a harvester or bale hay another. To them, hands-on management makes it easier to identify efficiencies and inefficiencies while gaining an up-close appreciation for the nitty-gritty details of the operation.

9. Control of variable costs
Top-performing farmers and ranchers pay close attention to the management of variable expenses. Each year, certain expenses have a way of creeping upward. So these operators consistently determine if those funds are being spent for their maximum effect.

For example, when diesel fuel and petroleum-based chemical costs increased this year, many successful operators reduced tractor work and looked for lower-cost alternatives to reduce fertilizer and chemical usage.

By controlling variable costs, farmers and ranchers generate more profits. They cut costs in ways that will not cause long-term harm to the business.

For example, I work with a large operator who needed to adjust after experiencing two years of operating losses. He sold personal assets and reduced debt. He had been growing his operation, but he reduced his extra acreage and also postponed buying new equipment by investing in equipment maintenance instead. These changes added cash and liquidity to his operation and helped him keep his trade payables current.

Kevin Kerns
Position: Assistant vice president and loan officer Office location: El Centro, California
Experience: Started in agricultural lending in 1996
Portfolio: Multi-crop operations, including alfalfa, sugar beets, wheat, Sudan, Bermuda grass, Klein grass, asparagus, potatoes, cauliflower, broccoli and cantaloupes. Also cattle, lamb and bee operations.

10. A broad range of skills
Profitable operators effectively manage both the business and farming aspects of their enterprises. They are successful because they prepare and develop a game plan. They take the time to decide what they want and then chart a course for getting there.

They have a keen sense of their personal management style, and surround themselves with a team of people who match that style, from loan officers to chemical sales people to employees. While they are specialists in a number of areas, such as field-crop production or agricultural economics, the most successful farmers and ranchers also possess enough general knowledge to be able to ask the right questions and get the best answers for their businesses.

11. Commitment to personal development
Successful farmers and ranchers are always eager to learn more. They learn how to fix problems, rather than repeat the same ones year after year. If a neighbor has higher yields, the successful farmer stops to study production differences and research new ways to gain better yields.

They consistently update their skills, knowledge, abilities, interests, competencies and understanding throughout their careers, by taking courses and attending conferences. They are out in the public picking up information that may benefit their operations, talking to neighbors and searching the Internet. They attend Farm Bureau meetings, district water and zoning board meetings. They stay current with global issues and prices. Even when their businesses are strong, they work to improve operations through professional education and development.

12. Effective debt management
The most profitable farmers and ranchers negotiate their best financing deals during the good times, when commodity prices and land values are high and when they can negotiate from a position of strength. They consolidate smaller loans and seller financing deals with higher rates into one package. They stretch payments during this time to increase cash flow, and they negotiate the best deals, too.

These owners are not highly leveraged. The most successful operators rely on strict budgets and carefully monitor their projections month to month, crop by crop, year to year - and performance almost always meets or exceeds projections.

Farm Credit as an essential resource
Farming and ranching are tough businesses to manage. Every year brings new variables, and being an expert at every part of your business (as suggested above), from production to financial management, can be difficult even for the best farmers and ranchers.

What the top business owners have learned is how to get help from the experts regarding what they can't do themselves.

A good first step is to speak with your Farm Credit Services Southwest loan officer, an expert on farm and ranch business matters. Together, you can examine each area of your business to determine appropriate courses of action that will help you maintain a profitable enterprise. Give us a call today!

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