When Scott Corbett’s students open their books to start their farm business planning, Corbett warns them they’re going to get their lowest marks of the term. He’s rarely wrong.
Corbett knows this, in part because he isn’t so different from the students he teaches at the University of Manitoba’s School of Agriculture. A graduate of the class of 1999, Corbett has also farmed all his life and is currently managing a 1,700-acre grain and cattle operation along with his father just northwest of Winnipeg.
The school hired Corbett to join a team of three other farmers to help first-and second-year students develop business plans for their farms. Each farm business management instructor, as they are called, sees about 20 or so plans per year.
The farm management instructors complement the strong agronomic training that students receive in their production courses. But by introducing concepts like profitability, break-even prices and rate of return, the business modules also temper the optimism that students typically bring to the program.
For most of the students — the majority come straight from high school and straight from the farm — the business education means a steep learning curve.
“We’re trying to teach students how to produce a set of financial statements that accurately reflect what is happening on their farms or — in the case of those students who don’t have a farm — a case farm we supply them,” Corbett says.
“We hammer them on accuracy,” Corbett adds. “Nothing of what we teach is of any use unless the students are accurate and true to what is on their farm.”
The course focus is what you would expect: goals and objectives, historical financial statements, enterprise budgets, projected financial statements, risk, and financial ratio analysis.
“This is just not the level at which the students have been involved in their own operations,” Corbett says. “So when it comes to doing a plan for their farm, they are most comfortable with the agronomic portion of the process. Production comes easily to them. Numbers and management are a lot tougher.”
So tough in fact that Corbett doesn’t mince his words when he describes how students react to the challenges that his farm management course throws at them.
“They hate the process.”
The first step — setting goals and objectives — is particularly difficult. “They’ll throw in goals related to asset acquisition, like a tractor or a piece of land, and maybe something about the level of income they want to generate. But they have a lot of trouble looking at the big picture and setting a future direction for their farm, again mostly because this is not where their heads are at.”
Getting a handle on where the farm is at financially is another significant hurdle. Once again, 18-year-olds are rarely involved with this aspect of farming. But there’s more to it than that.
“The fact that so much of what is done in farm accounting is focused on taxation is a problem,” Corbett says. “Cash accounting, when you are looking at one year in isolation like we do, really tells you very little about where the farm is at. Programs like Agri-Stability have made it more important to keep track of inventory and accrual adjustments but the home records that students have access to are still largely based on cash and income tax.”
Ironically, the increased use of professional accounting services and software packages can also make it harder to absorb financial skills. From a learning point of view, farm account books entered by hand can be best because they make it easier to teach students the basics.
By contrast, when all they see is the finished product, students are less able to grasp what went into the cash flow or the balance sheet, and therefore they are less able to use the data in them to plan for their businesses.
Corbett also sees a clear trend towards more and more complexity in how farms are managed and how financial information is gathered and tracked.
This is partly a result of more complex ownership structures like holding and operating companies and multiple partners involved in the same operation. Corbett estimates that 25 per cent of the farms he sees are now incorporated. As farms move away from sole proprietorships and towards other forms of ownership, the number and type of financial transactions make it harder for students to follow what is happening.
It is also partly the result of the increasing use of trade credit and credit cards. Credit cards bunch multiple transactions together and often lump business and personal expenses on the same statement, if not the same line item. There is also a time delay between when an item is bought and when it is paid for. Sometimes, only minimum payments are made. While all these intricacies can be managed, the degree of difficulty — especially for first-year agriculture students — is ramped up immeasurably.
When it comes to enterprise budgeting, production and agronomics are again rarely the problem. Corbett says most students have a pretty good handle on variable inputs like fertilizer, chemical, seed, feed, and vet bills. Fixed expenses such as depreciation, interest, and opportunity costs are more problematic, especially when they must be allocated to various enterprises or between several different ownership structures. But it is on the output side where the most coaching is needed.
“We often find ourselves asking the students: what is your 10-year average?” Corbett says. “Their tendency is to take last year’s results, especially if they were favourable, and budget that. But is it realistic to get dairy-quality alfalfa every year? Or a 98 per cent calving percentage?”
While historical averages provide an excellent reference point for production, the same cannot be said of prices, especially as they become more volatile. Knowing several months in advance what a crop or a calf or a finished hog may be worth has always been a challenge. What has changed is the range within which prices may fluctuate, not to mention how quickly they can plummet or explode.
“What we try to do is get them to budget conservatively,” Corbett says. “If you end up with higher production or prices than you had foreseen, you can always find a place for the money. It’s a lot harder to come up with more when you’re short.”
The enterprise budgets enable students to arrive at break-even prices and yields for their crops and livestock. These are key figures that are meant to influence students’ choice of enterprises as well as their marketing plans.
“We don’t focus on marketing per se,” Corbett explains. “Other courses in the diploma program do, and if students want, there are all kinds of information and seminars available through industry. But we do stress the need to know your cost of production. In the long term, you have to be able to sell at a profit to stay in business.”
Once enterprise budgets and historical statements are in place, the students have the building blocks to try their hand at developing projected statements. The whole projected statement, risk and ratio analysis package that students complete towards the end of their second year in the program results in a plan that students then present to a panel of experts from inside and outside the university.
“Risk analysis is usually pretty well done,” Corbett says. “Almost all of the grain farms that we see now are using the 80 per cent coverage level for their crops. It used to be that people talked about being self-insured and having another enterprise to fall back on if there was a crop failure, like a beef or a swine operation. But with the problems that both these sectors have faced, there are no fall-backs any more and the exposure to risk, because of high input costs, is just too great. Students usually have a pretty good understanding of this.”
Even so, when it comes to financial ratio analysis, it is again a matter of introducing tomorrow’s farm managers to something they have never seen before and about which they have never really thought.
Corbett is frank. “For many, it’s a case of don’t know and don’t care.”
Financial institutions have always used ratios in assessing the credit worthiness of farms. Now some, including Farm Credit Canada, appear to be pushing ratios a little bit more in their interactions with farm managers. So this may be changing.
But it still leaves what may be the biggest problem of all.
It’s hard for students to understand how they can realistically manage on-farm ratios because this involves bringing everything together and understanding how all the pieces of the puzzle fit together. But Corbett says it’s worth the work to figure it out.
As many as two-thirds of diploma graduates intend to go back to active farming. When they do, Corbett believes, they’ll begin to think that the farm management courses that they sweated through were among the best and most useful courses they ever took.CG
“ I would be shocked if 10 per cent of them have ever seen an enterprise budget or a day-today cash flow. for the most part, they’ve been labourers and they’ve done the jobs that Mom and Dad have told them to do.”— Scott Corbett