Do you know what sets the most financially successful farmers apart from the rest? I got in this conversation with one of the Ag bankers I know and his answer offers good food for thought.
The banker, Bob Boesdorfer from First Midwest, says he's seen a particular way of thinking help make some farmers more successful. He says they don't 'fall in love' with any certain asset on their farm – whether that's their land, equipment or livestock. They leverage this way of thinking as a business tool that can make their operation more successful.
These farmers are able to take a more objective look at what is creating profit for their farm - and what's not. If they find that an asset is detracting from the overall operation rather than creating value, then they first look for ways to improve that piece. But if it becomes clear that things aren't going to improve, they are able to set it aside and focus more attention on other parts of their operation, or sell the asset.
As farmers, we often feel emotionally attached to our land or our livestock. We might also really like our equipment line or our buildings. But I think the banker has a valid point here. Every asset that you have needs to create some sort of value for your operation. Otherwise, why do you have it?
It's almost like a swear word when you talk about selling land. I'm consulting with a person in another state. He bought a sizeable piece of ground back in June and got a good deal. The price was a little under $6,000 per acre and he has the opportunity to sell it seven months later for $10,500. I say why not? That's what I asked. When you look at land long term – when you look at the investor side of that, it's a three to four percent return every year for the last 70 years. Sometimes it's 10% per year. Sometimes it's depreciating…like in the 80s. But over time it's three to four percent and then you've got to cash flow at three to four percent.
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When something's appreciated 65 to 70% in seven months, think about how long it would take you to get that profit out of it by farming it. You paid cash for those 320 acres. How long would you have to farm that to make that? Everything can be for sale for the right price.
You are the master of those assets. You must not let them become your master.
Land has been a great investment since the 80s. But we may be on a land bubble now. I know most farmers would rather give up most other things before they would sell that land. It's important for farmers to step back and think about their relationship with their assets.
Take an objective look at what's generating profit for your farm. You can use your farm finances and work with your banker or other farm business advisor to help you. Doing this helps you identify where you are getting the greatest return for your time and money. Knowing these areas of greatest profit will help you in the process of growing your farm.
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