Agriculture has always been a volatile business where the unexpected is inevitable, from the obvious issues with floods and drought, to the seemingly uncontrollable challenges when trade and supply chains are disrupted.
We talked with four finance pros for some practical strategies on how to manage farm operations to build in resilience for unforeseen events. Their advice makes good business sense regardless of the factors that can impact your operation.
Darrell McClure is the National Director of the Agriculture Group Risk Management teamat RBC covering Canada. He describes future-proofing as a way to ensure your farm is viable in the next year, the next decade and for the next generation: “I think it’s putting another name on farm management and risk management.”
“While some factors are controllable, some need to be considered more closely when you are thinking long term about your operation,” says McClure.
Set goals and itemize the risks
Setting goals is nothing new. So how do you turn this age-old advice into action when it comes to the idea of future-proofing?
The farm businesses McClure sees that are thriving and growing have inevitably done the work to set goals, plan, consider the “what ifs” and build plan.
“When you identify your goals, itemize the ones with the highest risk and then address them one by one,” says McClure. “You can’t solve everything, but you can identify risks and work through mitigating them.”
McClure recommends producers pose “what if” scenarios that may help make the need for future-proofing more real and make it matter. What if it doesn’t rain? What if there is a rail strike? What if commodity prices drop?
By looking at these possible situations, producers can consider what they can control and what they can’t. “If you can control these scenarios, then think about how to future-proof with tools like insurance coverage, hedging commodity prices, pre-buying inputs to lock in prices, etc.,” says McClure.
For the scenarios you can’t control, there is immense value in having a healthy balance sheet with strong working capital to withstand adversity. “Make sure you have resiliency in your business to ride out these unforeseen situations,” says McClure.
Consider finances in succession planning
John Arnold echoes that approach to managing farm businesses for whatever the future brings. “Use debt wisely, be diligent with risk management using the tools that are available, and use your team of advisors,” says Arnold, an agrologist working in the Commercial Finance Group at RBC, former VP of Commercial Banking in southern Alberta.
It’s tough to talk about the financial aspects of planning for the unexpected without also talking about succession. “Whatever the size of your operation, get started early with communications to talk about your goals and what everyone wants for the business,” says Arnold.
The outcome of those discussions will help provide a clearer path for the future of the business and reinforce the need for future-proofing plans.
“There’s the financial side of future-proofing, but there is also the management and succession side to it that’ s very important,” says McClure. “Most farm operations in Canada are multi-generational and if you want to build a business for the next generation, you need a succession plan as part of your future-proofing plans.”
Include responsibility and accountability in your business plan
Evan Shout sees the value of future-proofing from a few angles. As chief financial officer of the Hebert Group, he oversees the financial health of a 40,000-acre grain farm in Western Canada. His financial acumen drives the consulting division of the operation called Maverick Ag. and in 2022, they launched Farmer Coach – an entrepreneurial coaching program for producers that he leads to help operations of all sizes get more into a business mindset.
“There’s so much more risk today in agriculture than there has ever been,” says Shout, a certified professional accountant. “Costs are higher, markets are unpredictable, the weather is unpredictable, and there are geopolitical forces in the market.”
Shout believes the heightened risks in agriculture highlight the need for a business approach to future-proofing. “We have multi-million-dollar farms that are family owned and operated, and they need to operate like a corporate business to be in a stronger position to manage the ups and downs.” He’s not talking about lifestyle. “Producers need to think about putting roles, responsibilities, compensation and accountability into their business plan,” says Shout.
And he doesn’t actually buy into the notion of uncontrollable risks in the business. “We like to treat agriculture differently than other businesses…but it’s not,” Shout says. He points to insurance programs, keeping costs in line to take a loss if commodity prices fall, and knowing your costs of production and breakeven points. “We actually have direct control over these things if you do the planning.”
The farm coaching business Shout runs focuses on helping farms function more like a business – a key trait for effective future-proofing – by looking at core values, growth, education and human resources, in addition to financial management.
“The coaching helps producers help themselves by giving them tools and big-picture thinking with long-term planning. There are things they can do, sometimes small steps like bringing in an HR manager, that can make really big differences.”
Shout reiterates the benefits of planning when it comes to talking about succession. “If you implement processes that help with future-proofing, you’ve already started the steps when you talk about transition plans,” says Shout.
Communicate your business plan
Dr. Dave Kohl has been advising farm businesses for about 45 years as professor emeritus of finance and small business at Virginia Tech, financial consultant with RBC and an agricultural business owner.
“I really think that in today’s world, future-proofing your business means managing controllables and managing around the uncontrollables,” says Kohl.
Those uncontrollable factors for farm businesses range from geopolitics to war, weather and climate, supply chain issues, social media and consumers. “You can’t manage those and if you try to, you’ll burn yourself out,” says Kohl. “So, from a mental health standpoint, you need to design strategies to manage around them. And then concentrate on what you can manage.”
When the risk is related to potential tariffs and supply chain issues, Kohl reinforces the value of a risk management plan that could be for pricing, input costs or interest rates.
For Kohl, sound future-proofing also starts with goals. “We have to get back to basics to help manage our businesses,” says Kohl. “Goal setting gives you focus. I have an 80-16-4 rule: 80% of businesses have no goals, 16% have goals on the top of their mind, and only 4% actually write them down.”
According to Kohl, research has shown that businesses that write down goals are four times more profitable, and their mental acuity is twice as strong. For him, those goals ideally cover six aspects of your operation – business, family, personal, mental, physical and spiritual – as they all contribute to a more successful farm business.
Then there’s the matter of a cash flow plan. Kohl wants to see this part of business management back in vogue. Building a cash flow plan sounds simple, but many don’t do it. “Developing a cash flow makes you think about your operation – pricing, costs, interest rates and the timing of your revenue,” says Kohl.
“Going through this process also helps you communicate with your partners, stakeholders, your spouse and your entire advisory team, and that’s definitely a benefit when it comes to managing for future events.”
A well thought-through business plan is key to future-proofing your farm
“Future-proofing has always been around and has become much more important because of so many external factors to farm business,” says RBC’s McClure. Identifying potential risks and putting strategies in place to prepare for controllable and uncontrollable events is key to future-proofing your farm. Reach out to your RBC advisor to learn more about putting your future-ready business plan into action.
