Profit-driven Decision Making on the Farm
At a recent conference the keynote speaker--a successful farmer in the agritourism business--talked about some effective ways to increase profits in his business. During a break, I struck up a conversation with someone I hadn’t met before by asking the gentleman what he thought of the keynote. He said that the speaker’s focus on increasing profits made him uncomfortable.
In my experience, a lot of farmers feel the same way. Something about discussing profitability just feels wrong. It seems greedy, or that the farmer is trying to take advantage of others.
Do business leaders outside of farming feel guilty about trying to increase profits?
Profit is the economic return on a business owner’s investment of money, time and labor in their business. After subtracting a fair value for the business owner’s labor and management, a business should generate a rate of return on its assets that is higher than the interest rate currently being charged for commercial loans. If a business is profitable, it makes sense for the owner to continue investing money, time and labor in the business. If a business is unprofitable, it would make sense from an economic standpoint for the owner to pull their financial investment out of the business, and devote their time and labor to something else.
A lot of farmers don’t know if they are profitable or not. Many may not care. That’s not a criticism; it’s just a reflection of the nature of farm financial management. As long as there is enough cash flow to cover expenses, make loan payments, and keep the farm operating from year to year, the status of a farm’s profitability probably isn’t driving day-to-day management decisions.
Why isn’t profit driving farm decision-making? A farm that produces and sells commodities typically doesn’t have much opportunity to set its own prices. The ability to raise prices is one of the primary tools most other businesses use to increase profits. Without raising prices, there are only two other ways to increase profit:
1. reduce operating expenses or overhead costs while maintaining the same level of production; and
2. increase production without increasing operating expenses or overhead costs.
Marketing direct to consumers
One of the great advantages of a farm that markets its products directly to consumers is the ability to set its own prices. It can raise prices when necessary to maintain or increase profits. Having the ability to raise prices doesn’t necessarily mean that a farmer will be comfortable using it. Farmers tend to be good, generous, empathetic people. Raising prices can be very difficult for them.
There are several reasons it’s important for direct-to-consumer farmers to get comfortable raising prices and remaining profitable:
- Farming is hard work. You don’t need to feel guilty about being paid fairly and adequately for your labor and expertise.
- If you aren’t able to generate an adequate return for your labor, at some point you will burn out no matter how much you love farming.
- Your customers want you to succeed and want you to remain in business for a long time. You and what you are providing are important to them. They are willing to pay more to ensure you stay in business.
- If you aren’t generating an adequate level of profitability, when you are ready to retire from farming you won’t be able to find anyone to purchase your farm assets at fair market value and keep the farm going for another generation.
- We need more farmers producing and selling products directly to consumers, and we need more local food processing capacity to support those farmers. We need profitability all the way through the chain and it begins at the farm level.
Profit is not a dirty word. It’s something we need to talk about more in the farming community and we need to celebrate. Achieving adequate profitability on the farm helps sustain the entire local food system. Be proud