By Roelof Bezuidenhout
President John F Kennedy is supposed to have said the farmer is the only one in the economy that buys everything at retail, sells everything at wholesale – and pays the freight both ways. Other than that – and the fact that farms are more exposed to the elements than most – farming is no more susceptible to financial problems than any other sole-owned small business.
Given that even Fortune 500 firms nowadays have a life of only 10 to 15 years, it’s remarkable that so many family farms are still operating – some into the fifth or sixth generation. Equally amazing is that they have survived for so long doing basically the same thing, selling the same product to the same market.
There are several reasons why the big companies don’t last very long anymore. The world is changing faster than they can adapt to consumer demand, and come up with new products and markets. Those that survive pay special attention to any possible and probable changes. Those that don’t, or make the wrong moves, simply don’t make it. Of course, the successful companies have the resources to buy the best brainpower, invest in research and development, and to take risks with innovation. This is where it becomes difficult for a farm that is run by a man-and-wife team.
The business environment for farming is also becoming more demanding as input costs soar and pressure groups and governments tighten the screws on aspects such as animal and environmental health, social responsibilities, and general sustainability. The carbon footprint issue could turn out to be one of the most telling developments in the food and fibre sector. Not only are farmers expected to cut their greenhouse gas emissions, but crops that are grown close to the markets could soon be the vogue – at the expense of those that are harvested far off and have to be transported over long distances. That includes almost all our agricultural exports. Unavoidably, rising production and marketing regulations will hit the smaller farmers as well as poorest consumers hardest because they increase both production costs as well as the price of food. The question is then, to what degree a farmer is prepared for and equipped to meet these challenges and then to survive for another generation.
Doing something about it is, of course, easier said than done.
Hardened businessmen like to say, “If you can see the bandwagon, it’s already too late”. Basically, it means that you have to keep your ear to the ground and stay informed about trends and markets so that you can act on and be ready for the changes when they come. Don’t wait until everyone in the street rushes out to cheer the band. By then the market could already be flooded or moving elsewhere. As a joker once remarked: There are plenty of good ideas out there; you just have to think of a new one. If you can’t, you can try to sell a new product, or a new version of the old product or service, or target an untapped market. In other words, diversify.
Before that, though, carefully analyse your true current situation and where it’s leading you. Will doing the same thing be enough to grow and keep you in business for the next decade or so? Perhaps it could. On the other hand, your business might be sliding downhill without you realising it. You could be beating a dead horse.
If that’s the case and you think you’re digging yourself into a hole, the textbooks say you should stop digging and start thinking about the possibility of changing direction using the ‘two engine business model.’ It boils down to focusing on alternative sources of income without letting go of your main (original) business or selling your farm. Initially, your main business (Engine One) could finance the new venture (Engine Two) or at least keep you going until it eventually (perhaps) replaces Engine One. The ideal would be to have both running smoothly at the same time. Example: You could augment your beef income with a transport business; or use your panel beating skills to set up a body shop.
A common mistake is to expect Engine Two to fire on all cylinders immediately while it would usually need several years to pick up speed. The trick is to get started – but not before some solid soul-searching, research and discussion with trusted advisors. You must have a clear idea of the risk – not only of trying something new but also of not doing so.
It’s common sense to spend your time and money where they will give the best returns, so beware of a little law that quietly can eat into your profits. In their eagerness to make farming pay, or to make a success of a particular branch of farming, farmers often forget how the law of diminishing returns can prevent progress. This law simply says your inputs into any venture, whether they are time, labour or money, will eventually produce lower increases in returns until you end up putting in more than you are getting out of the system. This not only means that feeding a pig increasing amounts of food every day will eventually produce a situation where the feed will cost more than the weight gain in pork, but that you would be better off spending the extra time and effort on another branch of your farming enterprise that might not be getting enough attention. This is where savvy, preferably backed by bookkeeping, comes in. You’ve got to know almost exactly what the optimum input is to get a certain benefit. And this changes along with the price of inputs as well as the price you can expect for the product.
This law applies to any activity when the stage is reached where any extra input will not produce an equal or worthwhile return. In the case of fertilisers, for example, increasing the application will increase plant growth until you are applying so much that you might actually damage the crop.
A more formal definition of the law reads: The economic law of diminishing (or marginal) returns states that if one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point. But it is not always easy to know exactly when the law kicks in. For example, if more and more workers are added to pick fruit in an orchard, at some point each additional picker will add relatively less output than his predecessor did, simply because he has less and less of the fixed number of trees to cover.
So, be careful that Engine One doesn’t suffer or even shut down because Engine Two is swallowing too much time and money. You’ve got to get the balance right.
Roelof Bezuidenhout is a fourth-generation wool, mohair, mutton and game farmer and freelance journalist. Attended Free State University, majoring in animal husbandry and pasture science. Other interests include golf, photography and geology.
