Farm Profits Require Luck and Smarts

Farm Profits Require Luck and Smarts

It's time to change my business; the things that got me this far no longer give me as great an advantage.

By Charlie Kraus

My formal education in business management and finance filled my head with a lot of notions critical of what I saw my neighbors doing with their farms.

Over the years, I've mellowed some.

I have been in this business in the community where I grew up long enough to have seen farms grow from nothing into large estates. I have also seen farms go from large estates to nothing.

People I knew from school or 4-H that I grew up with are now approaching middle age and the ones still involved with production agriculture have gotten to where they are by a number of different routes. I have a hard time saying which is best. These days I'm just happy having successful neighbors.

"My formal education in business management and finance filled my head with a lot of notions critical of what I saw my neighbors doing with their farms..."

Strictly speaking, business management does not stress sustainability as a means to business success. We all recognize the hazards of unsustainable farming and ranching practices from both an environmental and economic standpoint. Businesses that have prospered over long periods of time have done so by evolving and reinventing themselves.

However, I am beginning to believe the idea of an agricultural business model intended to be sustained as a business continuously may not be such a great idea.

Part of my thinking comes from my own observations but also from a book by Nassim Nicholas Taleb called "Fooled By Randomness." His message in this book is that a lot of what we perceive to be business success based on sound practices and wise decision-making is really the result of a manager using the right business model at the right time under the right conditions as the happy result of luck rather than intent.

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Therefore, just because someone was successful using a particular business strategy it does not mean they will always be successful. History proves this.

A business manager is not necessarily a good manager just because he made a lot of money. He may have just been lucky. A business manager is not necessarily a poor manager just because he lost a lot of money. He may have just been unlucky.

It is a hard message to accept. We in agriculture have been taught to believe that hard work and discipline lead to farming success. If things aren't going well, we need to work harder. If a farmer fails he surely must have done something wrong, after all.

But in all honesty, too many in agriculture work too hard to succeed by pushing the wrong business model at the wrong time. A prime example of this is buying a ranch, stocking it with cows and trying to pay off the mortgage with income from the cows.

Why do people do this? Well, we all know the stories of people who did this (or appeared to do this) and ended up filthy rich. In truth, there have been times down through the years when this approach worked like a charm. But most of the time this approach does not work.

Taleb says it is just our human nature that makes us want to believe stories we hear and stories we tell ourselves. The human mind wants things explained simply, with a happy ending if possible. Taleb says this is just part of our human nature and should be embraced rather than erased.

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No single business model works all the time. Therefore, no single business model is sustainable. Now, I'm not talking about environmental or biological sustainability. I am talking about economic sustainability.

When I started farming, I'll admit I made a pile of money with a lean, low overhead, high-asset-turnover, intensive rotation, no-till farming model on leased land. My competition was traditional wheat-fallow farmers, still trying to recover from the 1980's with farmyards full of iron and tanker-loads of diesel fuel.

Well, the competition is catching up to my farming business model and my advantage is dwindling. My model worked so well it was copied.

It's time to make some changes in my business because the things that got me this far no longer give me as great an advantage.

This is why entrepreneurship trumps innovation. Innovation can be copied. Entrepreneurship, by definition, is a break from what currently exists.

This in part explains my revived interest in the livestock part of my business. For years, it was the excess cash flow from crop farming that allowed my cow herd to grow. It also helped cover up the mistakes I was making learning to manage a cow herd. Now the cattle enterprise is large enough and well enough understood that devoting more effort to managing it makes a lot of difference to the bottom line of the whole business.

The cow herd that began as something I did in my spare time to add value to unused resources is becoming something that can and must justify paid wages and paid management. The model that worked in the beginning is no longer sustainable.

Kraus is a beef producer from Hays, Kansas.

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