Characteristics of Top Producers How do you become one?

Dr. Kohl’s “Barometer Chart” This gauge is included in your materials Use this to look at the trends for your operation – look at the graphing pages for the longer term trend The information can be found on the Executive Summary of your analysis (new front page) In today’s volatile environment, it is crucial to know where you stand financially Use this to consider your operation, but then use the Analysis book & your Rank ‘Em to compare with peers. I will also be completing the peer group comparison with you in the future. So, what have “top producers” looked like financially over the last number of years?

Characteristics of Top Producers What are the financial trends of the Top 20% over the years? What measures should you strive for to be the most profitable producer possible? How can you get there? The following was adapted from data compiled by Al Brudelie, Dean of Management at South Central and MN West Colleges Trend data for the past 10+ years was used in the analysis. The following are factors that consistently appeared each year in the top 10% of producers in the MN West and SCC book data.

Financial Characteristics Working Capital to Gross Income: Greater than 35% Years to Turn over Intermediate Debt: Less than One Farm Debt to Asset Ratio: Less than 40% WORKING CAPITAL: Basically the amount of current assets left after current debt would be paid Ways to increase: Save Cash Pay down debt obligations CASH IS KING! – in these tough, volatile times, cash is crucial. If you have cash available, you will be able to take advantage of opportunities that present themselves. YEARS TO TURNOVER INTERMEDIATE DEBT: If you used all available current assets, how fast could you pay off int. debt obligations? Ways to improve: Don’t fall victim to “needed” tax purchases – Sect. 179 is a great current tool, but can hurt future tax years when principal is due and no tax benefit left in depreciation Have a capital equipment purchase plan and stick to it Make smart capital purchases that will benefit the business and aren’t just getting you the latest & greatest equipment Equipment and technology has a place in the business and is needed in today’s operations, just use economical sense as you purchase If you purchase a new piece of equipment is it going to generate the cash necessary to make the payment? All of these are really interconnected…being smart here will improve working capital, debt level, etc. FARM DEBT TO ASSET RATIO: Level of debt the farm is carrying. What portion of the business does the bank own? Way to improve: Really, the same principals apply from above. Other Thoughts: At this juncture, all of us need to focus on paying down debt and lowering our debt level – that is what has lead to our current financial mess Larson-Allen V. Pres said, “they had been predicting this for awhile. US consumer/business debt level is currently at 3X our nation’s annual GDP (measure of our nation’s output or really our national income).” He stated in the interview that the only way out of the mess is for us all to pay down our debt.

Financial Characteristics Rate of Return on Farm Assets: Greater than 15% Rate of Return on Farm Equity: Greater than 20% Term Debt Coverage Ratio: Greater than 3.0 (or 300%) ROA & ROE: Is investing in the farm productive for you year in and year out? Don’t get caught – if you have low net worth, your ROE can look really good, - or if you have a lot of owned land it is difficult to get a good ROA, tough to turn the value of the land especially if it was purchased recently “Earns and Turns” Ways to Improve: Get rid of unproductive assets Generate more income with the assets you have Are the assets you have for the business productive? Consider Machinery Depreciation and Machinery Cost per acre – (granted fuel and repairs are in there too) For the size of your operation, would hiring some custom hire services make more sense? – Check around Could you share some equipment with a neighbor or have another farmer rent a piece of equipment from you or do custom hire services yourself with that questionable piece of equipment Today’s equipment is expensive to purchase and maintain. Do you need your own combine, sprayer, fertilizer spreader, grain truck, livestock trailer, or even all the tractors you have? Many of these sit much of the year and are really only productive in a short window of time, so could another possibility work for your operation. Many times there is a short window available for farming operations, so you do need your own equipment line and having someone else completely custom farm your fields is expensive. My point is just be thoughtful of what you are purchasing and what value it is bringing to the operation. TERM DEBT COVERAGE RATIO: How much money is available to pay term debt obligations PROFITS = REVENUE – EXPENSE. If you are struggling here, you need to: Generate more cash Lower expenses Increase off farm income Decrease family living costs Calc  NFI + Depr. + NonFarm Income – Family Living & Taxes + Interest pd on term debt = Money available to pay term debt

Enterprise Efficiency Asset Turnover Rate: Greater than 50% Operating Expense Ratio: Less than 70% Interest Expense Ratio: Less than 5% Net Farm Income Ratio: Greater than 20% ASSET TURNOVER RATIO: Farming is one of the few businesses that must purchase equipment that sits for much of the year. General Mills, Ford, Walmart, etc. wouldn’t make a capital purchase if the equipment purchased wasn’t fully utilized and adding to the productivity of operations There is a short window of time for farming operations & you need to “make hay when the sun shines”, but consider the alternatives available to you EARNS & TURNS – Does making a capital purchase in your Cash Flow increase your ATR? OPERATIONAL EFFICIENCY Every dollar that enters the operation goes 1 of 4 places  Interest, Depreciation, Cash Op. Expense or is left for Profit. Those profits are used for principle payments, family living costs, working capital, etc. How can you make the farm operation more profitable? Farming is a high expense, low margin business. And you are a price taker on both sides of the coin – input costs, and product sales. So, how can you mitigate risk, have a secure financial position, and keep more of your farm dollars for your self?

How Does Your Farm Stack Up? So, how does your farm stack up? What can you do to make it have better financial grounding? Hopefully this has triggered some thoughts on how to improve your farm’s financial position and reach the goal of becoming a “top producer”