Farm Horizons, August 2014

Decisions, decisions

By Myron Oftedahl
Farm Business Management Instructor, South Central College

The weather has forced us to make some decisions that we wouldn’t normally contemplate.

As a business owner, how do you make those management decisions?

The typical management decision cycle would involve the following steps: recognize the change that you are considering or the problem that you are facing, collect information, evaluate the options, develop a plan, implement the plan, and then review the outcome.

Did your plan have an unexpected outcome? I listened to Burke Teichert at the National Farm Management Conference in June, and he stated that as managers we need to understand that by changing one thing, it can impact more than one thing.

A good example of this is the prevented planting. You have decided to not plant a crop and take prevented planting payment from the crop insurance. You will receive a check, but what else will be affected?

You will need to consider planting a cover crop and weed control on those acres.

What effect will that payment have on your tax situation? What effect will it have on next year’s crop? What effect will it have on your Jan. 1 balance sheet? Will it affect your operating line? What effect will it have on next year’s income? Will you have enough grain to fulfill the contracts that you have in place? Will it affect the relationship with your landlord? Are there ways to improve the drainage of the land? Are there any advantages that you can use in your overall operation?

As Teichert spoke, he emphasized that a management decision needs to be integrated and system-based. We need to consider the unexpected consequences.

An example of this would be a dairy producer focusing on a breeding program to increase milk production, but not considering that all of the sires that are being used will increase birth weights or contribute to poor feet and legs.

Increased milk production on an animal that will last only a year or two milking does little to sustain the overall performance of the herd.

A system-based decision would take all of these into account. We can put an emphasis on milk production, but we need to realize that the other components are important to the total picture. It may take longer, but it is possible.

I am sure that you could recall some examples of decisions that you made, and found out that something else got affected by that decision.

Often, you may tell yourself, “I wish that I had known that before I did what I did.”

I know of some farms that had sizable crop insurance checks last fall, only to discover later that now they have a much larger tax liability than usual. If they had done some tax planning or known that they could defer the yield/loss portion of the payment, that insurance income would not have had as much impact on taxes.

We, as farm business managers, face a number of decisions each day. Some are routine and we have a pretty good idea of what the outcome of that decision will be. Some are because of the weather. We can’t control the weather, but it is probably the biggest risk that we, as farmers, face. We can manage around it and we have tools to reduce the risk.

Sometimes, the decision may be to expand or replace machinery. We can use the decision cycle to help us make a decision. Sometimes the most difficult part of the cycle is to collect information concerning the options available.

Where do you go for information; your equipment dealer, banker, FBM instructor, crop advisor, or neighbor?

Use your support system, depending on how complex the problem is. If it is a routine decision, you can use your own experience. If it is something more complex, you will need to seek input from other sources that have experience in this matter. You may need to do a pro/con list for a complex issue such as adding to the herd.

So, as you face decisions, use the decision cycle. Identify the issue, research the issue, implement a plan, execute the plan, and then do a review. Did the plan do what you expected? Or did it create a need for more decisions?

Have a profitable day!

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