Farm and Ranch Business Success Factors

1. Farm and Ranch Business Success Factors Steven L. Klose Dean A. McCorkle Greg H. Kaase Joe L. Outlaw David P. Anderson George M. Knapek Texas Cooperative Extension Texas A&M University System National Extension Risk Management Education Conference March 26 – 27, 2003

2. Texas Risk Management Education Program • Risk Management Education • Master Marketer, Marketing clubs • Curriculum Guide • FARM Assistance • Decision Support System • Financial analysis of alternative operating strategies • Database of Base Farm Analyses

3. What is FARM Assistance? A strategic planning tool designed to provide farmers and ranchers the flexibility to pro forma analyze their operation under riskfor the purpose of choosing among risk management tools and/or business strategies.

4. What is FARM Assistance? • Information • All Enterprises • Non-farm Activities • Projection • Ten year pro-forma • Incorporating risk in production and prices • Reports distribution of key financial performance measures • Comparative Analysis

5. Logistical & Personnel Aspect of FARM Assistance • Directly with individual producers • 7 district-based extension specialists • 4 campus-based extension specialists Steps in FARM Assistance process: • Initial visit (data gathering/setup) • Base verification (prelim. results) • Report visit (deliver analysis report)

6. Report Contents • Graphical, Tabular, Written Summaries • Profitability,Liquidity, Equity Growth • Cash flow risk • With risk, and deterministic (no risk) • Supporting information

7. Base vs. Alternative Base Scenario Alternative 1

8. Cash Flow Risk Probability of Cash Deficit Cash Reserves

9. FARM AssistanceData Base • Data Base of Farms • 400+ Completed Reports • Actual Individual Operations • The FARM Assistance Subscriber • Full time farm or ranch • Mix of Successful and Financially Stressed

10. FARM AssistanceData Base • Data Base of Financial Information • Actual and Near Term Projections • Where is the operation today • What is the structure of the operation • Projected Data • 10-year Projection • Including Risk

11. Identifying Success • Objective: • Defining Future Success • Classifications of Operations • Correlation of Current Measures to Future Success • Subjective: • Empirical Experience of Extension Specialists

12. Definition of Success • Success Index is Function of: • 10-year average Return on Assets • 10-year average Annual Percentage Change in Real Net Worth • Average Probability of Cash Shortage (Refinancing Operating Note) • SI = ROA + %∆RNW - 0.25*P(C<0)

13. Classification of Farms

14. Composition of Performance Groups

15. Financial Indicators by Group

16. Financial Indicators by Group

17. Financial Indicators by Group

18. Financial Indicators by Group

19. Indicator Rankingsfor all Farms and Ranches

20. Indicator Rankingsfor all Crop Farms

21. Indicator Rankingsfor Livestock Operations

22. Indicator Rankingsfor Diversified Operations

23. Subjective Indicators of Success • Specialists/Producer Contact • Interviewing and Collecting Data • Conducting Analysis of Alternatives • Two Key Characteristics Imply Success • In-Depth Knowledge of Operation Details • Forward Thinking Approach

24. Conclusions • Quantitative Results Follow Expectations, Critical Factors Suggesting Future Success • Expense/Receipts Ratio • NCFI/acre • Debt/Asset Ratio • Management Style Influences Success

25. Farm and Ranch Business Success Factors Greg H. Kaase Dean A. McCorkle Steven L. Klose Joe L. Outlaw David P. Anderson George M. Knapek Texas A&M University National Extension Risk Management Education Conference March 25-26, 2003