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Let’s Talk About Making a Profit

Defining, Determining, and (humbly) Demanding a Farm Profit

By Katelyn Walley-Stoll, Farm Business Management Specialist and Team Leader with Cornell Cooperative Extension’s Southwest New York Dairy, Livestock, and Field Crops Program

Profit. It seems that the term “profit” stirs different types of emotion into farmers’ hearts whenever I try to casually bring it up in kitchen table conversations. For some, profit has always been a goal – will always be a goal – and is tracked from year-to-year, or even month-to-month. For others, profit is a lofty idea that, in theory, the farm strives for – as long as they don’t have to pay in any income taxes at the end of the year. Yet, for some, profit is a “bad word” and definitely not the right reason to be in the business of farming.

Random clip art images along a spectrum to demonstrate the many feelings that come along with farming for profit.
Talking about profit in the farm business can bring up a broad range of feelings, emotions, and reaction. Where do you land?

Wherever your thoughts and gut reactions lie on the profit spectrum, if the farm is being operated as a business, profit will come into play at some point. Understanding what profit is, and the role it plays in farming, is important to reach your overall agribusiness goals.

Defining a Profit

Most of the time, the profit equation is presented as:

profit equation
Income minus expenses equals profit

Income – Expenses = Profit. Income minus expenses equals profit. Also known as Value of Production less the Cost of Production equals Profit or Loss. So, you start farming and sell what you’ve farmed for income. Then, you subtract out all of your expenses to create that income. And (hopefully) you have a profit at the end of the year and can keep chugging along.

BUT what if we started thinking of the profit equation as:

reverse profitability equation
profit equals income minus expenses

Profit = Income – Expenses. Now, this is a bit of a thought exercise because both equations will get you to the same point at the end. What would happen if you started farming with profit in mind from the very beginning? It’s so easy to get caught up in the incomes (yay) and expenses (another bill) that you can quickly lose track of your overall financial and business goals. What if you knew what your profit goals were and then planned for incomes and expenses accordingly – instead of just farming how you hope will meet your goals and dealing with whatever profit or loss came at the end?

There are a million different ways to farm, and all of them are right! However, if you’re not monitoring profit and redefining it as a priority, you could be doing everything “right” and never “get ahead”.

*An important note: This idea of switching around the commonly delivered profit equation isn’t mine! I recently spoke with a wonderful person, Goli Ziolek, at the National Extension Risk Management Education Conference. Along with Kate Larson and Ritchie Wai, their team runs “Stateline Farm Beginnings”, based in Caledonia, IL. Learn more about their amazing program here: https://www.learngrowconnect.org/sfb.html.

Determining a Profit

How do you know if your farm is making a profit? It’s so much more than watching your checkbook balance go up and down throughout the year, or guesstimating your assets to liabilities balance. Profit is measured by using your farm’s Income Statement.

An Income Statement shows your farm’s overall productivity, categorized expenses, and return on investment. This is also called a Profit and Loss Statement. Compiling an income statement isn’t an overly taxing process (pun intended) because many of the numbers you’ll need come right from your end-of-year tax documents.

However, most farms do their taxes on a cash basis, meaning incomes and expenses are recorded as cash leaves or enters the check book. While this is a perfectly acceptable and manageable method for cash-based, farm-business reporting for income tax purposes, adjusting your cash-basis accounting to accrual accounting is one way to accurately measure your farm’s profitability.

Accrual accounting takes into account changes in inventory, accounts payable/receivable, interest, depreciation, and values unpaid labor and management. These are things that have value but might not have a direct line item on a Schedule F or checkbook ledger.

Steps to an income statement

Income Statements have two main parts: Incomes and Expenses. After calculating the incomes and expenses, you’ll make the “accrual” or non-cash adjustments to each to better reflect your farm profitability.

Incomes include cash sales of livestock and their products, crops, government payments and insurance proceeds, and other income streams related to the farm. Do not include any sources of income that are not from the farm (off-farm jobs, annuity or similar payments, etc.) – more on this later.

Non-cash adjustments to income will account for things that provide value to your farm, but don’t show up in the checkbook ledger. You’ll note changes in inventory of feed and grain, breeding and marketing livestock, supplies on hand, etc. This helps make sure the value of a farm product is counted in the year that it’s produced, instead of when it’s sold. An example – you had a really good crop year and put up a lot of extra baleage. Your plan is to store that baleage and sell it in the following year, once winter really hits. But – you’ve already paid to produce that baleage. Without making non-cash adjustments by recording inventory changes, your checkbook balance will see all of the associated expenses (wrap, fuel, twine) but none of the associated incomes (baleage sales).  You’ll also note accounts receivable which includes income that you’ve earned but haven’t received. Usually things like the last month’s milk check, an upcoming grape contract payment, or a livestock auction check that hasn’t made it to the bank yet.

Then, you’ll add up the cash expenses of your farm. These, again, would all come from the Schedule F. However, any large capital expenses (land, equipment, big repairs) will not be included here – instead, you’ll use deprecation to account for those expenses. Depreciation is a non-cash adjustment used to show the decline in value of a capital asset over time. You can use the depreciation values on your income tax return, but you might find something like straight line depreciation more valuable and realistic. One other non-cash expense is something called “Value of Owner Labor and Management” which we’ll talk about next.

Summarize the Income Statement by subtracting your total farm expenses from the total farm revenue to get your net farm income.

(Humbly) Demanding a Profit

Now, to the part that will probably make some of you squirm a bit. You should DEMAND a profit from your farm. You’ll see that I graciously added *(humbly)* in the title of this section so you don’t think I’m a completely heartless monster. But – demanding a profit from your farm business is in the best interest of you, your family, your customers/market, and your long-term business sustainability. And here’s why.

As a farm owner, raise your hand if you regularly write yourself a steady, prevailing-wage, paycheck out of your farm business account that fairly compensates you for all of your time, labor, management, and investment…

While I can’t see you as you’re reading this, I’m guessing that your hand isn’t raised. As farm owners, most of the time you’re not receiving a regular draw from the business. And sometimes, you might be using off-farm sources of income to cash flow the farm during lean times. In this situation, a farm profit is – essentially – your paycheck. When you’re only looking at the checkbook balance and cash inflows/outflows, without a profit there’s no paycheck for you, the farm owner.

Calculating your “Value of Owner Labor and Management” can be a scary and humbling adventure, but is important to consider in your farm profitability analysis. This figure can be used as a placeholder for your “paycheck” and represents that time and effort you put into the physical and mental management work on the farm. Consider this – if you weren’t farming, could you earn a paycheck someplace else? How much would that paycheck be? If you’re working as unpaid owner labor on the farm, are you currently earning a profit that’s high enough to value your labor? What’s the value that you’re providing to the farm business if you had to hire someone else for the role?

If you’re still not sold on demanding a profit, your argument is likely something to do with valuing the farm lifestyle, or choosing to raise your family on a farm, or wanting to raise healthy food for your family….And, if you’re absolutely committed to making a profit, you’re probably ALSO farming for any and all of the reasons above. Most farmers don’t farm because they really enjoy paperwork and crunching the numbers. In agriculture, making a profit every single year isn’t a guarantee – but it should always be a goal. While it’s absolutely, positively okay to farm for reasons other than profit, you should at least make sure you’re operating the farm in a financially sustainable way.

When farms aren’t profitable, the farm “loss” has to be made up someplace else. I usually see this coming from sales of capital assets which are things that you’ve purchased and have built equity with over time, or the use of reserves that might have been built in better years. Neither of these are good options for the long-term. There’s also the use of off-farm income to essentially subsidize the farming operation. This shows up in the form of off-farm jobs, utilizing annuity or similar payments, cashing in on retirement accounts, and taking out personal loans/credit cards to make ends meet. While these options diversify farm income to varying degrees, they all carry certain levels of risk that can make it difficult to maintain personally.

How can you “demand” a profit from your farm? Manage it as a business.

  • Consider how you’re going to make a profit before incurring incomes and expenses instead of accepting the profit/loss that happens after-the-fact.
  • Maintain accurate records that you compile and analyze on a regular basis (including the preparation of an income statement).
  • Evaluate decisions not only from a best management practice standpoint but also for their effects on your cost of production and adjust accordingly. Being the best farmer you can be doesn’t guarantee a profit.
  • Set profitability goals that will prevent you from using your labor/management and any off-farm income from subsidizing the farm business.

This material is based upon work supported by USDA/NIFA under Award Number 2021‐70027‐34693.

Funding Acknowlegement

Dairy Forward Grant Opportunity

Cornell Cooperative Extension and American Farmland Trust invited dairy producers across the state to join a free webinar focused on the Dairy Forward grant program. This program aims to help dairy farm families in New York access information and professional services to plan for farm transitions in the face of tremendous challenges such as a weak dairy economy, disruptions from severe weather, and an aging farmer population. This virtual learning opportunity was held on Wednesday, February 24th from 12noon – 12:30pm. The webinar recording and supporting resources are available below.

The main presenter, Molly Johnston-Heck, Regional Farmland for a New Generation Manager with American Farmland Trust, gave an overview of Dairy Forward and answered many questions from the webinar participants. American Farmland Trust is joining Chobani to support dairy farmers in planning for the future. The Dairy Forward program offers grants of $500 to $5,000 that can be used to help NY dairy farm families plan for farm transfer and generational succession, general farm business planning, permanently protect their land, and adopt regenerative farming practices. These funds are available on a first come, first serve basis.  Eligible farms must be located in New York state and be a dairy operation, have sold more than $1,000 in agricultural products in 2020, and have a service provider identified for their proposed project.

Attending this webinar is not a requirement to apply for Dairy Forward funds. For more information visit farmland.org/dairy-forward or contact Molly Johnston-Heck with American Farmland Trust by emailing dairy@farmland.org or calling 315-565-1538. Your local Cornell Cooperative Extension Farm Business Management Specialist is also available for guidance.

Dairy Forward Presentation Slides

Dairy Forward Grant Guidelines

Preliminary Progress Report #2: Dairy Farm Business Summary and Analysis Program

Originally published on March 20th, 2020 in the Cornell CALS PRO-DAIRY e-Leader newsletter. 

By Jason Karszes and Lauren Hill, PRO-DAIRY.

The second preliminary Progress of the Farm Report has been released by the Dairy Farm Business Summary. As dairy businesses across the state continue to analyze their financial and business performance utilizing the Dairy Farm Business Summary and Analysis Program, updated progress of the farm reports are provided to review the changes that have occurred from 2018 to 2019. Along with how things changed from 2018, the range across selected factors for 2019 is reported in a business chart format, which reports the averages by 20 percent increments for each category summarized. With 78 farms included in this report, along with the average of all farms, the report includes preliminary data for farms less than and greater than 900 cows.

Highlighted ranges of performance from the 2nd preliminary report, for all farms:

 Lowest 20%
of Measure		  Highest 20%
of Measure
 Milk per Cow   19,922  28,609
 Milk Sold Per Worker Equivalent    770,410  1,714,133
 Feed & Crop Input Expenses per Cwt. $5.92 $8.57
 Operating Costs to Produce Milk $13.32 $18.63
 Total Costs to Produce Milk $17.70 $25.21
 % Return on All Capital, w/o Appreciation  -2.5%   9.0%

If you are interested in analyzing your business performance, please contact your local Cornell Cooperative Extension office to inquire about what resources are available to assist in this effort.

Novel Coronavirus Prevention & Control for Farms

Originally published on March 12th, 2020 on the Ag Workforce Journal by Richard Stup, Cornell University, of the Cornell Agricultural Workforce Development Website. 

The U.S. is confronting an outbreak of a novel coronavirus that causes serious respiratory disease and may be deadly for older people and those with weakened immune systems. The World Health Organization is now calling the outbreak a global pandemic because it is affecting countries all over the world. People and organizations can still fight coronavirus by taking steps to prevent transmission of the disease, the whole point of widespread cancellation of events is to create “social distancing” to lower the infection rate and prevent health care systems from being overwhelmed. New York State Department of Health has a Coronavirus Website with English and Spanish posters for preventing coronavirus infection (https://health.ny.gov/diseases/communicable/coronavirus/).

The U.S. Centers for Disease Control and prevention (CDC) provides clear guidance about preventing infection in both English and Spanish. They also provide a number of printable factsheets and posters in English and Spanish suitable for use in the workplace. (Download at: https://www.cdc.gov/coronavirus/2019-ncov/communication/factsheets.html)

Employer Actions Steps

Your farm workforce is not immune to coronavirus, please begin taking steps to protect yourself and your employees.

  1. Talk with your employees about coronavirus, how it spreads, and how to prevent getting infected.
  2. Print the CDC factsheets and posters, post in your workplace and employee housing facilities.
  3. Provide guidance to help employees clean and disinfect employer-provided housing. Follow up with employees and manage the process to be sure that this happens. Set up a regular weekly and daily schedule for cleaning.
  4. Clean and disinfect your workplace. The employee breakroom and bathroom are great places for virus to be transmitted. Clean and disinfect any areas where employees congregate or routinely touch items such as doorknobs and computer keyboards. Set up daily and weekly cleaning schedules.
  5. Provide cleaning supplies such as cleaning solutions, buckets, mops, brushes, etc for cleaning at work and for those living in employer-provided housing. (CDC list of approved antimicrobial cleaning products: https://www.epa.gov/pesticide-registration/list-n-disinfectants-use-against-sars-cov-2 
  6. Review your sick leave policy. The first advice for people who are sick is to stay home except to get medical care. Do you provide paid sick leave for your employees? If you do not, will employees feel financially obligated to come to work even if they are sick?
  7. Communicate with employees that they should stay home if they are sick. Employees sometimes come to work believing they will face punishment or firing if they miss work. Be sure your employees understand that their health and that of their co-workers’ comes first. Communicate and make a plan to cover for sick employees. CDC provides posters in English and Spanish covering symptoms of novel coronavirus.
  8. Prepare your disaster contingency plan. What will you do if 50% of your employees become sick and unable to work? Are there neighboring farms who might be able to share resources in an emergency? Who will manage for a few weeks if you or another key manager are unable to leave your house or are hospitalized?

At minimum, share the guidelines below from New York state with your employees and family.

New York State Department of Health Prevention Tips

While there is currently no vaccine to prevent this virus, these simple steps can help stop the spread of this and other respiratory viruses:

  • Wash your hands often with soap and water for at least 20 seconds. If soap and water are not available, use an alcohol-based hand sanitizer.
  • Avoid touching your eyes, nose and mouth with unwashed hands.
  • Avoid close contact with people who are sick.
  • Stay home when you are sick.
  • Cover your cough or sneeze with a tissue, then throw the tissue in the trash.
  • Clean and disinfect frequently touched objects and surfaces.

Additional Resources

Farmer Talks about Crop Insurance

Crop Insurance: A Shield of Protection for Farmers

Originally published on March 9th, 2020 on the Cornell Cooperative Extension South Central New York Dairy & Field Crops Program Blog. 

By Fay Benson, Cornell University Cooperative Extension

Time to start planning your 2020 crop protection strategy. Make an appointment with a Crop Insurance Agent before the March 16th deadline to obtain insurance for corn, soybean, and other spring planted crops.

Combining crops, dairy and agri-tourism into a vibrant and successful family-run farm operation requires an open mindset toward new methods, technologies and opportunities, and the same kind of business acumen that you are likely to find in a meeting room of corporate executives.

Ron and Nancy Robbins’ farm is located in Jefferson County, New York, situated between the Adirondack foothills and the St. Lawrence River valley, near the eastern shore of Lake Ontario.  Starting with 100 rented acres in 1977, their farm has grown to over four thousand acres of vegetables and field crops, a 1000 head dairy, a grain storage and processing facility for both feed and food-grade grains, and an agricultural tour and education enterprise.

Crop Insurance is a no brainer for Ron, he uses it to protect against adverse weather, which gives him the confidence to forward contract, pricing his harvest ahead of time, and gives him credibility with his lender.

Ron feels every business should have a mission statement: “Our mission statement for our farm is to be growth minded and be able to take advantage of new technologies, and any new opportunity that comes along to us”.  As the farm has grown, the Robbins’s became aware of the added risks a larger farm is exposed to:  management and labor shortage, debt to asset ratios, more animals to feed, etc. To help manage these risks Ron has put together a “Toolbox” of Risk Management Tools. “We’ve really embraced risk management in all aspects here, and I think it’s gotten us from being average farmers, to being above average, [in terms of] production, and financially,” said Ron Robbins, in an interview last September.

Diversifying their business is the first Risk Management tool the Robbins used. Their multiple income streams help prevent being too reliant on any one business having a bad year.  They also have adopted a range of business and risk management tools to optimize fluctuating dairy margins, maximize profit, manage risk, and ensure smooth operation and growth of the farm despite potential obstacles and challenges that could come their way.  “We’ve tried to build a strong management team here in case I became ill or my wife became ill, or something happened to us and we weren’t here anymore, that the farm would still be able to continue on.”

In addition to a collaborative management team, learning and applying crop insurance and pricing tools, Robbins has used the Livestock Gross Margin for Dairy as well as the new Dairy Revenue Protection. He describes how these dairy risk management tools have worked on his farm in the video linked below.

 

Cornell University delivers crop insurance education in New York State in partnership with the USDA, Risk Management Agency. This material is funded in partnership by USDA, Risk Management Agency, under award number RM18RMETS524C018

calves in a barn on straw

Dairy Market Watch – March 2020

Dairy Market Response to COVID-19 and Early Spring Flush

Originally published on March 23rd, 2020 on the Cornell Cooperative Extension Southwest New York Dairy, Livestock & Field Crops Program Website. 

By Katelyn Walley-Stoll, Cornell University Cooperative Extension

It’s been a month. Looking back to price forecasts in December and January editions of Dairy Market Watch, producers were looking to expect $20 milk in 2020, with a close eye on export markets and projected milk production increases. With a more productive than expected start to our seasonal spring flush, and the COVID-19 pandemic, price projections have dropped drastically with future declines expected. Some forecasters have even gone as far as to avoid making any type of estimates with these uncertain times.

While grocery shelves are emptied of fluid milk, yogurt, and cheese as American families prepare for social distancing and, in some cases, shelter in place orders, it would be easy to think that this increase in demand could only lead to heartier milk checks. But, as businesses shut down, unemployment rises rapidly, and stock markets react to uncertainty, we are headed into a period of global economic decline that could mirror the 2008 Great Recession. Market buyers see prices dropping and are reluctant to purchase in large quantities, knowing that continued virus spread and increased spring flush milk loads will further drive prices down. As public schools close, which account for 8% of our total fluid milk consumption and a large portion of cheese orders, fluid milk markets are unsteady. Even though many are offering meal deliveries/pickups to their student populations, it won’t be a one-for-one replacement. While milk production, and the food system as a whole, is safe and has been deemed essential, there are uncertainties surrounding workforce availability. Employees may become sick themselves, or stay home to care for sick family members or children home from school. Many plants have increased their hiring in anticipation, which will have cash flow implications as the year continues. Still, areas of the country are trying to meet fluid milk demand with limited production capacity and aging infrastructure. Additionally, as restaurants and food services close, or are limited to delivery/pick-up only options, cheese and butter demand has decreased. With an uncertain economy, the average consumer will also be more reserved with their purchases.

On a worldwide view, many of our main export market economies were already on the edge of economic downturn, the virus being the very large straw that broke the camel’s back. Dry Products have also dropped on the futures markets with ample products available for buyers. As it stands now, Class IV futures have dropped below $14 through the next few months, rising to $15 by the end of the year. Class III is projected to hit a low of $14.50 this summer, and doesn’t rise about $16 for the remainder of the year, averaging $15.92. This would be a drop of at least $1 as compared to 2019 for our 2020 averages. These numbers are constantly changing, responding to stock market shifts and virus impact estimates. If global economies improve over the year, and COVID-19 responses in place “flatten the curve”, we could see prices rally, at least partially, towards the end of the year. But – this will have to coincide a slow in milk production increases. Using the indicators of our early spring flush, declining beef market prices, and producers trying to create more sound balance sheets following years of low prices, make this unlikely.

These are stressful times during what should have been a year of optimism and recovery. Farm owners should have a disaster plan in place and implement social distancing recommendations immediately. The average farm owner, and farm workforce, is at risk for contracting COVID-19 – we are not immune no matter how many salt blocks you licked as a kid. Employees of the farm might also be facing illness, childcare conflicts, and general anxiety over the situation. Be prepared to up your communications (from a safe distance), cross-train employees, and handle issues as they arise. If your cash flow is already looking tight, have a conversation with your banker sooner rather than later. Keep an eye out for upcoming relief packages that your farm business might qualify for. Most importantly, reach out. While we might need to stay away from people physically, the phones are still working. Call your neighbor, call your mentor, call your farm advisor, call NY FarmNet (1-800-547-3276). Reach out and stay connected!

Dairy Market Watch 2020 03 (March 2020) (pdf; 2043KB)

Interim Guidance for Animal Care Operations

Interim Guidance for Animal Care Operations release from New York State Department of Agriculture and Markets on March 22, 2020.

This guidance is provided for animal agriculture workers to include those employed in veterinary health; manufacturing and distribution of animal medical materials and supplies, animal vaccines, animal drugs, feed, and bedding, etc.; raising of animals; animal production operations; transportation of live animals, animal medical supplies; transportation of deceased animals for disposal; livestock markets, including live bird markets, slaughter and packing plants. It also includes equine operations and companion animal/pet stores and shelters; veterinary services for equine, companion animal and other businesses considered essential; and related support/service operations.
​

Background:

In December 2019, a new respiratory disease called Coronavirus Disease 2019 (COVID-19) was detected in China. COVID-19 is caused by a virus (SARS-CoV-2) that is part of a large family of viruses called coronaviruses.

On March 20, 2020, Governor Cuomo signed the “PAUSE” Executive Order, a 10-point policy to assure uniform safety for everyone. It includes a new directive that all non-essential businesses statewide must close in-office personnel functions effective at 8PM on Sunday, March 22. Essential businesses are exempt from this guidance. Animal care operations, as defined below, have been deemed essential and are exempt.

Animal Care Operations:

For purposes of Executive Order 202.6, animal care operations are defined as the following businesses/activities:

Livestock/Equine/Captive Cervids

  • Feeding
  • Barn or facility maintenance, stall cleaning and enclosure repair
  • Turnout and exercise
  • Essential hoof maintenance and veterinary care
  • Transportation necessary to meet any of the above functions
  • Agribusiness that supports any of the above functions

Companion Animals

  • Care and feeding of companion animals in shelters, kennels, rescues, operations and pet stores
  • Pet food manufacturers, distributors, and retailers
  • Essential veterinary care, including spay/neuter, treatment for infectious disease
  • Animal shelters receiving seized, lost or abandoned animals
  • Adoption of animals from within New York State
  • Pet boarding facilities
  • Service dog training and care

If a business does not fall within this guidance, but you believe that it is essential or it is an entity providing essential services or functions, you may request designation as an essential business. To request designation as an essential business, please click here.

Animal Care/Boarding Facilities:

If you have an animal at a privately-owned facility, terms regarding client use and visitation rests with that business owner. Social distancing must be adhered to.

For equine: It is permissible to have horse owners as the primary providers of daily care for their own horses at boarding facilities, however business owners and horse owners must collaborate to minimize the number of people in the stable and to adhere to social distancing.

*There is no evidence that animals, including pets, in the United States might be a source of infection/can spread this new coronavirus. To date, CDC has not received any reports of pets or other animals becoming sick with COVID-19.

FOR EMPLOYEES

Cleaning/Disinfecting and Social Distancing:

All privately-owned facilities must practice social distancing, and proper cleaning and sanitizing of the facility. This includes:

  • Regular hand washing with soap and water for at least 20 seconds should be done:
  • Before and after eating.
  • After sneezing, coughing, or nose blowing.
  • After touching face, hair, cellphone and/or clothing.
  • After using the restroom.
  • Before handling food.
  • After touching or cleaning surfaces that may be contaminated.
  • After using shared equipment and supplies.
  • Cover coughs and sneezes with tissues or the corner of elbow.
  • Dispose of soiled tissues immediately after use.

It is encouraged to post signage with hand washing procedures in prominent locations. Clean and disinfect buildings and equipment as outlined in this guidance.

For additional information, visit the links below: