April 2, 2014

Agronomist Notes

Hello Reader

Brrrr! That blast of snow brought spring to a grinding halt. Plans are laid, inputs are bought, and it’s a waiting game now until seeding starts.

The biggest news on the street is that big money is back in commodities with hedge and commodity funds playing on the oversold market. Look for larger swings in futures soon.

In this week of Beyond Agronomy News we’ll look at the principles of a successful and unique collaborative farming venture. Next, we’ll revisit the Ag Venture business model that combines the buying and selling power of multiple farms. Last, we’ll take a look at comparing CPS wheat to HRS wheat for 2014. We’ll finish with technical grain market news.

Photo: Grass and clover respond to the warm spring sun in the Fraser Valley, British Columbia, March 31, 2014. Source: V. Larocque

Collaborative farming

Economies of scale, efficiency and family farms

Every week in the news you hear of company mergers and acquisitions that are designed to create efficiencies and economies of scale to grow profits. You could argue that family farms are pressured to focus on economies of scale to increase profitability as well. In fact, input companies and machinery dealerships structure discounts that encourage farms to grow and benefit from economies of scale. So how do you generate economies of scale and efficiencies in farming today when land is hard to come by and competition is fierce? You collaborate.

John Gladigau and Robin Schaeffer from South Australia formed a collaborative farming venture between their two family farms six years ago. The initial collaboration called Bulla Burra consisted of two, 5,000-acre properties and has grown to crop over 22,000 acres between owned and leased land in 2014. I know John; he’s a fellow Nuffield Scholar and focused his research on collaborative farming. You can read about it here.

The core of Bulla Burra’s business model is the development of optimum efficiency cells, and the implementation of a professional business structure with an emphasis on accountability and transparency. There are seven key principles that are central to the success of any collaborative business according to John.

Differentiate between real estate and operations: Most dryland farmers in struggle to realise that they are actually running two enterprises, a real estate business and and operations business, and both of them need to return a profit in order for long term sustainability to occur.

Utilise Machinery resources efficiently: One of the great limiting factors in growth in the agricultural sector is the over capitalisation in machinery. Businesses need to understand the true cost of owning machinery, compared with investing that capital in other income producing investments and utilising machinery from other sources.

Create cells of optimum efficiency and replicate them: This is one of the key principles farming businesses need to comprehend in order to grow their level of efficiency and profitabilty. Basically this involves creating cells of optimum efficiency (sometimes called scaleable units) by matching the machinery, labour and infrastructure required to most efficiently farm a given area of land, and replicating those cells in order to grow the business.

Create an environment of win-win: We deal with many people within our businesses. Neighbours, share farmers, lessors and lessees, contractors, wholesalers, retailers, marketers and employees. We need to create an environment where all parties have something to gain, no matter the circumstances.

Utilise specialist services: You do not have to know everything about every intricate aspect of your business. If you have the ability to source or collaborate with people who have expertise in areas you are lacking, have the ability to manage those people, keep them focussed on a common goal, and generously reward them both financially and mentally, then your business will grow and prosper.

A level of independence is needed: Every successful business talks about the need for professionalism, accountability and transparency in order for it to survive and thrive. Within a collaborative venture, these traits are even more important – especially in regard to the differences in personalities and any emotional issues involved. In fact, emotions and personality differences are one of the biggest threats to the success of any collaborative business. Having an independent person or group involved in a collaborative venture, who sit outside of the emotion, have no conflicts of interest, and has the ability to keep the business focussed on its strategic plan can assist a business to grow to a new level.

Be strategic: While this seems obvious, the reality is that most businesses focus on the daily operations of the business, rather than the business itself. Regularly scheduled time needs to be dedicated to determining what you wish the business to look like in the future, and what steps, structures and practicalities need to be put in place to make this happen.

To read an excellent outline on Bulla Burra’s structure, advantages and lessons learned go here.

There is no doubt that serious reductions in cost, gains in efficiency and improved profitability can be created through a collaborative model. Yes, you give up some autonomy in the decision-making but you also begin to generate a return on your land, on your farm, on your time, skill and family succession plan. I like the collaboration model and I’d like to see it work in Western Canada. It makes sense in so many ways. SL

Source: John Gladigau

Bulla Burra website

Ag Venture Business Model

Strength in numbers

While we’re on the topic of improving costs and efficiencies in farming, I’ve included a recap of the AgVenture group business model. This business model born out of Australia and one I came across in Kenya combines the buying and selling power of ten farms who also share equipment, parts and intellectual knowledge. I was so impressed with the structure and opportunities inside this type of business model and I thought it could be a good fit for producers in Western Canada.

The Kenyan-based AgVenture Group business model has four objectives:

Procure Farm Inputs. To date it has been chemicals and fertilizer.
Marketing of Crops. 2% levy to farmers on all crops, except peas are 5% levy.
Processing of Crops. To date, AgVenture-owned crushing facilities extract oil from canola and sunflower.
Research and Development. Bi-monthly field walks are conducted at each farm to learn new agronomy techniques. International agronomists are brought in and hosted by group members to introduce new farming techniques and agronomy practices.

The AgVenture group has a managing director who is on a salary plus bonus remuneration package. His role is to procure crop inputs for the group, manage the sale of grain and handle the relationships with millers and processors. He also addresses any issues with rejected loads or price discrepancies. There are a number of advantages with this business model and some group members have provided a brief summary:

Buying Inputs. It is up to AgVenture to negotiate a price reduction from the chemical companies. The member essentially pays the same (or less) as he always did and AgVenture keeps the margin. Benefits to members are that AgVenture profits, he has more clout and the ordering hassle is removed. He now has one invoice and one order once a week.

Selling Grain. This is a hard one to make in-roads on. AgVenture has targeted two or three millers and have developed relationships and partnerships with them. With this approach, they have begun to understand the group and it’s benefits. They find it easier to deal with one company rather than a number of individuals, payments are streamlined and quality issues are easily resolved.

Advantages. The advantages are many. It is amazing what two people can achieve over one. The key is that members are on the same wavelength. Members must be prepared to discuss everything and think long term.

Shareholder Obligations

To purchase all agricultural inputs from the Company (unless in an emergency).
All crops that can be processed internally must be sold to AgVenture.
90% of ‘non-processable’ crops must be sold through AgVenture.
The joining fee is $12,000 CDN.
The Shareholder’s Nominee is the only person, and shall remain the only person authorized to deal with the Company in relation to the business.
Structure and other interesting points
AgVenture is a Private Limited Company.
The Board may distribute up to 50% of Net Operating Profits in the form of a credit/bonus to each shareholder. These will be in direct proportion to that shareholder’s value of business.

In Western Canada, it is likely that most of the purchasing of crop inputs would be through crop input dealers and not chemical companies. You can imagine the volume discounts accompanied with a group of ten farms plus the rebates on seed, seed treatments, herbicides, fungicides and insecticides. I believe you could achieve a 10% to 15% reduction in fertilizer and chemical cost, which would go straight to the company. There is the possibility of purchasing equipment as one unit and the multi unit discounts that are available. Reducing equipment costs by 5% to 10% through multi-unit discounts may add some significant dollars to the overall gross margin of the company.

The sale of grain may be a little tricky given our autonomous nature to control grain sales but I can see a group working direct with maltsters, millers and processors with the ability to offer volume.

Steve’s quick math on ten 3,000 acre farms.
10 x 3,000 acres = 30,000 acres
30,000 acres x 1.5 T/ac = 45,000 tonnes of grain
$130/acre (fert/seed/chem.) x 45,000 acres = $5,850,000.00
$5,850,000.00 x 12% margin from rebates and bulk discounts = $702,000.00
45,000 tonnes x $300.00/tonne avg x 2% levy = $270,000.00
Total potential operating margin = $702,000 + $270,000 = $972,000

You could pay a managing director an excellent salary plus bonus and find a top notch individual to run the business with $972,000 plus in annual gross margin. The remaining margin can be put towards processing facilities, value adding, on farm research, bringing in international crop consultants and other possible ventures in the future. You would have one invoice for all your crop input bills and enjoy the benefits of economies of scale without the additional risk of farming more acres. I think this business model would fit inside a group of five two to three thousand acre farmers easily. With the right group you could gain some serious competitive advantages over farms that operate autonomously. SL

Source: Don White, Ag Venture Group, Kenya

Comparing CPS to HRS wheat for 2014

I’ve been wracking my brain trying to decide whether to grow HRS wheat or CPS wheat in 2014. The criteria I’ve put together are simple: 1) can you grow wheat with protein above 12.5% consistently, and 2) can you produce a No. 2 grade or better each year. If you answer no to one or both of these questions then maybe you should look at CPS for 2014. Here’s why.

Steve’s quick math
No. 1 11.5% HRS: 60 bu/ac × $6.24 = $374.65/ac
No. 1 13.5% HRS: 60 bu/ac × $6.65 = $399.00/ac
Risk spread: $399.00/ac - $369.60/ac = $24.35/ac

No. 2 11.0% CPS: 70 bu/ac × $5.75 = $402.00/ac
No. 2 <11.0% CPS: 70 bu/ac × $5.53 = $387.10/ac
Risk spread: $476.00/ac - $441.00/ac = $14.90/ac

Prices taken from CWB online. The basis level is fixed at -$1.73 bu which is the current basis level for CWB HRS and CPS wheat.

If you look at the protein spread between a No. 1 HRS 13.5% versus No. 1 HRS 11.5%, you are potentially risking $24.35 an acre in revenue should your protein not meet spec, even if it grades a No. 1. If you look at the spread between a No. 2 CPS 11.0% and No. 2 CPS <11.0%, you’re risking $14.00 an acre in revenue if it doesn’t meet spec. In this example a #2 CPS, 11.5% will produce the same revenue as a #1 HRS 13.5% pro for the same cost of production.

Based on experience and conversations with regular CPS growers, you can comfortably bank on a 15-20% yield bump with CPS over HRS wheat so long as you follow up with the right agronomy. Here are some considerations if you decide to grow CPS:

Yield potential may not be realized on sandy or coarse textured soils so a 15-20% yield advantage over HRS may not be realistic.
CPS wheats tend to have less tolerance to disease than HRS wheat varieties. A fungicide is a must in the program and possibly two applications in a wet year with high disease and decent yield potential. Stick to premium fungicides like Folicur, Prosaro, Headline or Quilt. Tilt and Stratego are very short lived and don’t provide the extended protection needed against disease.
Aim for high plant densities (28/ft2 to 35/ft2) to minimize tillering and encourage main stems.
CPS has much larger seeds compared to HRS. CPS ranges 39 to 55 tkw versus HRS ranges 31 to 45 tkw. Seeding rates of 160 to 180 lbs/ac not unusual.
To meet 11.5% protein in CPS you aim for 1.75 lbs/N/bu versus 2.5 lbs/N/bu for HRS. For example: 1.75 lb/N/bu × 80 bu/ac = 140 lbs/N/ac - soil N - OM nitrogen
I like the varieties 5700PR, 5702PR, and AC Foremost. If you’re pushing nitrogen and yields over 100 bu/ac, then 5700PR and AC Foremost have great standability.
Look up a CPS variety comparison chart here http://www.agric.gov.ab.ca/app119/report

If you look at the cost of growing high protein HRS versus CPS wheat, you’ll notice that they are basically the same, depending on whether you normally pencil in a fungicide or not with HRS. I’m confident we can achieve a 15-20% yield increase over HRS wheat with an agronomy program that includes the right variety, plant population, fungicide and fertility. In my opinion, if you don’t normally produce wheat with protein above 12.5% or typically grade less than a No. 2 HRS, then CPS may be a fit on your farm this year. SL

[Steve’s note: CPS was the highest grossing margin crop on all of our client's farms for 2012 and 2013. It paid off big time.]