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Farm Report Card: How does a farm get a good grade?

L&J Greengate Farms Ltd., from Douglas, Manitoba, received its first farm report card in early 2008. Manager-owner Larry Penner was glad to see it, once he understood it. The Farm Report Card is like a five year performance snapshot for the business, and he is getting at least a B average.


December 3, 2008
By John Dietz

A ‘snapshot’ of how the farm is doing versus its potential.

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Larry Penner makes hay and is pleased with a good report card from Meyers Norris Penny.


L&J Greengate Farms Ltd., from Douglas, Manitoba, received its first farm report card in early 2008. Manager-owner Larry Penner was glad to see it, once he understood it. The Farm Report Card is like a five year performance snapshot for the business, and he is getting at least a B average.

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The Penner family crops about 3400 acres, produces hay, and runs a livestock operation near Brandon. The report card was presented privately as local Meyers Norris Penny (MNP) accountant Grant Griffith finished up their financial year-end.

A maximum score is 100 points, based on a national industry standard. It scores the farm on 13 measures for liquidity, financial structure and profitability, for up to five years. Year by year, and line by line, scores change. Trends show up in numbers and in graphs. Some financial ratios are good news, while others can be like a red flag warning that something needs to improve.

Better businessmen
“The push with MNP is to teach us how to be better businessmen,” says Penner. “I’ve been farming for 30 years, and my son Tim has just started to farm. What’s available to him now, to become a better businessman, was never available for me. I sort of fumbled through with my own banker and whatever accountant I was using at the time. The risk is higher now, these numbers are beneficial. It’s good to see where you are, but you have to keep up with it.”

Farm Report Card is a recent product developed by Meyers Norris Penny. Software produces the report card as the farm’s year end is crunched for business and taxes. If the information is available, the software can generate separate reports for grain and
livestock enterprises.

Like a school report card, it shows the current status and, if the records are available, the five year performance trend. Griffith, MNP director of primary producers, was involved in developing the report card. The purpose, Griffith says, is to “increase the financial fluency with farm clients. The response has been very positive. It’s a different way of looking at financial statements. You can look at five years of numbers, or at graphs associated with each component. Getting into those types of discussions takes more than a financial statement and how much tax you owe. The design was to create additional discussion. Hopefully, clients get a much better understanding as to what their financial statement is truly telling them.”

It encourages discussions on sensitive topics, such as ‘Is the farm getting stronger, or weaker?’ ‘If there is a problem, is it man-made or is it the industry?’ and ‘What trends can be modified?’ “On a diversified farm, it leads to discussion about which side is making more money, your grain or your livestock,” Griffith says. “Down the road, we would like to be able to specialize and break data into areas or niches, so a grain farm in southern Alberta could compare itself to other grain farms in southern Alberta rather than Canadian standard ratios.”
Some clients would like to know how they rank compared to others in the same region. Some want to be in business at the top of the pile.

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The MNP report card helps to identify profitable sector of the farm.Photos courtesy of Dietz Ventures


Perspective
Penner says, “This report card points things out in a different way, not just whether you made money or lost money, or whether you can afford to buy this or that. Now we look at debt to equity ratio, debt structure and working capital. It points out a lot of things, things that should be getting a little more attention.”

First year clients get the same report card, but without the benefit of seeing trends. Trends are presented both in numbers and in graphs. Grain and livestock are reported separately.

Greengate Farms had a very good year in 2007, Penner says. The report card helped put that in perspective.

“Some of the numbers I didn’t want to see. Thank goodness ‘07 was a good year,” Penner says.

The current ratio represents a farm’s ability to meet its financial commitments during the next year. A strong current ratio, according to MNP, should be 1.5 or greater. If the assets are $2 and the debt is $1, the current ratio is 2.0 and the farm is in a great position. “It’s helpful to see that,” Penner says. “It helps in marketing, in choosing when to sell your grain or what you should expect from your grain sales to meet these obligations. That was tough to do in ‘04,
‘05 and ‘06.”

His return-on-assets was excellent in 2007. “It’s getting better, no doubt about it, but I would like to see us in a much better position,” he says. It would be nice to be debt free once, but hopes of plowing profits from a good year into a better debt to equity ratio always seem to be retreating. “You have to keep up with technology, to a point. You want to be financially strong, and with my son coming up farming, I need to be in a somewhat strong position,” he says.

Knowing where the farm stands, Penner has a better perspective about the financial decisions that lie ahead. For instance, in July 2008, it helped him make the call on whether to buy fertilizer or put something away for retirement.

That month, he had an opportunity to invest for retirement but he also was thinking about the 2009 fertilizer supply and prices. His market indicators were saying buy now; inputs will be much more expensive next spring.  He says, “We had to buy fertilizer before fall if we wanted this so-called deal. We needed cash flow to do that, and looking at the report card numbers, it was possible. I made a calculated risk to order early.”    Report card trends revealed that the bad years could have been worse.  The farm grew good crops in those tough years. “I think we did as good as we could, I think the consistency was there.”

Penner is thinking as the hours go by in the field, driving machinery and watching crops. He reaches conclusions as he considers his first Farm Report Card. “I can only speak for myself, but I’m not comfortable and at this stage I will not carry that amount of debt again. I just won’t do it,” he says.
He is looking forward to his next report card.  “Absolutely. It’s like going to school again.”