Decision Making in Farm Management

1. Decision Making in Farm Management AAE 320 Dr. Paul D. Mitchell

2. Goal Today • Overview decision making process, focusing on a farm manager, and how it relates to the material covered in AAE 320 • Readings on course page • Farm and Ranch Strategic Planing

3. How Do I Decide What Is Right For Me?How Do I Decide? (What Is Right For Me?) • How Do I Decide? • What is the decision making process? • What Is Right For Me? • What is your mission? • What do you value? • What gets you out of bed in the morning? • So often courses, meetings, etc. focus on the process and not the motivation, when often motivation is just as, or more, important

4. Today’s Lecture • How Do I Decide What Is Right For Me? • Strategic Management • How Do I Decide? (What Is Right For Me?) • Tactical Decision Making

5. Strategic Management • Define your mission • Formulate your goals • Assess your resources • Survey your environment • Identify and select strategies • Implement and refine selected strategies

6. Mission Statement • Short description of WHO your are & WHY you exist • The dream you pursue, your life’s activity, the kind of person you want to be • Your personal/business mission – what you are working toward • Reflects your and your family's social, religious, cultural values, special talents • Reflects reality: economic, social, physical, and personal limits

7. Mission Statement • Google “Strategic Management” • Many “how to” pages, academic journal • Google “Mission Statement” • Many “how to” pages • Fortune 500 Examples: http://www.missionstatements.com/fortune_500_mission_statements.html • Weird Al’s "Mission Statement" https://www.youtube.com/watch?v=GyV_UG60dD4

8. Dairy Family Farm Example Our mission is to produce safe and nutritious milk at a reasonable cost, to maintain and enhance the quality of the natural resources under our control, and to contribute toward making our community a satisfying place to live. (Source: Kay, Edwards, & Duffy 2004, p. 20)

9. Formulate Goals • Concrete steps you take to achieve your mission • How you work to make your dreams come true • Goals should be: Specific, Measurable, and Have a Deadline 1) “To own 240 acres of prime farmland in Columbia County within 5 years” 2) Not “Someday I’d like to have some land” (not specific, not measurable, no deadline)

10. Assess your Resources Internal look at your resources • Physical: land, livestock, machinery, buildings, irrigation, orchards, pasture • Human: your own and your family’s skills, talents, preferences, etc. • Financial: capital you have and can acquire from lenders, investors, family

11. Survey your Environment External look at your environment • Available technologies, genetics, production practices • Consumer tastes, changing markets • Government Regulations Dairy Producer: should be aware of new breeds and practices; consumer preferences;international markets, and nutrient/manure, labor, and machinery regulations

12. Identify and Select Strategies • Identify Strategies: How you approach your mission • This is the time to be creative and innovative, to dream up new ideas • Worry about feasibility later • Brainstorm, Think Outside the Box, Cutting Edge, Think Big, etc. • Can be taught, but not in this course

13. Identify and Select Strategies • Strategy Selection: Ag examples to illustrate • High volume, low margin production • Commodity crops and milk • Low volume, high value production • Organic milk, farmer’s market crops • Integrate crop and livestock, or specialize • Dairy & crops, grains only, vegetables only • Form coops/alliances/contracts • Join organic dairy coop, CSA farm, contract vegetables, tie in with a specific retailer or company • Work off farm and be “evening & weekend” farmer

14. Implement and Refine Strategies • Form a business plan with specific goals, work to carry them out, and see if you meet your deadlines • Evaluate as you go along and refine or change your strategy—Is it working? • Managerial Improvement: Set time aside to assess and improve yourself and business (books, classes), learn about where your world is going (new technology, new laws, market changes) • Changes happen, so you may need to change your mission, your goals, and/or your strategy

15. Strategic Management • Define your mission • Formulate your goals • Assess your resources • Survey your environment • Identify and select strategies • Implement and refine selected strategies • Hard questions, easy to avoid

16. The Decision Making Process: How Do I Decide? • “How Do I Decide?” • Where it’s easiest to focus and avoid the hard, “Why am I doing this?” type of questions • Strategic Management calls this step “Tactical Decision Making” • Have mission, goal, strategy, etc., now implementation: Choose Tactics

17. Tactical Decision Making • Identify and define problem/opportunity • Identify alternative solutions • Collect data and information • Analyze alternatives and make decision • Implement decision • Monitor and evaluate the results • Accept responsibility/consequences

18. Identify & Define Problem/Opportunity • Identification: How do I know I have a problem? • Sometimes it’s obvious: Accountant tells you • Compare your performance to others • Problem Definition: Unlimited possibilities with limited resources and multiple options • Many focus on relaxing resource constraints: more land, labor, (human) capital, inputs and/or time • How do you choose how much of each resource to use for each option? • How choose which options to pursue?

19. Economic Problem Definition • Economics: create a “model” of human decision making to describe problem mathematically: Choices and outcomes • Find the mix of activities (crops, livestock) that maximize your profit/utility, subject to using only the resources you have (land, labor, capital, time) • Choose inputs to maximize profit • Production functions, isoquants, cost functions • This is what we will cover in the next section

20. Identify Alternative Solutions • Make a list of possible ways to deal with the problem/opportunity • Some are obvious, some are only apparent once start collecting information • Brainstorm, Think Outside the Box, … • Be creative, worry about feasibility later • Can be taught, but not in this course

21. Collect Data and Information • University Extension/Research • USDA: NRCS, FSA, AMS, RMA • Farm Media: newspapers, TV, radio, farm journals/magazines • Company mailings, pamphlets, brochures • Agricultural Professionals: consultants, input suppliers, veterinarians, banker, accountant, lawyer, government official

22. Collect Data and Information • Internet Search Engines • Many useful web pages • FarmDOC • Center for Farm Financial Management • National Risk Management Library • Government Agencies: USDA, NOAA and National Weather Service, WI DATCP

23. Analyze Alternatives, Make Decision • Analyze the alternatives you identified using the information you gathered • Financial Analysis; Partial and Enterprise Budgeting, Farm Taxes/Accounting • The “meat” of this course: economic methods to analyze farm management alternatives • Work with key people to make decision: family, banker, investors, partners, etc.

24. Implement Decision • Requires communicating with family, partners, employees, etc., so all buy-in • Make and implement your plan: negotiate contracts, acquire resources, hire builder, hire workers, etc. • Set goals that are specific, measurable, and have a deadline • Requires many skills: organizational, management, people skills • Can be taught/learned, just not here

25. Monitor and Evaluate Results • Did you meet your specific and measurable goals within your deadline? • Things change and you may have to re-evaluate and make changes/adjustments • Keep good records and use them to see how you have done or are doing • Financial Analysis: how to read and use financial statements, farm accounting, taxes, etc. • Hire experts to assess your operation

26. Accept Responsibility • Hopefully most of the results are good! • Take credit when credit is due — celebrate your successes • Accept responsibility when it’s your fault; don’t play the blame game • Learn from your mistakes — failure can be a great teacher • Sometimes it’s just bad luck! Plan for the worst case or use risk management tools

27. Summary • Know (be able to explain) the difference between a Mission and a Goal • Know (be able to explain) the difference between a Strategy and a Solution • AAE 320 will focus on Tactical Decision Making • Economic definition of management problem • Information and data collection • Analyzing alternatives • Evaluating results