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Extension > Agricultural Business Management News > September 2016

Friday, September 30, 2016

Skills for Negotiating; Land Rents, Contracts, Purchases and Other Business Agreements

by Don Nitchie, Extension Educator

Over time, you can fall into a mind-set, especially with long-time landlords, lenders and other suppliers or vendors you may work with—that all they care about is the “bottom line”. This maybe true for some but, not necessarily for all. Now with the pressure caused by tight or negative profit margins, to reduce costs—good negotiating skills and practices can be a significant business advantage. This can be the case even with your long-term business relationships and certainly with new ones you are considering. As a decision-maker you have lots of good data at your disposal-from FINBIN and many other sources. While this data is very useful in business negotiations, “people skills” are required beyond just the use of or knowledge of data, to be successful in negotiating. The following are negotiation techniques highlighted in Katie Shonk’s Guidelines for “Getting to Yes” blog post, with examples that have been customized for specific farm business situations:

1. Separate the people from the problem or the deal. When negotiating, it’s easy to forget that our counterparts have feelings, opinions, values, and unique backgrounds that contribute to what they do and say during talks. When misunderstandings and conflict arise in negotiation, we need to deal with the “people problem” directly rather than trying to gloss over it with concessions. Strive to imagine the situation from your counterpart’s viewpoint. If someone is refusing to back down from a hardline position, ask them how they think things are going. Exploring each side’s perceptions openly and avoiding the tendency to blame are key negotiation skills.

2. Focus on interests, not positions. We tend to begin our negotiation by stating our positions. A farm tenant may start out by stating, “This rent is too high”. When we stake out firm positions, we set ourselves up for impasse. In our goal of getting to yes, we need to draw out the interests underlying our counterpart’s positions by asking questions, such as; “how do you feel the weed control is looking on your land—or the drainage, or erosion control’? By identifying what interests are motivating the other party, and sharing your own interests, you can open up opportunities to explore tradeoffs across issues and increase your odds of getting to yes.

3. Learn to manage emotions. Be sure that you and your counterpart have ample opportunities to express and discuss any strong emotions related to your negotiation. Allowing one another to speak your mind will benefit both sides. When you know that you will have your turn to express how you’re feeling, it will be easier for you to listen when your counterpart has his turn. A landlord may have strong feelings about the care and upkeep of their farm, the economy or their financial situation-for instance.

4. Express appreciation. Expressing appreciation can be a means of breaking through impasse. “No one likes to feel unappreciated, and this is particularly true in a negotiation,” Express appreciation by working to understand the other’s perspective, seeking merit in that perspective, and communicating understanding through words and actions—all critical negotiation skills.

5. Escape the cycle of action and reaction. “If the other side announces a firm position, you may be tempted to criticize and reject it. If they criticize your proposal, you may be tempted to defend it and dig yourself in . . . if they push you hard, you will tend to push back.” To head off this vicious cycle, avoid escalation by refusing to react. Instead, channel your resistance into more productive negotiation strategies, such as “exploring interests, inventing options for mutual gain, and searching for independent standards.”

Incorporating these methods into your negotiation tool kit could prove very helpful in your negotiations during these tight economic times in agriculture. They may not bear fruit in every case but, if they help in just a few situations it could add up across multiple landlords, suppliers and markets you sell to. Experiment and give some of these techniques a try.

Source: Harvard Law School Daily Blog, Six Guidelines for “Getting to Yes”, Katie Shonk, Oct. 2015

Skills for Negotiating; Land Rents, Contracts, Purchases and Other Business Agreements

by Don Nitchie, Extension Educator

Over time, you can fall into a mind-set, especially with long-time landlords, lenders and other suppliers or vendors you may work with—that all they care about is the “bottom line”. This maybe true for some but, not necessarily for all. Now with the pressure caused by tight or negative profit margins, to reduce costs—good negotiating skills and practices can be a significant business advantage. This can be the case even with your long-term business relationships and certainly with new ones you are considering. As a decision-maker you have lots of good data at your disposal-from FINBIN and many other sources. While this data is very useful in business negotiations, “people skills” are required beyond just the use of or knowledge of data, to be successful in negotiating. The following are negotiation techniques highlighted in Katie Shonk’s Guidelines for “Getting to Yes” blog post, with examples that have been customized for specific farm business situations:

1. Separate the people from the problem or the deal. When negotiating, it’s easy to forget that our counterparts have feelings, opinions, values, and unique backgrounds that contribute to what they do and say during talks. When misunderstandings and conflict arise in negotiation, we need to deal with the “people problem” directly rather than trying to gloss over it with concessions. Strive to imagine the situation from your counterpart’s viewpoint. If someone is refusing to back down from a hardline position, ask them how they think things are going. Exploring each side’s perceptions openly and avoiding the tendency to blame are key negotiation skills.

2. Focus on interests, not positions. We tend to begin our negotiation by stating our positions. A farm tenant may start out by stating, “This rent is too high”. When we stake out firm positions, we set ourselves up for impasse. In our goal of getting to yes, we need to draw out the interests underlying our counterpart’s positions by asking questions, such as; “how do you feel the weed control is looking on your land—or the drainage, or erosion control’? By identifying what interests are motivating the other party, and sharing your own interests, you can open up opportunities to explore tradeoffs across issues and increase your odds of getting to yes.

3. Learn to manage emotions. Be sure that you and your counterpart have ample opportunities to express and discuss any strong emotions related to your negotiation. Allowing one another to speak your mind will benefit both sides. When you know that you will have your turn to express how you’re feeling, it will be easier for you to listen when your counterpart has his turn. A landlord may have strong feelings about the care and upkeep of their farm, the economy or their financial situation-for instance.

4. Express appreciation. Expressing appreciation can be a means of breaking through impasse. “No one likes to feel unappreciated, and this is particularly true in a negotiation,” Express appreciation by working to understand the other’s perspective, seeking merit in that perspective, and communicating understanding through words and actions—all critical negotiation skills.

5. Escape the cycle of action and reaction. “If the other side announces a firm position, you may be tempted to criticize and reject it. If they criticize your proposal, you may be tempted to defend it and dig yourself in . . . if they push you hard, you will tend to push back.” To head off this vicious cycle, avoid escalation by refusing to react. Instead, channel your resistance into more productive negotiation strategies, such as “exploring interests, inventing options for mutual gain, and searching for independent standards.”

Incorporating these methods into your negotiation tool kit could prove very helpful in your negotiations during these tight economic times in agriculture. They may not bear fruit in every case but, if they help in just a few situations it could add up across multiple landlords, suppliers and markets you sell to. Experiment and give some of these techniques a try.

Source: Harvard Law School Daily Blog, Six Guidelines for “Getting to Yes”, Katie Shonk, Oct. 2015

Monday, September 12, 2016

What Direction will 2017 Farmlands Rents Go? Stay the Same? Up? or Down?

by David Bau, Extension Educator

Each year I put together tables listing actual farmland rental rates by county from Adult Farm Management Records.  Unfortunately farmers and landlords are starting to negotiate 2017 farmland rental rates and the last actual numbers available are for 2015 so I am forced to estimate figures for 2016 and 2017.  When I did this last year I used an estimate of a 5% decline and the actual figure came in at 5.3% decline statewide.  For 2016 I heard many times that rents were down $20 to $25 per acre, although some rents went up and some remained the same.  In table 1 below I estimated a 10% decline in 2016 from 2015.

But what direction should 2017 farmland rental rates go?  How do I determine an estimate for 2017 farmland rental rates?

Should they stay the same? 
Landlord property taxes continue to increase, while schools pass referendums that also increase taxes. If rents stay the same, a landlord’s income will go down if taxes increase and if taxes are not increasing the revenue to the landlord will remain constant, when they have grown accustomed to significant increases since 2007.

Should they go up?
Landlord expenses increase as property taxes increase and they want to pass this cost increase onto the farmer and increase the rental rate. Another example might be where there has been a long term lease in place where the rental rate has not changed for many years and this rate might be considered low today and due for an increase.

Should they go down?
Farmers have experienced decreasing corn and soybean prices since record high prices in 2012 for corn and 2013 for soybeans and current prices offered for 2017 corn and beans are below what farmers sold their grain for in 2007, when rents were $125 per acre. Average production budgets for 2017 indicate losses for farmers if rents are above $100 per acre. With the average rents in Table 1 in 2015 averaging $217 per acre, to go down to $100 per acre would be over 50% reduction in average rents.

So you could make an argument for all three scenarios, but looking at the economics for corn and soybean production in 2017 using 180 bushels per acre, yield and $3.25 price per bushel, for corn and 50 bushel yield and $9.00 price for soybeans, income would be $585 for corn per acre and $450 for soybeans. With average cost projected to be $555 for corn and $290 for soybeans before rent and labor, this would leave $30 per acre for corn and $160 per acre for soybeans to be shared between the landlord as rent and the farmer and income. This would be an average of $90 per acre to be shared.

So I projected a 7% decline in rental rates from 2016 to 2017 for figures listed in Table 1.

But from earlier examples 2017 farmland rates could go down by over 50% or increase from 2016 rates depending on the individual situations.  It will be a very challenging year for both the landlord and farmer to determine where the 2017 farmland rental rate should be.

Table 1. Average County Farmland Rental Rates from 2007 to 2017



What Direction will 2017 Farmlands Rents Go? Stay the Same? Up? or Down?

by David Bau, Extension Educator

Each year I put together tables listing actual farmland rental rates by county from Adult Farm Management Records.  Unfortunately farmers and landlords are starting to negotiate 2017 farmland rental rates and the last actual numbers available are for 2015 so I am forced to estimate figures for 2016 and 2017.  When I did this last year I used an estimate of a 5% decline and the actual figure came in at 5.3% decline statewide.  For 2016 I heard many times that rents were down $20 to $25 per acre, although some rents went up and some remained the same.  In table 1 below I estimated a 10% decline in 2016 from 2015.

But what direction should 2017 farmland rental rates go?  How do I determine an estimate for 2017 farmland rental rates?

Should they stay the same? 
Landlord property taxes continue to increase, while schools pass referendums that also increase taxes. If rents stay the same, a landlord’s income will go down if taxes increase and if taxes are not increasing the revenue to the landlord will remain constant, when they have grown accustomed to significant increases since 2007.

Should they go up?
Landlord expenses increase as property taxes increase and they want to pass this cost increase onto the farmer and increase the rental rate. Another example might be where there has been a long term lease in place where the rental rate has not changed for many years and this rate might be considered low today and due for an increase.

Should they go down?
Farmers have experienced decreasing corn and soybean prices since record high prices in 2012 for corn and 2013 for soybeans and current prices offered for 2017 corn and beans are below what farmers sold their grain for in 2007, when rents were $125 per acre. Average production budgets for 2017 indicate losses for farmers if rents are above $100 per acre. With the average rents in Table 1 in 2015 averaging $217 per acre, to go down to $100 per acre would be over 50% reduction in average rents.

So you could make an argument for all three scenarios, but looking at the economics for corn and soybean production in 2017 using 180 bushels per acre, yield and $3.25 price per bushel, for corn and 50 bushel yield and $9.00 price for soybeans, income would be $585 for corn per acre and $450 for soybeans. With average cost projected to be $555 for corn and $290 for soybeans before rent and labor, this would leave $30 per acre for corn and $160 per acre for soybeans to be shared between the landlord as rent and the farmer and income. This would be an average of $90 per acre to be shared.

So I projected a 7% decline in rental rates from 2016 to 2017 for figures listed in Table 1.

But from earlier examples 2017 farmland rates could go down by over 50% or increase from 2016 rates depending on the individual situations.  It will be a very challenging year for both the landlord and farmer to determine where the 2017 farmland rental rate should be.

Table 1. Average County Farmland Rental Rates from 2007 to 2017



Use Your Income Statement to Understand Your Farm's Finances


by Betty Berning, Extension Educator

I’ve written a couple articles this year and all have been related to farm finances.  I am passionate about finance and economics, but I understand that finance isn’t the most glamorous topic for most people.  Would you believe that I’ve tried very hard to make these articles as exciting as possible?!  I know, I know, they’re not very exciting! 

Having said that, finances are very important.  They are critical to a farm’s success.  Without strong finances and a solid understanding of them, one’s operation will have a difficult time surviving.  Anyone can become better at understanding finances, it just takes time and practice (repetition).

I’ve written about understanding revenue and expenses and balance sheet.  If you recall, the balance sheet is one of four financial statements.  The other three are 1.  Income statement, 2.  Statement of cash flows, and 3.  Statement of retained earnings.  For this post, I’ll focus on what an income statement is and what it tells you.

An income statement measures profitability over time.  For example, your Schedule F from your tax return is an income statement of sorts.  Your Schedule F measures your income and expenses over the past year (a period of time) and calculates what is leftover (profit).  This is considered a cash-based income statement.  Table 1 below illustrates an accrual-based income statement.  You can see the types of items that are included as income and expenses and the net farm income for the year.  The table includes accrual adjustments which give you a better picture of how much money your farm actually earned.

Table 1  Accrual Based Income Statement
Income

Crop sales
$403,588
Crop inventory change
$50,626
Livestock sales
$680,442
Livestock inventory change
-$97,475
Government payments
$48,418
Other cash farm income
$141,966
Change in accounts receivable
-$65,576
Gain or loss on hedging accounts
$4,367
Change in other assets
$1,690
Gain or loss on breeding lvst
-$923
Gross farm income
$1,167,124


Expenses

Cash operating expenses
$1,072,018
Change in prepaids and supplies
$2,815
Change in growing crops
$91
Change in accounts payable
-$9,747
Depreciation
$77,130
Interest paid
$35,471
Change in accrued interest
$2,197
Total operating expense
$1,179,975


Net farm income from operations
-$12,851
Gain or loss on capital sales
-$759
Net farm income
-$13,610
Source:  Center for Farm Financial Management, FinBin

By looking at your income statement, you can see where you are making and spending money.  Take some time to really analyze your statement.  Identify the areas where you spend the most money and the least money.  Ask yourself, where am I making the most money?  The least?  Are you surprised by your answers?  

I’d also suggest comparing your current income statement to a past income statement.  An easy way to do this is to compare your 2014 tax return to your 2015 tax return.  Or you could compare one month’s income statement to another.  For example, compare your June 2016 income statement to your May 2016 income statement.  Analyze what you see.  Notice where there are differences.  Did you spend more money on one particular expense?  Did you make more money in one time period than another?  Make sure you understand and can explain any variability you see in your income statements.

Remember the balance sheet that I wrote about last time?  Find that when you’re doing your analysis.  There are a few simple ratios you can calculate using your income statement and balance sheet.  These ratios will help you understand how efficiently your operation is running.


1.        Return on Assets (ROA):  This helps you understand how efficiently you are using your assets create profits.  Generally speaking, anything over 8% is very good.  Less than 4% indicates an opportunity to improve.  You can calculate ROA using this formula-

2.        Return on farm equity (ROE):  This ratio illustrates how much money you are making for each dollar of equity.  A ROE of over 10% is excellent; ROE of less than 3% suggests more work is needed.
The analysis described in the previous paragraphs might seem a little confusing and daunting.  I strongly encourage you to spend some time trying to do this analysis.  Dig into the numbers.  Sit with your banker or farm business management instructor.  Try to understand your numbers.

By doing this, you can begin to see where you might have opportunities to increase your revenue or decrease your expenses.  Additionally, you may be able to spot potential problem areas before they become problems and take steps to avoid them all together!  One of the keys to financial success is being proactive when opportunities and threats arise.  Finally, careful analysis of your income statement can help you budget for the future.  You can utilize your monthly or yearly income statement to estimate your revenues and expenses for the next month or year.  Again, this will allow you to be proactive in your finances.

I’ll go back to what I said at the beginning- finance isn’t the most glamorous topic, but it is critical to the success of a farm.  If you aren’t spending much time digging into your farm’s finances, start now.  Over time it will get easier and hopefully it will provide you with tools for even greater success.  
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