Agriculture Law and Management

Accessibility


| Share

Step 3: Business Environment

Business Planning -- Business Environment

 

Some farmers may hope that once they have selected a farm plan and their business is established, they will be able to maintain that plan, produce close to their optimum level of production, and use the same practices throughout their farming career, with only minimal changes. These operators may remark, "If I could only purchase a few more pieces of equipment ..., buy the neighboring tract of land ..., or expand my livestock herd ..., I would be set." Such statements imply that the operator wants to reach the next stage in the business and stay there for a while.

The purpose of this step is to identify external factors that impact farm businesses and the quality of life for the owners and their families. Key political, economic, and social factors may include consumer preferences, changing technology, government policies, living costs, educational system, medical facilities, entertainment opportunities, and community amenities. Farmers' future expectations of these factors influence how they assess opportunities. Having carefully considered these factors beforehand, farmers are prepared to quickly assess the impact that any changes will have on their business, and to take advantage of opportunities.

No one's expectations or assumptions about the future are better than anyone else's. However by documenting their expectations, farmers often gain a better understanding of how external factors impact their farm business.

Objectives of Step 3

  • Identify external factors that affect the agriculture industry, economy, and government policy
  • Identify external factors that affect local farm businesses
  • Identify external factors that influence local non-farm issues
  • Identify potential markets and technologies

Needed to Complete Step 3

  • Publications describing key trends affecting agriculture
  • Economic analysis
  • Forecasting

Results of Step 3

  • Documentation of factors important to the farm business
    • Historic prices
    • Current prices
    • Expected prices
  • Documentation of factors important to quality of life

 

Farmers, like most individuals, desire stability. It is uncomfortable to be in a position wherein you are always reacting to outside forces. Furthermore, changing the farm business can be costly because of the difficulty in buying and selling land, machinery, and buildings. If farmers could only isolate themselves from external forces, they would not have to react to market adjustments.

Unfortunately, few farmers can afford to do this because change is an important part of modern agriculture. The successful farmers of the future will be flexible and willing to accept change. With a farm business plan, farmers can develop long-term (strategic) and functional plans to guide them in making adjustments to unexpected changes. By planning, they will be better prepared to seek and capitalize on small windows of opportunity.

This step in the business planning process is a chance to think about the external factors that influence your farm. These factors include prices for commodities, cost of inputs, government policies such as trade agreements, government programs such as price supports or Commodity Credit Corporation loans, fiscal and monetary policies, technological advances, and many others. The worksheet offers a space for you to document your thoughts and future expectations about the external factors that impact your family and farm business.

Market Forces Impacting Farm Businesses

Changing commodity prices and input costs are of great concern to farmers. They realize that commodities are subject to price fluctuations induced by changes in the marketplace (supply and demand), weather, and government support programs. In this step however, you are urged to think more broadly and also describe the impact that a change in consumer preferences, industrial products, technology change, and macroeconomics policy will have on your business. These issues affect the business because they can impact the price received at the market or the cost of producing the commodity.

Some issues that often influence on the farm's viability are

  • technology changes,
  • production (yields per acre, rate of gain per animal, pounds of milk per animal),
  • local labor (availability and price),
  • land and machinery (availability and price),
  • consumer and industry demand for your products,
  • markets (availability, niche, traditional, organic),
  • operating environmental forces,
  • conservation programs (regulations),
  • family living and medical expenses (current and future),
  • macroeconomic forces (inflation, interest, and exchange rates),
  • trade agreements (NAFTA, GATT, CAFTA), and
  • other items unique to the farm business.

Farmers are probably most familiar with prices for inputs they use and commodities they produce. Knowing and understanding the determinants of these prices can help farmers decide which enterprises to include in the business plan. The three major influences on prices are

  • trend prices (long run direction of prices),
  • cyclical prices (medium run variation of prices), and
  • seasonal prices (short run variation of prices).

These three influences help to explain the variability of prices. Trend variations are the overall direction of prices in the long run. They can increase, decrease, or remain flat. Cyclical variations are the price cycle that commodities experience during a several year time period. For example, the beef cycle is 10 years. Seasonal variations are changes that occur in less than one year. For example, wheat prices are at a low during the late summer/early fall and at a high during late spring/early summer.

For more information on price cycles, farmers can refer to private newsletters, extension publications, and numerous other sources.

The table for this step includes space for you to record your expectations for prices and to determine where the market is in the price cycle. In completing the table, you can indicate whether you believe the market price will increase, decrease, or remain flat over the next 5, 10, or 15 years. Your price expectations will, in turn, help you decide which enterprises to include in your business.

Dealing With Change

A farm business plan is a statement of how you intend to react to changes in the marketplace. It reflects your expectations about the market environment in which you will operate. It is for this reason that you are encouraged to specify your expectations as you begin the planning process.

Farmers' expectations often incorporate trend and cyclical price variations. Other fast-changing circumstances that affect the operating environment also should be documented because they could affect the long-run trend. What effect will CAFTA/GATT, the emerging Chinese economy, loan defaults by a developing nation, changes in the Mexican economy, and other global events have on the price you will receive at the local elevator? Gathering information from different sources provides different views about these factors to help farmers in their evaluation.

Another factor that can affect the market or income side of the business is government farm support programs. These programs are not stable; they can change from year to year and from one administration to another. Understanding these programs and how they relate to the business should allow you to adjust your farm to maintain its profitability.

The macroeconomics primer further explains the economic topics discussed here. The primer discusses interest rates (demand for money, supply of money), inflation rates (agriculture, federal government spending), and exchange rates.

Community Resources

Another category for farmers to consider when assessing their operating environment is the community in which the business operates. What resources are available in the community that can be acquired and used in the farm operation, such as

  • feed sources to add or expand an existing livestock enterprise,
  • unused buildings that could be placed in service,
  • land currently available or likely to become available,
  • capital from financial institutions, investors, and non-traditional lenders,
  • market opportunities, including proximity to major or special markets,
  • modes of transportation such as highway, railroad, air,
  • intermediate products, such as feeder cattle, feed, or waste from a processing plant, that can be used in the farm operation,
  • the capacity and business stability of suppliers of manufactured inputs and services and the quality of those services.

Answers to these types of questions often help in canvassing the community for opportunities. Even though farmers may have lived in the neighborhood their entire life, reassessing the community from a different, yet positive, perspective may suggest ideas that have been overlooked.

The cost of available resources in the community also affects the business. If farmers can hire custom work, they can free capital or labor for other areas of the business. Knowing what types of resources are available in the community allows farmers to take advantage of them. After the long-term plan has been developed, farmers should be able to assess how these factors impact their farm business.

Outcomes of this step

The product of this step is a written statement of your 1) expectations for the future of factors that affect your farm business (prices, yields, macroeconomic forces) and 2) reasons for holding those expectations. The farm business plan that farmers develop reflects their expectations about the external environment and how it will impact the strengths and weaknesses of the farm business. In particular, farmers will be using the output prices and input costs developed in this section when they begin developing cash flow projections and enterprise budgets in later steps.

An assessment of the resources available in the local communities that affect the farmers' personal life (schools, hospitals, clinics, entertainment) also should be documented here. Although these last resources may not affect the farm's "bottom line," they can substantially impact whether farmers fulfill their personal goals.

To complete this table, farmers will enter values they believe will exist. Each farmer (as well as each analyst) has their own expectations. However, nobody is more familiar with local market conditions than the people who live and work there. Therefore, this process has to reflect your farming situation, especially since you are responsible for implementing your plan.

Sources of Outlook Information

Many farmers obtain their outlook information from various sources. Some of the most popular sources include U.S. Department of Agriculture publications and conferences, land-grant university outlook publications and extension meetings, and private industry newsletters, magazines and meetings. Successful farmers of the future will probably need an ability to scan a variety of publications and synthesize the important points of each. Relying on a single source of information is hazardous because it could be biased or narrow in its evaluation.

The following links are examples of sources of government information about agriculture.

Questions to promote your thought process.

Creative Commons License
Feel free to use and share this content, but please do so under the conditions of our Creative Commons license and our Rules for Use. Thanks.