Business Plan for Father Daughter Farm

Executive Summary

The Father Daughter Farm is organized to efficiently crop approximately 3,000 acres. The farm is facing the choice of either purchasing 640 acres of land (630 cultivated) that previously had been rented or continuing operations with reduced crop acres. The purpose of this business plan is to assist the farm managers in the decision related to whether to finance the land purchase ($1,120,000) or to forgo the purchase and operate on fewer acres.

The future vision for the farm business is to be a viable and sustainable business managed by the daughter. The overall business strategy is to continue developing the farm business as a knowledge driven organization that focuses on achieving acceptable financial returns at acceptable levels of risk.

The financial projections suggest that the farm business could achieve acceptable returns and maintain strong liquidity and solvency positions while financing the land purchase. Key elements that would contribute to this desired outcome would include:

• Gaining knowledge of price and delivery opportunities that enables the farm business to capture target prices.
• Gaining knowledge of customer needs that enables the farm to be a preferred supplier by providing customers with superior quality and value.
• Gaining a detailed understanding of cost drivers that enables the farm to consistently achieve low cost crop production.
• Continuously monitoring financial performance of the farm business in order to respond to variability and unplanned shocks.
• Continuously identifying, assessing and managing risk events in order for the farm managers to be able to take the right action at the right time.

• The Father Daughter farm business is currently operated as a partnership between the father and the mother with the daughter being actively involved in management decisions. The longer term objective is for the daughter to assume management responsibilities and ownership.
• With the purchase of 640 acres of land, the farm would own 2245 acres of owned land with 2192 acres cultivated in east central Alberta. An additional 800 acres is cash rented with 760 acres being cultivated land.
• The farm is facing the choice of either purchasing 640 acres of land (630 cultivated) that previously had been rented (purchase price of $1,120,000) or continuing operations with reduced crop acres.
• The farm is organized to efficiently crop in the range of 3,000 cultivated acres. Forgoing the opportunity to buy the 640 acres and operating at reduced acres could adversely impact the efficiency of the farm operations and possibly limit the ability of the farm business to pass ownership and management from one generation to the next.
• The financing terms available to the daughter to make this purchase would be $1,120,000 at 3.5% over 20 years with semi-annual payments (blended) of $39,168.74 providing the father offers additional land (320 acres) as security for the loan.
• The purpose of this business plan is to explore how the additional debt servicing requirements (approximately $82,000 per year) would impact the whole farm business. As well to determine if the additional debt will adversely impact on the objective of maintaining a strong financial position along with the ability to deal with unexpected shocks emanating from a dynamic and changing business environment.
• The farm cropping program includes canola, wheat and peas.
• The strength of the farm business has been maintaining a strong financial position combined with consistently strong production capabilities.
• The farm has a complete line of modern cropping equipment including a GPS navigation system that supports auto steer and precision placement technologies.
• The farm has a modern home along with grain storage, fertilizer storage and machinery storage.
• The daughter has completed an agriculture management diploma at the Olds College and initially will draw wages as an employee of the farm business. As well, she has past experience working for a local business and will return to this business in order to earn off-farm wages over the winter months.

• The father has 25 years of farming experience and 20 years managing the current farm business. Up until the last three years, he has been responsible for all management activities including monitoring financial performance, crop marketing decisions as well as organizing cropping and harvest operations and
• The daughter has actively participated in the management of the farm business over the past three years by providing economic and financial analyses to key decisions. Her college training has enabled her to develop skills in both production and business management.
• The father and the daughter have worked closely with a grain market advisor who has assisted them in determining break-even costs, developing and implementing marketing strategies as well as identifying price and delivery opportunities.
• The farm records are maintained by a local bookkeeper. The accounting is handled by a firm in Stettler. The father and daughter have had annual reviews with the accountant in order to gain insight on the financial structure and performance of the farm business over time.
• The father and daughter have worked closely with an independent agronomist to implement a soil testing program as well as develop cropping and fertility plans.
• In the longer term the business objective is for the daughter to take over all management activities and ownership of the farm business.

1. The father and daughter will invest time and energy in assessing the industry, the market, and the competition for resources that will shape the future business environment their farm business will have to operate in. This will enable them to consider the role the future farm business will have in the future industry.
2. The father would support the daughter in gaining the financing of $1,120,000 to purchase 640 acres by providing an additional 320 acres of land as security for the loan.
3. The father will take steps to transition the relationships with lenders and other stakeholders to the daughter.
4. The daughter will take steps to monitor cost per unit of production, gain insights on key cost drivers and continuously make improvements to reduce costs per unit of production.

• The farm will maintain its focus on crop production and continuously pursue above average crop production performance.
• The farm will take steps to gain detailed knowledge of cost drivers and cost control procedures that can contribute to low cost production.
• The farm will continuously undertake to identify and realize opportunities to provide commodities with enhancing features that lower transaction costs for buyers.
• The farm will continuously monitor financial performance in order to ensure a strong working capital position and strong overall financial position.

• Continually identifying and assessing opportunities to achieve superior crop production performance with an emphasis on low cost production.
• Continually identifying and assessing technological advances for opportunities to improve whole farm performance.
• Continuously gaining market knowledge that allows the farm to provide crops of superior quality and value that improve the well-being of the customers in specific market segments.
• Continuously identifying, assessing and managing risk events that if they were to occur could have an impact (either positive or negative) on the goals and objectives of the farm business.
• Continuously gathering feedback on management performance and whole farm performance in order to learn not only what happened but more to understand why various outcomes occurred.

• Ensuring the farm business has sufficient capacity to finance the land purchase as well as maintain liquidity and solvency measures sufficient to recover from significant shortfalls in production or market prices as well as deal with unexpected shocks emanating from social, economic, political and environmental forces.
• Achieve efficient use of resources that contributes to long term growth in net worth.
• Achieving profitability and cash flow performance that ensures a strong working capital position.

• The commodity cereals, oilseed and pulse crop markets tend to be dominated by large multi-national firms in which the primary producer is a price taker.
• Technology is will continue to advance and generate opportunities for increased productivity and for providing attributes that can enable the farm to provide a superior value/cost equation to customers .
• A growing population will likely continue to drive food production. However there will be increased variability in market prices.
• Society’s concerns for the environment will contribute to greater consumer and regulatory forces shaping resource use and the impact production practices have on natural resources and the environment.
• There will be increased competition for the key resources of land, capital and energy.
• Interest rates have been favorable over the past five years. However there is no certainty that this will continue. An increase in interest rates of 1.5% on the $1,120,000 being considered would cause annual payments to increase by an estimated $11,100 per year and total interest costs over 20 years to increase by an estimated $221,350.

• The past reliance on rented land has allowed the farm to develop the cropping enterprise without incurring significant levels of debt. However this has made the farm vulnerable to losing substantial acres when landlords choose to sell their land. The purchase of land that is available to the farm at this time will provide land tenure and lessen the vulnerability of losing crop production acres.
• The farm has been progressively investing in modern crop technologies which combined with strong organizational capacities have contributed to above average crop production capabilities. If the farm were to take on more land debt it may not be able to continue with aggressively adopting new technology that requires capital purchases and debt financing. However the modern line of equipment does provide the potential for the farm to pursue custom work (both seeding and harvest) as a means of generating additional revenues.
• The farm has been able to achieve above average crop production along with below average costs. As well, the farm has been able to provide the market with crops of superior quality and value at a lower cost of production than competitors.
• The farm business has developed a culture of learning and knowledge that has enabled it to be flexible, creative and well prepared to respond to changes emanating in the external environment.
• Working with the marketing advisor, the farm has been able to identify price and delivery opportunities as well as become a preferred supplier that can reliably meet contract terms specifying quantity and quality.
• The increased level of debt required to replace land currently being rented will place the farm in a changed financial situation. Rather than paying cash rent in the range of $50 per acre the farm would have financing costs (Principal plus interest) of $125 per acre on the 630 acres. This change in the financial structure of the business can impact on the ability to recover from significant shortfalls in production or market prices.
• The daughter’s ability to gain off-farm work during the winter months could reduce the level of wages that would have to be paid to her from $35,000 per year to $14,000.

• Decision making will continue to balance the multiple objectives of achieving economic returns, managing financial risk as well as ensuring strategic and organizational fit.
• Implementing risk management processes that enhance the ability of the farm managers to recognize and capture opportunities and mitigate threats more quickly than rivals.
• Continuing to work with the accountant to monitor the financial performance of the farm business in order to have the information needed to pursue the objectives of maintaining a strong financial position and the capacity to deal with variability in production results and market prices.
• The managers will continue to work with the agronomist to implement crop production practices that contribute to higher productivity levels and lower costs per unit of production.
• The daughter will continue to assess key cost drivers and identify innovative ways to manage production costs.
• The managers will continue working with the market advisor to use contracting to capture market opportunities.
• The managers will maintain the modern equipment with the capacity to take on additional acres and generate additional revenues through custom work in the right situation.

• Gaining knowledge of price and delivery opportunities that enables the farm business to capture target prices.
• Gaining knowledge of customer needs that enables the farm to be a preferred supplier by providing customers with superior quality and value.
• Gaining a detailed understanding of cost drivers that enables the farm to consistently achieve low cost crop production.
• Continuously monitoring financial performance of the farm business to ensure it maintains a strong financial position with the ability to deal with year to year variability and unplanned shocks.
• Continuously identifying, assessing and managing risk events in order for the farm managers to be able to take the right action at the right time.

• To continue monitoring the financial performance of the farm business and ensuring it sustains a strong financial position that deals with variability in the short run and future ownership changes in the long run.
• To continue investing in crop production technologies that contribute to achieving acceptable return to total farm assets at acceptable levels of risk.
• Leverage marketing knowledge and resources to identify price and delivery opportunities as well as provide crops with enhancing features such as delivery of large lots that lower transaction costs.

• Continue working with market advisor to leverage a strong knowledge of price patterns, local basis levels and patterns, marketing tools and sources of market information to capture pricing and delivery opportunities.
• To continue using of production costs to determine break even prices and establishing target prices for crops and livestock.
• Take time to learning from past marketing decisions in order to understand why past decisions were not effective.

• With the purchase of the additional 640 acres the farm would consist of 2245 acres of owned land of which 2192 are cultivated. An additional 800 acres are cash rented with 760 acres of cultivated land. The land is located in an area where rainfall is considered to be the main limitation.

• The key objectives and action plans for the operations component of the farm business are as follows:
• The crop production system is a zero tillage rotation with inputs applied to achieve economic returns. The father and daughter have recently changed their input philosophy from fertilizing to achieve target yields to one of fertilizing to achieve $2 in added revenues for every $1 of added fertilizer.
• The father, daughter and agronomist will continue to assess the net benefits of adopting new technologies. Those technologies that have a reasonable likelihood of contributing to %ROA at acceptable risk and fit with the organization and operations of the farm business will be adopted and implemented.
• The daughter will continue to assess the key cost drivers in crop production in order to identify opportunities to reduce the cost of production.

• The father and mother will continue to operate the farm as partnership with the longer term (5 to 10 years) objective of passing ownerships to the daughter.
• The daughter is currently an employee of the farm business drawing a set wage of $35,000 per year while living at home. She has the opportunity to pursue off-farm work during the winter season which could reduce the wage costs to $14,000 per year.
• The father anticipates having a reduced workload on the farm in the next 10 years. Accordingly there may be a need for additional hired help during seeding and harvest. The daughter recognizes the need to develop the leadership qualities required to organize operations and effectively manage hired employees.
• The farm has a strong network of advisors including a bookkeeper, accountant, agronomist and market advisor. The father and daughter will continue to work closely with these resource people in order to identify, assess and realize opportunities that may arise.
• The father has managed the relationship with lenders to this point in time. Going forward the father will transition these relationships with lenders and other stakeholders to the daughter.
• The daughter has been active in decision making over the past two years. Going forward they will continue to work together planning and decision making activities with the daughter taking over all decision making in 8 to 10 years.

Canola			HRS Wheat			Peas
Price Probability			Price Probability			Price Probability
$/bu	chance	weighted value	$/bu	chance	weighted value	$/bu	chance	weighted value
$9.50	15%	$1.43	$5.50	20%	$1.10	$6.50	15%	$0.98
$10.00	20%	$2.00	$5.75	20%	$1.15	$6.75	25%	$1.69
$10.50	25%	2.63	$6.00	25%	$1.50	$7.00	25%	$1.75
$11.00	25%	$2.75	$6.25	25%	$1.56	$7.25	20%	$1.45
$11.25	15%	$1.68	$6.50	10%	$0.65	$7.50	15%	$1.13
	100%			100%			100%
Weighted Price	$10.49	/bu	Weighted Price	$5.96	/bu	Weighted Price	$6.99	/bu

Table 12.2: Expected Values for 2015 Crop Prices

Canola			HRS Wheat			Peas
Price Probability			Price Probability			Price Probability
$/bu	chance	weighted Value	$/bu	chance	weighted value	$/bu	chance	weighted value
$10.00	15%	$1.50	$5.75	15%	$0.86	$7.00	15%	$1.05
$10.50	20%	$2.10	$6.00	20%	$1.20	$7.25	25%	$1.81
$11.00	25%	$2.75	$6.50	20%	$1.30	$7.250	25%	$1.88
$11.50	25%	$2.88	$7.00	25%	$1.75	$7.75	20%	$1.55
$12.00	15%	$1.80	$7.50	15%	$1.13	$8.00	15%	$1.20
	100%			95%			100%
Weighted Price	$11.03	/bu	Weighted Price	$6.24	/bu	Weighted Price	$7.49	/bu

Table 12.3: Expected Crop Yields, Crop Prices and Operating Costs for 2014

Projected Crop Production 2014	Canola	HRS Wheat	Peas	Totals
Acres	1450	1350	150
Price	$10.49	$5.96	$6.99
Yield	40	45	45
Value of Production ($/acre)	$420	$268	$315	$1,017,673
Total Variable Costs	$309.40	$249.20	$210.25	$816,588
Total Cash Fixed Costs	$23.75	$23.75	$25.00	$70,250
Total Cash Expenses	$333.15	$272.95	$235.25	$886,838
Margin	$86.45	-$4.75	$79.30	$130,835
Break-Even Selling Prices	Canole	HRS Wheat	Peas
To Cover all Cash Costs	$8.33	$6.07	$5.23

Table 12.4: Expected Crop Yields, Crop Prices and Operating Costs for 2015

Projected Crop Production 2015	Canola	HRS Wheat	Peas	Totals
Acres	1350	1450	150
Price	$11.03	$6.24	$7.49
Yield	42.00	48.00	44.00
Value of Production ($/acre)	$463	$300	$330	$1,109,139
Total variable costs	$308.15	$248.00	$209.00	$806,953
Total Cash Fixed Costs	$23.75	$23.75	$25.00	$70,250
Total Cash Expenses	$331.90	$271.75	$234.00	$877,203
Margin	$131.36	$27.77	$95.56	$231,937
Break-Even Selling Prices	Canola	HRS Wheat	Peas
To Cover all Cash Costs	$7.90	$5.66	$5.32

Table 12.5: Liquidity and Solvency Measures of the Current farm Business

The expected financial performance for the farm business over the next two years is presented in Appendix E. These projections include the following key assumptions:

• The daughter purchases 640 acres of land (630 acres cultivated) on April 1, 2014 for $1,120,000.
• A term loan of $1,120,000 is advanced on April 1, 2014 to finance the land purchase. The loan semi-annual loan payment of $39,168.74 commence on December 15, 2014. (See Appendix D)
• The farm achieves the crop yields and prices presented on the previous page of this document. (Tables 12.3 and 12.4)
• Other than approximately $9,100 all revenues received by the farm are from the cropping enterprise.
• The daughter receives wages of $35,000 per year while living at home which are included as an expense.
• The father and mother require $55,000 for living requirements which is treated as a draw from net profit.

Of note is that the expected values for crop prices used in these forward projections reflect the weighted average of a range of possible prices along with the considered probability attached to each by the farm managers (Tables 12.1 and 12.2). Accordingly these values do consider the range of possible prices.

The forward projections have resulted in the following key indicators of expected financial performance and financial structure based on the scenario of financing the purchase of the 640 acres.

Table 12.7 Indicators of Financial Performance Over two Years of Operation with Debt

The farm business also recognizes that carefully monitoring and managing the financial performance of the farm business will be a critical element in ensuring the farm is able to deal with variability in yields and prices and achieving financial success. In the coming year the daughter will take responsibility for implementing the following actions:

• Develop forward financial projections for the business in order to gain an assessment of expected outcomes for profitability, cash flows and financial structure.
• Work with the bookkeeper to gain quarterly income statements and develop budgeted versus actual assessments in order to monitor financial performance on an ongoing basis and update forward plans when necessary.

	Yield Parameters
Crop	Worse Possible	Best Possible	Most Likely
Canola	35	46	40
HRS Wheat	38	48	45
Peas	40	48	44
	Price Parameters
Crop	Worse Possible	Best Possible	Most Likely
Canola	$9.50	$11.25	$10.50
HRS Wheat	$4.50	$6.50	$6.00
Peas	$6.50	$7.50	$7.00

	Scenario 1	Scenario 2	Scenario 3
Expected Gross Margin	$151,557	$187,715	$213,782
Standard Deviation of GM	$73,404	$89,937	$93,867
Chance of GM Below $192,051	69.74%
Chance of GM Below $230,214		67.80%	57.75%

Factors	Weighting	Impact Scoring	Weighted Score	Max. Possible	%Score
Economic Attractiveness	30.00%	4	1.20	1.5
Financial Attractiveness	30.00%	4	1.20	1.5
Risk	20.00%	3	0.60	1
Strategic Fit	10.00%	5	0.50	0.5
Organizational Desirability&Fit	10.00%	5	0.50	.5
Total	100.00%		4.00	5	80.00%

Appendix B –Historical Financial Performance

Appendix C - Current Financial Position of the Father Daughter Farm

Appendix D – Payment Schedule for Proposed Term Loan