AAE 320Dr. Paul D. Mitchell

Decision Making in Farm Management

Goal TodayOverview decision making process,

focusing on a farm manager, and how it relates to the material covered in AAE 320

Readings on course pageFarm and Ranch Strategic Planing

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

Today’s LectureHow Do I Decide What Is Right For Me?Strategic Management

How Do I Decide? (What Is Right For Me?)Tactical Decision Making

Strategic Management1. Define your mission2. Formulate your goals3. Assess your resources4. Survey your environment5. Identify and select strategies6. Implement and refine

selected strategies

Mission StatementShort description of WHO your are &

WHY you existThe 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

Mission StatementGoogle “Strategic Management”Many “how to” pages, academic journal

Google “Mission Statement” Many “how to” pagesFortune 500 Examples: http://

www.missionstatements.com/fortune_500_mission_statements.html

Weird Al’s "Mission Statement" https://www.youtube.com/watch?v=GyV_UG60dD4

Dairy Family Farm ExampleOur 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)

Formulate GoalsConcrete steps you take to achieve

your missionHow you work to make your dreams

come trueGoals should be: Specific, Measurable, and Have a Deadline1) “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)

Assess your ResourcesInternal look at your resources1. Physical: land, livestock,

machinery, buildings, irrigation, orchards, pasture

2. Human: your own and your family’s skills, talents, preferences, etc.

3. Financial: capital you have and can acquire from lenders, investors, family

Survey your EnvironmentExternal look at your environment

1. Available technologies, genetics, production practices

2. Consumer tastes, changing markets

3. Government Regulations

Dairy Producer: should be aware of new breeds and practices; consumer preferences; international markets, and nutrient/manure, labor, and machinery regulations

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 laterBrainstorm, Think Outside the Box, Cutting Edge, Think Big, etc.

Can be taught, but not in this course

Identify and Select StrategiesStrategy Selection: Ag examples to

illustrateHigh volume, low margin production

Commodity crops and milkLow volume, high value production

Organic milk, farmer’s market cropsIntegrate crop and livestock, or

specializeDairy & crops, grains only, vegetables

onlyForm 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

Implement and Refine StrategiesForm 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

Strategic Management

1. Define your mission2. Formulate your goals3. Assess your resources4. Survey your environment5. Identify and select strategies6. Implement and refine selected

strategies

Hard questions, easy to avoid

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

Tactical Decision Making1. Identify and define

problem/opportunity2. Identify alternative solutions3. Collect data and information4. Analyze alternatives and make

decision5. Implement decision6. Monitor and evaluate the results7. Accept responsibility/consequences

Identify & Define Problem/OpportunityIdentification: 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 optionsMany 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?

Economic Problem DefinitionEconomics: 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

Identify Alternative SolutionsMake 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

Collect Data and InformationUniversity Extension/ResearchUSDA: NRCS, FSA, AMS, RMAFarm Media: newspapers, TV, radio, farm journals/magazines

Company mailings, pamphlets, brochures

Agricultural Professionals: consultants, input suppliers, veterinarians, banker, accountant, lawyer, government official

Collect Data and InformationInternet Search EnginesMany useful web pages

FarmDOCCenter for Farm Financial Management

National Risk Management Library

Government Agencies: USDA, NOAA and National Weather Service, WI DATCP

Analyze Alternatives, Make DecisionAnalyze 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.

Implement DecisionRequires 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

Monitor and Evaluate ResultsDid 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

Accept ResponsibilityHopefully most of the results are

good!Take credit when credit is due —

celebrate your successesAccept responsibility when it’s your

fault; don’t play the blame gameLearn from your mistakes — failure

can be a great teacherSometimes it’s just bad luck! Plan for

the worst case or use risk management tools

SummaryKnow (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 MakingEconomic definition of management

problemInformation and data collectionAnalyzing alternativesEvaluating results