Predicting the future using ‘what-if analysis’
Glacier FarmMedia – How many times a day does a farmer ask, “What if I did X? What would happen?” It sounds like the beginning of a joke, but it’s actually a great place to start a “what-if” analysis.
Also known as scenario planning, a what-if analysis can help a farm business assess its best potential for making a profit, and for addressing and overcoming risks.
There are many tools designed to help with what-if analyses, from simple spreadsheet-based calculators to complex digital platforms. But a tool is just a tool unless you find ways to use it that improve your farm operation.
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Mathieu Lipari, risk management lead at Farm Management Canada, says there’s a process farmers must go through even before running what-if scenarios.
“(The process) begins with identifying the most important risks to your farm, as comprehensively as possible, including the risks we may not typically think about, like risks related to farm transition, farm safety, human resources (including family), cybersecurity, policies and regulations, and so on.
“After this, it’s important to assess those risks and drill down into the risks that are highly probable, that have a potential for high impact on the farm, and for which the farm is the least prepared.
“Once that is done, what-if scenarios can come into play to help determine contingency plans for likely scenarios that relate to high-priority risks.”
Farm Management Canada offers several resources and programs to help farmers assess and manage risks on the farm, including its Roots to Success training program, the AgriShield platform and its latest release, the Risk Management Resources Bundle.
Roots to Success offers training to help farmers proactively identify, assess, mitigate and plan for risks using AgriShield, a comprehensive risk assessment and planning platform. The platform allows farmers to assess current risk exposure, develop personalized strategies and create action plans to address vulnerabilities across six critical areas: people, finances, markets, strategic management, business environment and production.
The Risk Management Resources Bundle takes the same approach, using a more simplified risk assessment and planning spreadsheet, and includes a Starter Guide to help farm owners and managers better understand risk and the farm’s risk management process.
The value of wondering “what if?”
“Our research shows that farmers who have written plans are more successful, are better positioned to make good decisions and have greater peace of mind. What-if scenarios are a part of that,” Lipari says.
“Failing to comprehensively assess the farm’s risks before examining what-if scenarios could lead farms down a narrow path without seeing the full range of risks in front of them. They could end up focusing on what seems important at the time, while ignoring risks that should be a priority.
“In agriculture, given the broad range of risks and limited time for risk management, it’s important to focus on the right things from the get-go.”
Farmers tend to get siloed in their thinking, says Lyle Cowell, senior agronomist with Nutrien.
“On any given day, a farmer might only be thinking about seed prices or the price of fuel. Sometimes, we become obsessed over the cost of a certain thing and we lose sight of the potential for profit.”
Nutrien offers several free calculators on its eKonomics website to help farmers assess different variables of their operation, from nutrient return on investment, growing degree days and nutrient removal, to application rates per acre, input planning and dry fertilizer calculators. Their Input Planning calculator helps farmers and agronomists estimate farm profit.
Predictions need to be realistic
Most farmers are familiar with cost of production calculators, but it’s important to make sure the numbers they feed into these platforms are realistic.
“These are simple tools to help farmers better understand their cost of production and the probability of having positive income at the end of the year for their farm or a specific crop,” says Cowell.
“Two critical things to enter are a realistic yield and selling price, not yields that they hope to achieve — and not the best price they have ever been able to get — but what they think is a realistic yield for each crop or field based on a long-term average, and what they think they are realistically going to sell that product for.”
Besides predicting known outcomes, it’s also important for farmers to better understand and explore the different options available to create more income.
“For example, you might be able to spend 30 per cent less money on your fertilizer bill, or you might be able to sell your canola for six or seven per cent more, and end up in the same place,” Cowell says.
“What do you need to spend your time doing to make money? Most of the time it’s marketing your grain better. It’s about managing the whole cost and income, putting it all on paper, and sorting out where the farm is sitting and understanding where you can be profitable.”
In addition, Cowell says it is essential that farmers use the products they buy efficiently, for example, following the 4Rs of fertilizer use (the right product, applied at the right rate, at the right time, and in the right place) and to keep a similar approach with all farm inputs.
“What-ifs are one part of a comprehensive farm management plan, and while it’s important to do projections, risk analysis and scenario planning, it’s also necessary to keep track of the realities throughout the year,” says Cowell.
“It’s easy to lose track of how you are spending your money and everybody should have that sit-down on a regular basis to review the annual budget. Farmers don’t deal with hundreds of dollars; they often deal with hundreds of thousands of dollars, and the implications of wrong spending are much bigger for a farmer.
“You should have a plan in place that you know what you might spend and then revisit that throughout the year to make sure you are not going too far past that.”
Source: producer.com