Aug 2, 2018Accounting versus economics
A prominent potato grower’s loan officer recently remarked to him, “If I had one wish it would be that every ag degree issued in every university required a minor in economics – not accounting, economics.”
Why would a banker make such a statement? Why would a banker feel a need to distinguish economics from accounting? One could surmise that he has seen too many examples of financial grief coming from inadequate training in economics and not from inadequate training in accounting. All can agree that keeping good financial records is important, but in this banker’s opinion, understanding fresh produce economics is more vital to surviving and prospering in the potato producing business than accounting. Is he onto something?
Let’s examine he difference between accounting and economics. Simply put, accounting lists a company’s expenses and income – anticipated and/or actual – in proper columns and tracks the results. Economics, on the other hand, concerns production and consumption and the transfer of wealth that results from how the two – production and consumption – interact.
Think about this for a moment. The first one, accounting, reports whether or not your farm is producing a profit. The second one, economics, explains the market forces that transfer wealth – equity – either away from your farm or toward your farm. Given a choice, which one would you rather master: addition and subtraction or wealth transfer?
More broadly, accounting production cost and sale price yields a P/L number that tracks the degree to which wealth is either gained or lost by your farm. Infinitely more vital, economics explains the market forces that make the P/L statement turn out like it does. In today’s data-focused world, for a grower to not know exactly how production and consumption forces transfer wealth either toward or away from his farm could be called dereliction of duty, lack of due diligence, or even malfeasance. What kind of manager operates this way?
A potato producer incapable of immediately listing his market segment’s production/consumption profitability parameters – be it in fresh potatoes, process potatoes, or both – classifies him as economically illiterate and, no doubt the very fellow the banker is talking about. He’s the loose cannon roaming about the market’s deck capable of torpedoing not only his own crop’s value but that of fellow producers as well.
A truism to write on your bathroom mirror with your wife’s lipstick is that consistently successful crops such as citrus, lettuce, pears, tomatoes, almonds, avocados and others, even wine, all support market-tracking databases. These market-tracking databases exist for the sole purpose of informing producers of their market’s economic parameters including current supply logistics, balanced supply limits, upcoming supply events, supply glitches and consumption trends. No potato grower can properly manage their business without understanding and managing the very production and consumption forces that determine financial outcome (wealth transfer).
Can you fully distinguish the economics of your business from its accounting? Are you swimming deeply enough in the potato market’s economic data flow to consistently guide wealth toward your operation, or might you be just splashing about in the wading pool of accounting and hoping that things turn out well?
-Buzz Shahan, chief operating officer United Potato Growers of America
