Top Producer Seminar hosted agricultural producers from 30 states at the Chicago Hilton in downtown Chicago in late January. The theme “Think Outside the Farm” brought in speakers from outside of agriculture to challenge farmers in how they do business.
Off-the-farm thinking provides a unique learning opportunity
More than 860 of the nation’s largest producers, representing more than 4.5 million acres, gathered in Chicago, Ill., Jan. 30 – Feb. 1 for Farm Journal Media’s Top Producer Seminar. This year’s theme "Think Outside the Farm" brought in speakers to challenge how farmers do business.
"Coming off a terrible drought year, producers need to think outside of their normal mentality to manage risk and improve their operations," says Jeanne Bernick, Top Producer editor and seminar host. "We worked hard to provide high-level information and take-home value." The following pages include highlights from the event.
The Perfect Storm and Risk Management
Captain Larry Brudnicki, the real-life captain of the Coast Guard ship that performed two dramatic rescues during the worst weather in more than 100 years, which became known as the "The Perfect Storm," shared his story with attendees and talked about his decision-making process. He said risk cannot be avoided. "Some managers believe that all risk is bad," he said. "This approach is similar to the ostrich that sticks its head in the sand." Brudnicki defined risk management as the skillful use of foresight to identify possible adverse future outcomes, and then develop potential viable options to minimize the hazards while maximizing the potential rewards, monitoring the situation and making necessary adjustments to achieve the desired outcome.
He recalled someone telling him that a superior sailor is someone who uses his judgment to keep him out of situations that require use of his superior-ship handling skills. Brudnicki said that the principles of risk management are universal and can be applied to any endeavor that requires you to make decisions without guaranteed success.
"Throughout your life, you will have to make decisions constantly that will affect your future or the future of your business," he noted. "There is no magic formula to eliminate risk, but you can manage it."
Brudnicki shared seven principles to help farmers make the right decisions. The first principle is to identify tasks. "Whenever you begin any new project, it is usually large and complex," he said. "Break the project down into individual tasks."
Second, identify hazards. "Look for anything that could go wrong in terms of equipment, environment and personnel," he said. Three, assess risk. "Risk is the potential adverse consequence of each hazard," he added. "Risk equals severity times probability times exposure."
The fourth principle is to identify options. Start by looking at all the tasks that have high risk, he said. "Can you perform a different task to accomplish the same goal?" he asked. "If you can, by all means do so. If not, there is not much you can do to change the severity. Is it possible to use different equipment, procedures or personnel so you can reduce the probability or exposure, which will lower the overall risk?"
Fifth, evaluate benefit versus risk. The captain said there are three simple but very important criteria for this evaluation process: never accept unacceptable risk, never accept unnecessary risk and never accept a project unless the benefit outweighs the risk. Sixth, execute the plan and lastly, monitor the situation. Risk management is a continuous process, and you are far from being done when you execute you plan, he explained.
Watch Land prices
Farmland values aren’t in a bubble, but prices could still tumble, says a Purdue University ag economist. Like most economists, Brent Gloy, who directs the Center for Commercial Agriculture at Purdue University, does not believe farmland values are in a bubble. But he also thinks there’s real danger that values might fall, especially if the economic winds at agriculture’s back suddenly change direction.
In nominal terms, it doesn’t look as if farmland prices have increased as fast as they did during the last bubble, in the 1970s. However, when you take inflation out of the equation, recent increases are "absolutely on par" with what happened in the ‘70s, Gloy said.
"We pay about 30 times cash rent for a farm today," Gloy said. "It’s never been that high. It’s high in part because people think that cash rents will keep going up, but it’s also because interest rates are low." Gloy urged farmers to resist the temptation to buy farmland on credit, which is what led to the farmland bust of the 1980s. He also advised against buying farmland "just because everyone else is doing it." That’s the psychology that precipitated both the technology and housing busts.
Rising land values make plenty of sense given growing demand from the biofuel industry, foreign nations and growing affluence in developing countries, among other sources. "It all comes back to supply and demand," he said. "Have we seen any increases? You bet we have. Persistent demand growth can substantially increase land values and capital investment."
Land investors, particularly the institutional variety, are bullish because they believe world demand will continue to grow, and the productivity of U.S. farms will continue to improve. But he questioned whether the industry has "reached the point where we can’t keep up with demand growth through productivity enhancements." Low interest rates are a big part of the land equation. Without today’s low interest rates, farm incomes would have to be much higher to support today’s land prices. He urged farmers to keep a careful eye on the Federal Reserve. "When the fed takes us out of accommodation, pay attention," Gloy advised.
- March 2013