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.
Trade policy is another major wild card. "You don’t hear as much about trade policy. But every major bust in ag has corresponded with a bust in exports," he said, recalling the grain embargo after Russia invaded Afghanistan. "Trade policy is something we forget about. Don’t lose sight of that as a farmer." If grain demand is boosted by trade, it’s supported by domestic ethanol production as well. Noting that corn demand for ethanol production might have peaked, Gloy said that "any downward changes would not be good for farmland values."
In the final analysis, Gloy isn’t sure what force might take land values in another direction. "It’s almost impossible to figure out what will take us out of the cycle," he said.
Fertilizer Supply Trends
"Make sure your equipment is fully maximized, but not overextended, by the acres you have."
Crop nutrients have seen upward price pressure, noted Keith Swanson who leads the fertilizer risk management program for CHS Hedging. Supply is catching up with demand.
How do we transition from a short supply to a potential surplus, he asked. Nitrogen manufacturers’ margins have pushed global capacity higher, but it’s hard to know by how much. Nitrogen has a price allegiance to corn, which allows growers to follow margins, he said.
"Take the price of urea and compare that to Chicago corn; track that," he advised. "Over time, it gives us a correlation. To see where the spread is going, we have to look at profits at the acre level to determine margins. Looking at CBOT prices, that’s enough risk; then add input cost risk. These compound to make per-acre margins very volatile."
Five Considerations Before Buying Land
What are the goals for your farming operation? How will your operation evolve or grow in the future? Bret Oelke, University of Minnesota Extension ag business management expert, said farmers have many reasons for growing their business. These include maintaining or improving production proficiency, adding family members to the business, greed, personal challenge and just because they can.
The common thought in farm country is growing an operation means adding more acres. Oelke cautioned farmers to think about these points before writing a check or getting a loan for more land.
You can grow without adding land. "Growth is important and you should grow 3 to 5% per year or you are standing still or even maybe going backward," Oelke said. Adding land is one way of growing your operation, but he said there are other good ways. He advised farmers to try to maximize yields, use all the resources at your disposal and become a better marketer, all of which can add to overall growth.
Consider making land improvements. Drainage, irrigation and tiling to current land have huge payback. Oelke said land investments currently have a higher rate of return than land purchases at "top of market" prices.
Know production costs. To make a quick decision to add new land to your portfolio, whether through renting or buying, Oelke said you must know your cost of production. "I can’t stress this enough. The lowest-cost grower will always be better to pay more for cash rent."
Oelke said your goal should be to have your labor and machinery optimized to your operation’s size. He said you should ask yourself: How many acres can you farm with one planter, one combine and the supporting tillage and other equipment you have? Make sure your equipment is fully maximized, but not overextended, by your acres.
As competition becomes higher for land to rent, Oelke said communication with your current landlords is vital. "You need to have a plan on what to do if someone offers your landlords more money than you are," he said. Also, make sure your landlords understand your operation and aren’t starting to believe rumors or gossip. Oelke explained, in many cases, land owners hear about high prices and assume that farmers sell their entire crop at these high levels."
Top Producers share lessons learned
This year’s Top Producers Luke Brubaker of Brubaker Farms in Lancaster, Pa.; David Nelson of Nelson Family Farms in Fort Dodge, Iowa; and John Carroll of Carroll Brazil Farms in Carthage, Ill., shared lessons they’ve learned in farming.
All three acknowledged that timing has had much to do with their success. Nelson said his timing to return to the farm and work with his father has been a blessing. "The economy was right for me to come back and be profitable with the business," Nelson said. Carroll, who farms in Brazil, referenced Warren Buffett saying that if you can buy dollars for 30¢, buy all you can. "That’s kind of what we did," Carroll said. "Now that difference or spread has shrunk."
When asked about how they manage risks, Brubaker and Carroll stressed the importance of having good cash flow. "Before I made any purchases, I always made sure the farm could cash flow it," Brubaker said. Carroll explained that in Brazil the lending system is virtually nonexistent. "When you are expanding, you have to buy your inputs, plant a crop and know what your revenue will be," he said. "We would forward sell about 75% of our crop so we knew what we would get."
Nelson came at risk management from a different perspective and stressed the importance of peer groups. "Peer groups help you assess your risks," Nelson said. "In order to assess your risks, you have to know what you really have. Compare yourself to peers."
Throughout their careers, each has had to deal with and plan for growth. Brubaker, who farms with his two sons, said he belongs to a professional dairy group in Pennsylvania that helps him strategize and figure out what they can do better. Nelson follows a similar philosophy: Make every acre count. "We try to be as profitable on every acre as we can be," Nelson said. "Relationship-building and networking are a part of our strategy."
Carroll is focused on growing equity — whether its ginning, hogs or grain. "We benchmark ourselves against our peers and pick the things we do well and expand in those areas," Carroll said. "Markets are not perfectly efficient, but there are places with opportunities."
Learn more and watch videos about the 2013 Top Producer of the Year winner and finalists at www.TopProducerSeminar.com.
How Does Farming Compare to Other Businesses?
Farmers are incredibly self-reliant, but that can also be their downfall. As CEO of the Family Business Institute, Wayne Rivers sees a wide variety of industries from the inside. So, how do farmers and ranchers stack up against manufacturers, car dealers, general contractors or McDonald’s franchisees?
"Your bond with land is unlike anything we’ve ever seen," Rivers said, imagining what it must be like to pick up dirt on a family farm that might have been in the hands of great-grandparents. Many manufacturers, by comparison, could care less whether they are making products in Detroit or Birmingham; they’ll go where it’s cheaper.
Rivers said he is equally impressed with the industry’s self-reliance. "It completely blows my mind," he said, telling the story of one farmer who needed to run water from a river 200 feet up a bluff. Instead of calling an engineer, this farmer built the system himself. "I can’t believe some of the things you guys can do," Rivers said.
At the same time, an unwillingness to seek outside help might be an industry "blind spot," Rivers said. The consultant told the story of one farmer who had an extremely high cost of maintenance, yet he refused to spend money on a system that could reduce the time and energy he spent just maintaining. "That same day, he bought two combines," Rivers noted.
Human resource management is another area of weakness, Rivers said. Farmers are too focused on the things they love — their crops, equipment and family. "Everything else is a necessary evil," he said, including the "hired man who needs to be treated as part of the team."
Rivers criticized farmers for hiring the guy from down the road "because he’s a warm body and has a commercial driver’s license." Instead, he advised farmers to put together an exhaustive job description, then publicize it near and far. "You want to get 100 applicants, which increases the chance of getting a great person," he said. "Ag can be an industry that’s very desirable to be in."
Thank You to Our 2013 Sponsors
Top Producer sends a huge thank you to its sponsors for making this event possible. Premier sponsors include: AgriGold, AGROTAIN, Asgrow, Dekalb, Apache Sprayers, BASF, Bayer CropScience, Cargill, Challenger, Dow AgroSciences, ESN, Firestone Farm Tires, DuPont Pioneer, RCIS, SFP, Syngenta and Top Third Ag Marketing. Co-sponsors are Advance Trading, Integris, Michelin, Novozymes, Kennedy and Coe LLC, SoybeanPremiums.org and Water Street Solutions.
Did you miss the event or want to look at something a speaker showed? Many presentations from Top Producer Seminar are available online. Visit www.agweb.com/topproducer/top_producer_seminar.aspx or click on the QR code at right. For all coverage from Chicago, visit TopProducerSeminar.com.