Aug 6, 2018

Ag Experts Say Sound Ag Management Is Crucial Amid Uncertainties

Concern over a trade war with China and the depressed state of the agricultural economy drove farmers and others in agribusiness to Bell Bank’s annual ag symposium in record numbers.

They learned that NAFTA – the North American Free Trade Agreement – could be an even bigger issue with a larger long-term impact than China.

Canada is the United States’ top trading partner, and Mexico is No. 3. Together they are bigger than the whole Asian region, remarked Dr. David Kohl, one of the nation’s leading experts on ag economics and the event’s keynote speaker.

“We’ve got to watch NAFTA because it’s critical to our pocketbooks,” David said. “This type of environment makes people look at alternatives.”

He also cautioned those in ag to keep a close eye on China’s Belt and Road Initiative (also called the Silk Road Economic Belt), a strategy to boost trade and economic growth by investing in infrastructure to connect 60 percent of the world’s population.

“This is long-term competitive pressure,” David warned. “China was the world’s leading economic power for 600 years. Guess what? They want it back.”

‘Better Before Bigger’

To deal with the uncertainty, both David and Lynn Paulson, Bell’s director of agribusiness development, told producers they need to manage around the uncontrollables.

“Get better before you get bigger,” Lynn advised. “The low-hanging fruit has been picked. It’s about doing a lot of little things better.”

Lynn questioned how long farmers can produce their way out of lower prices. Farmers often measure success by how big a crop they can grow. Instead, Lynn said they should focus on how much it costs to produce. Farmers need to put the same level of proficiency they put into production into financials, planning and marketing.

Producers’ financials are improving, but Lynn commented that they need to get even better. He also noted that bankers are looking more at the quality of working capital. They’d like to see more of it in cash.

“Bankers want to be paid back with cash, not the sale of assets,” Lynn remarked. “Future financial statements will be built more on profits than asset appreciation.”

That’s a point David wholeheartedly agreed with.

“When you do not have cash, you give up your moves and your strategy,” he noted. “I can’t stress enough the importance of being a good manager.”

Half of producers are refinancing due to family living costs, David commented. People are living outside of their means and health costs are putting a lot of farm businesses and small businesses in jeopardy.

“What I am really watching for this winter is how many producers are committed to improvement and how many are just burning through equity,” he remarked. 

‘Navigating the Headwinds’

We’re in a transition period in agriculture that’s placing a lot of pressure on economics, David said, adding that agriculture tends to lead the general economy into a recession. In addition to low prices and trade concerns, hog farmers are getting hit (and grain farmers need a healthy livestock sector), and interest rates are expected to continue rising.

“Higher interest rates usually mean a stronger dollar, which inhibits exports,” he noted.

A period of transition means it’s also a good time for producers to reassess their operations, figure out what motivates them to keep going, and put their goals, plans and financials in writing.

“Long-term agricultural tail winds are firmly in place,” Lynn said. “Now it’s about navigating the headwinds.”

To navigate those headwinds, the most successful producers:

  • Know their cost of production

  • Don’t see themselves as victims

  • Have a backup plan

  • Get better before they get bigger

  • Learn as much as possible

  • Keep in touch with their banker

  • Pay attention to consumer demand

  • See challenges as opportunities

“For the young producers sticking it out, the lessons you’re learning today will help you become phenomenal producers later on,” Lynn remarked.  

The key, both speakers said, is to go into an operation knowing and understanding the financials.

“I’m optimistic about the future of agriculture because young farmers have that business IQ,” David commented. “Complacency kills. Business management practices are very, very important.”