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The Farm Economy: How to Respond to the Downturn

The Farm Economy: How to Respond to the Downturn. Michael Boehlje Senior Associate Centrec Consulting And Center for Commercial Agriculture Purdue University. The Business Climate: A Downturn. World Annual Domestic Growth Rate Growth 5.9% 1.0%

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The Farm Economy: How to Respond to the Downturn

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  1. The Farm Economy: How to Respond to the Downturn Michael Boehlje Senior Associate CentrecConsulting And Center for Commercial Agriculture Purdue University

  2. The Business Climate: A Downturn

  3. World Annual Domestic Growth Rate Growth 5.9% 1.0% 5.5% 2.0% 3.3% 1.0%

  4. Exports Are Critical • Agriculture is almost twice as dependent on trade as the overall U.S. economy • China remains the largest market for US ag exports – soybeans as well as animal proteins • But income growth is slowing down from 7-10% to expectations of 5-6% • Mexico and Canada are also big markets – NAFTA renegotiation may have an impact • New Administration rhetoric and position on trade (G-20 is latest example) presents challenges • Global economic growth and global trade access critical to agriculture

  5. Pork Profits Fuel Expansion. Chad Hart and Lee Schultz, Iowa State University Farm Outlook October 2017.

  6. The Public Sector Safety Net • ARC‐CO payments generally small in 2017 • ARC‐CO payments likely to decline or even disappear by 2019 • Federal government direct farm program payments forecasted to account for 20% of Net Farm income in 2017 – likely to decline as a percentage going forward • One year delay in receiving farm program payments • RP insurance guarantee reduced by almost 50% in 2016 compared to 2012

  7. Key Financial Vulnerabilities 1. Working capital (current assets less current liabilities) • Goal – 30% of gross revenue • Burn rate – reduction due to losses ($50 – 100 per acre) • First line of defense against financial stress

  8. 2. Cash shortages • Operating losses particularly for renters • Increased tax burdens • Capital expenditures?

  9. 3. Tight repayment capacity • Short repayment schedules on equipment/land loans • Reduced income/cash flow

  10. 4. Solvency – debt load • Generally still strong • Weakening for highly leveraged • Few defaults/bankruptcies

  11. How Do I Respond?

  12. The Fundamental Premise Be Best In Class!

  13. Elements of Best in Class 1. Intense Cost Control - efficiency/productivity is critical - know your cost components per unit sold 2. Margin Management - know your costs of production - know your margins -contribution margin – revenue above operating costs - profit margin - revenue above all costs - protect positive margins

  14. Elements of Best in Class 3. Execution - Use SOP’s (standard operating procedures) - Timely operations - Details, details, details

  15. Elements of Best in Class 4. Buying Right - Procurement mentality - Compare supplier offers - Use a bid sheet - Sets your cost structure - Don’t pay premiums for control - Consider repairing rather than replacing

  16. Elements of Best in Class 5. Managing Operating Risk - Technology performance – pest control, fertility effectiveness/loss, seed selection - Marketing/pricing of inputs and products - Government program and crop insurance participation - Casualty and liability insurance

  17. Elements of Best in Class 6. Debt/Capital Management - Maintain working capital - Sources of debt (dealer financing) - Buy vs. lease - Lengthen payment terms - Fix interest rates - Deleverage - Reduce capital expenditures - Don’t surprise your lender

  18. Elements of Best in Class 7. Simplification/Automation - Complexity creates confusion/errors/mistakes - Systemize work activities/processes - Adopt user-friendly automation technology (people make mistakes)

  19. Elements of Best in Class 8. Do Fewer Things Better - What is your hedge hog – what you do better than anyone else? - Focus and intensify - Outsource

  20. 9. Data Management - Collect efficiently - Aggregate but share carefully - Capture the insights - Think carefully – false signals, confirmation bias Elements of Best in Class

  21. Best In Class Is Not New Return to the basics Dust off the old playbook

  22. How Do We Win in Tough Times? -Resiliency • absorptive capacity • protect your position • “defense” -Agility • capture the upside • “offense”

  23. Long Term Agriculture Is a Growth Industry

  24. Animal Protein as a Share of Total Protein

  25. ClosingComments • Long-term demand for food, feed, fiber, and energy appears bullish • The productivity challenge is significant but we have the technologies to meet the demand • While long-term drivers are encouraging the path to the future will be volatile

  26. The Bottom Line You can’t accurately predict the future, so position for the challenges and opportunities.

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