November 08, 2016
Agriculture at the Crossroads
Dr. Dave Kohl – Professor Emeritus, Virginia Tech
While his contributions to Major League Baseball are too numerous to list, Lawrence Peter “Yogi” Berra may be best remembered for his phrases and sayings about baseball and life. One of Yogi’s quotes was, “When you come to a fork in the road, take it.” Well, the agriculture industry is at a fork in the road, or perhaps at a crossroad.
Today, farmers and ranchers face many challenging choices. They can turn and take the high road to profitability, keep driving straight to maintain the status quo, or choose to take the exit ramp. In agriculture, various short- and long-term economic forces and trends will drive business models for the next year, into the next decade and beyond. Voluntary or otherwise, producers will have to choose a road.
The first question for many producers is, “When are commodity prices going to rebound?” In fact, this question is foremost in many sectors connected to agriculture as well as in the numerous rural communities tied to the industry. The answer lies in the progress of four major areas: emerging nations, global monetary policies, the oil industry and future events.
Demand from the emerging nations was instrumental in the unprecedented intensity and duration of the recent commodity super cycle. From 2008 to 2013, many agricultural businesses ended up on the high road of profitability, regardless of management skills or business plan execution. While the growing demand in the emerging nations initially increased commodity prices, it ultimately increased fixed and variable costs throughout the industry. Of course, the old saying holds true: “High prices cure high prices.” Today, economic growth in the emerging nations, both in the short- and intermediate-term, is curtailed, which is a strong headwind for commodity prices and manufactured goods. However, back to the old saying: “Low prices will cure low prices too… eventually.”
Central Bank Switch
The U.S. Federal Reserve also played a critical role in the initial crossroads of agriculture. Using loose monetary policies to create wealth and prosperity, the U.S. Federal Reserve actions devalued the U.S. dollar to the benefit of exporting industries and emerging nations. For many in agriculture, this brought record profits along with complacency in management. Today, the U.S. Federal Reserve is reversing stimulus while other Central Banks around the world attempt to fuel growth by increasing stimulus. Of course, the result is an exceptionally strong U.S. dollar. Strength and duration of the dollar are major headwinds for agricultural profits. Yes, monetary policies in the U.S. and abroad are critical to balance sheet values of agriculture and rural America.
Following the money in agriculture often leads one to monitor oil prices more closely. Frequently, commodity prices and oil prices are in lockstep as many associate oil with everyday variable and operating costs. The oil industry is undeniably interconnected with commodity prices, economic behavior and volatility. Business owners and managers looking for the higher road of profitability need to keep the activity of the oil industry on their radar screen.
Looking ahead, a signpost at the crossroads may point to the high road and read “technology and innovation ahead.” Remember that innovation often trumps the latest gadgets and technological toys. In planning for the future, businesses must determine which technologies best fit their natural resources, human resources, consumers and end-users. As consumer markets continue to change, businesses must match those shifts with systematic adjustments and tweaks to stay on the high road to profitability and success.
For agriculture, the domestic and international consumer will present specific challenges, but also opportunities. Scrutiny on issues such as food safety, labeling requirements, regulations and production methods will intensify. In addition, markets will be fragmented by social media and newer forms of communication. Foresight for 2020 or perceptual acuity will be critical to the success of any producer and agribusiness. In other words, whether they manage a backyard operation or a large multi-entity farm business, producers must develop the ability to connect the dots and foresee changing trends in a world that is largely disconnected with agriculture.
The aforementioned economic trends, both short- and long-term, will accentuate a widening gap of profitability among agricultural businesses. Management acumen will be a premium skill that dictates one’s choice at the fork in the road. At a recent seminar, one young farmer and rancher asked, “Which decisions can I make to end up in the top 20 percent of profitability, versus the low percentage of profitability, or worse, the exit ramp?” Whether it is in family discussions, planning meetings or networking events, there are several points to ponder.
Businesses in the top 20 percent of profitability and even in the top half know their cost of production. This element is foundational to marketing plans, negotiations, resource allocations and prioritization. The high road of the sector will closely monitor costs and make critical adjustments before others. Businesses that maintain the status quo will continue to try to produce their way to profits, and hope for a home run in marketing. These same businesses will depend on their equity, such as land to cover management mistakes. Strategies of this type may work in the top part of the economic cycle but are quickly exposed as deficient management when the cycle wanes.
The most profitable businesses also follow distinct management practices. They take time to plan and strategize. However, more importantly they execute their plan, and then monitor the results. Achieving profits above 80 percent of the rest of the industry requires a systematic approach to management. Failure most often happens in the execution phase because it is easy to get caught up in momentary emotions rather than follow the strategized plan.
A choice to follow the high road often requires one to first stop. Pause to ask questions and seek directions from those who have been down the road before or perhaps chose another road. Whether it is setting goals, monitoring financials, marketing, managing risk, or transitioning the business, a pit stop along the way can add fuel and energy to the journey. Continuing education, a good team of advisors and re-energizing the business with the younger generation can provide the mental makeover that is critical on the high road of success.
Along the way, remember to stop long enough to enjoy the scenery. Especially in challenging times, have some fun! Engage with others on the same road because often, those around you help determine your direction. For others, the exit ramp can be a disguised blessing allowing time to think about options and life in general. At the end of the day, life is about choices. Surround yourself with positive energy and good resources so you can choose wisely in business and in life. As Yogi said, “You’ve got to be very careful if you don’t know where you are going, because you might not get there.”