After seven years of an extended economic downturn with tight margins causing the erosion of profits and cash flow, agricultural producers are heading in three different economic directions. As we enter the new decade of agriculture, these three directions are termed the three R’s.
Dr. Jason Henderson, Sr. Associate Dean and Director of Purdue Extension, and Nathan Kauffman, of the Federal Reserve Bank of Kansas City, both indicated at a recent American Bankers Association’s Agricultural Bankers Conference in Dallas that this decade could develop into an economic plateau similar to the 1990s. Of course, the 1990s was characterized by lower net incomes with a greater share of profits resulting from government support payments. In that light, they indicated that agricultural producers are generally going in three directions called the three R’s.
The first group is repositioning. They are paying attention to line by line cost management. They are very selective about making capital investments that result in profits on the bottom line. Producers who are repositioning are very good negotiators and pay particular attention to cost and expense management. On the other side of the equation, they are also very good marketers and risk managers who utilize the tools of proactive management. This group is very innovative in developing new sources of revenue both inside and outside the business. This provides a diversified stream of income that capitalizes on their resources and management skills.
The next group is regressing. This group has a strong balance sheet, particularly in land equity, which provides options to restructure losses on to term debt. This segment is holding out for the next big surge in commodity prices or market opportunities. The issue comes when the next generation attempts to operate like the existing generation, which creates challenges in transition management.
The third segment of producers is retiring or phasing out. Expect retirements to accelerate in the next two to five years as producers in this group attempt to preserve wealth and move into their “golden years.” This may result in rapid consolidation of farms and ranches as those who are repositioning incrementally grow their business from this segment.
Each of these producer segments will be monitored very closely by agricultural lenders and agribusiness suppliers. As the economic cycle continues, how big will these segments become?
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The opinions of Dr. David Kohl are not necessarily those of Farm Progress.