When ag economist David Kohl talks, many farmers listen. So when he says that the 2020s will be marked by lots of uncertainty, it’s good to at least hear what he has to say.
“Manage the controllables and manage around the uncontrollables. We can’t determine what’s going to happen in Washington, or what’s going to happen in Berlin or Beijing,” he said during a webinar on business and financial management for young farmers.
Young farmers are a growing segment of agriculture, he said. In fact, one of the fastest-growing trends he sees is young people with non-ag backgrounds entering the business. Many of these aspiring farmers have lots of energy and lots of great ideas, but neither translate into a successful business unless there’s a plan.
“The business plan is critical. Even just a five-page business plan. If you’re going into niche markets find your market. Be one, two, three products ahead of the competition. This is critical. And have a good lender,” he said.
Decade of transition
It’s been a wild first two years of the decade, and for the younger farmers taking over farms, Kohl sees more volatility and extremes coming.
“You have to be able to adapt and innovate. Think outside the box, but focus and follow through, follow the process,” he said.
This will be a decade of management transition as baby boomers retire and the next generation takes over. Transition plans will be critical, he said. In a recent face-to-face meeting he had with incoming farm owners, he said that their biggest concern was that there was no transparency in the transition plan.
Dairy is coming off a fairly good year, he said, “but it might be analogous to an athlete on steroids due to monetary policy worldwide, government checks, China increasing its protein complex and those sorts of things.”
These supports won’t continue, he said, so it will take farm managers with “good business IQ” to manage through what will inevitably be a downturn at some point.
‘Fueling the Phoenix’
There’s always things to look out for in the business of agriculture. Kohl sees these as opportunities as much as things to look out for.
When it comes to global economics and trade, “be careful of betting your farm on trade with China,” he said. “Don’t put all your eggs in one basket.”
Other disruptors he sees include:
- new standards for environmental and social demands
- consumer trends and where they’re going
- alternatives to traditional foods, especially dairy and meat
- ability of farmers to adapt new technologies and bioengineering
The move from fossil fuels to “green” is moving too fast, Kohl thinks. This is something producers should keep a close eye on and plan for since 80% of farm expenses are linked in some fashion to energy.
Labor issues, extreme weather and black swans like the COVID-19 pandemic are also things to look out for. “All these are disruptors that really influence our business strategy,” he said.
So what do the most successful farm business managers do? No. 1, they focus a lot on marketing and risk management, and operate efficiently. “Every line counts on those financial statements,” he said. “It’s not about bigger; it’s focusing on the margin.”
The 7 P’s
To “fuel the Phoenix” in a business, as Kohl describes it, producers should remember the seven Ps:
1. Plan. This is about managing those controllables and managing around the uncontrollables. For young farmers, especially, Kohl said a team of advisers can help.
2. Projections. Cash flow is 80% of the business plan, Kohl said, and it’s a good idea to overestimate money and time by at least 25% because of inflation.
3. Pivot. Having working capital and the ability to get cash quickly is crucial, he said. Also, it’s a good idea to have at least four to eight months of household expenses in cash in the bank.
4. Profitability. Kohl’s 60-30-10 profit plan focuses on 60% operating efficiency and growth, 30% for building working capital, and 10% for enjoying yourself.
5. Pathway. This is about retirement and ensuring that 50% of retirement income comes from outside investments. You should have separate personal and business budgets, and ensure at least 5% of income is invested outside the business.
6. People. Get the right people on the bus and “kick the bad ones out,” as he describes. And even though family will always be family, they should also be held accountable for their part on the farm.
“Sometimes we have some family members, they draw a manager’s salary, and you have to remember that everybody counts in the business,” he said. “Remember, role players win championships. Never forget those front-line people, those role players.”
7. Prioritize. There is life outside of farming, and this something each farm owner should remember, he said.
Having a good balance work-life balance is key. Kohl recommends producers don’t work more than 2,500 hours a year — about 48 hours a week — to focus on family and mental health.