Agriculture is a complex, multi-faceted industry affected by numerous influences producers cannot control.
The key to success, says Michael Swanson, economist and senior vice president, Wells Fargo Bank, is for farmers to be very good at managing things they can control.
He quipped during the recent Oklahoma State University Rural Economic Outlook Conference in Stillwater that the answer to ag economics questions is: “China.” Regardless of the question, he said, China’s influence in global trade has become the dominant force in agriculture.
He said trade with China is good for American agriculture, but predicting what the Chinese government will do is difficult. “China will look out for its own best interest.”
U.S. farmers, he said, must make certain they are competitive in the global market, even as competitors become more efficient and more productive. He said farmers in competing countries “are getting better at productivity.”
The top ten grain producing countries control 86 percent of the acreage and 90 percent of the production. “And no one punches harder than the United States is the grain world. The remaining 112 countries control 14 percent of the grain acreage and just 10 percent of production.”
Monetary policy, China trade and the biofuels policy all will play significant roles in the grain market,” Swanson said. “Regardless of [that] environment, you need to execute your plan.”
That plan means production efficiency, which makes a difference. “We see a huge gap in U.S. producers, a wide spread in farming performance.”
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He said gaps persist between the best and worst farmers. “Bottom performers,” are in the mix.
A key factor, he added, is to understand the value of land. “Landlords are paid by the acre; farmers are paid by the bushel. Getting more land does not necessarily mean making more money. Farm ground is worth money because it produces income.”
He said marketing expertise does not produce a “competitive advantage,” for farmers. “You can fail on [marketing] but you can’t outperform on it.”
Production cost, on the other hand, does provide a competitive advantage. “Agronomic skills vary,” among farmers, Swanson said. “Asset discipline matters, too. Farmers may place too much emphasis on land investment. An equalization of return on investment does matter.”
Swanson says some farmers are very good at agronomic skills and capitalizing on investments. He points out that within the same environment different farmers produce widely different results. “Over the last decade everyone has done better, but the good ones have done much better than the mediocre,” and those have done much better than the least successful. He said the difference between the top and middle levels is a 5 percent to 15 percent greater return over total assets.
He offers three “accurate but not precise” principles. “No one is a better marketer. Some are much better producers. There is no wealth without income.”
The fallacy of the market he said is that “you can’t ‘out market’ the market.” The deck is stacked against producers who have to pay trading fees and “are outside the information loop.” Professional traders get information first and act on it before producers know about it.
Also, producers have a “built-in bias. You are not an expert because you grow it and you want it to go up and only up,” Swanson said. “Traders don’t care if it goes up or down. They just want to market to move.”
He said managing cash basis does offer a competitive advantage for producers.
He also contends that farmers can “out-produce the market. Agronomic skills are the only true economies of scale. Farmers manage complexity,” he said, “in an industry that “is constantly changing. Knowledge is the key and is important in an economy of scale. If a farmer is smart about managing 100 acres, he’s smart about managing 200.”
Change and adapt
Asset discipline also makes a difference. Managing assets is a simple concept, he said, but it’s not easy to do. “Opportunities change with prices and some producers are better at accepting and adapting to change.”
He said all assets are not equal in importance. It is best to determine where the best management pays off. “Producers don’t necessarily need ‘more’ land; they need the ‘right’ land.”
Swanson pointed to a study that shows Minnesota cash rent corn production return differential between a high and a low profit range. “We saw more than a $3 per bushel cost of production difference. That has a huge impact on profit.”
He said 2012 was “the best year ever,” for south Central Minn., corn producers. He asked: “How did you earn $250,000 in 2012?”
The top producers, with a per bushel profit margin of $2.76, needed 90,580 bushels to earn $250,000 with 193 bushels per acre. Acreage required was 469.
Average producers posted a $1.72 per bushel margin and needed to make 145,349 bushels to hit the mark. With a yield of 175 bushels per acre, average producers needed 831 acres.
The bottom 20 percent, with a profit margin of 87 cents per bushel, had to make 287,356 bushels and average 157 bushels per acre on, 1,830 acres to make the goal.
“Productivity is the key,” Swanson said.
In 2013, the task was harder. The top 20 percent had a profit margin of only 62 cents per bushel, needed to make 403,000 bushels with an average yield of 184 bushels per acre from 2,191 acres. Average and the bottom 20 percent could not make enough corn to earn a profit. Both had negative profit margins per bushel with 171 and 157 bushels per acre, respectively.
Know the field
Swanson said producers have to know their fields and what goes on in the fields. “Proven yields are distributed throughout the fields and include above average and below average areas. If a field is losing money, what do you do?” Possibilities include not farming those fields or investing in them to bring productivity up.
He said knowing cost of production is critical. Yield maps are also helpful in locating those weak areas and identifying the “good and bad acres.” He showed test results that indicated a significant advantage of “heavy investment” in a bad field to bring the average up and the per bushel cost down.
It’s important, he said, to “do all the math,” to determine whether to plant or not or invest money to improve the acreage. “You can do just about anything, but can you do it economically? That’s the big question.”
Swanson said the land market is flawed “because people are flawed. Fight against overstating the economies of scale [with land]; short-term costing on long-term assets; and assuming ‘it’s never coming up for sale again.’
“It’s about bushels not acres. Your success is average cost, and average depends on marginal. Adopt and adapt is a learning process.”
Finally, he asked producers: “Does your system focus on what is controllable?”