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

2. The Business Climate: A Downturn

8. World Annual Domestic
Growth Rate Growth
5.9% %
5.5% %
3.3% %

10. 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

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

21. 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 – likely to decline as a percentage going forward
One year delay in receiving farm program payments
RP insurance guarantee reduced by almost 50% in compared to 2012

24. 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

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

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

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

28. How Do I Respond?

29. The Fundamental Premise
Be Best In Class!

30. 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

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

32. 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

33. 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

34. 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

35. 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)

36. 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

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

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

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

40. Long Term Agriculture Is a Growth Industry

41. Animal Protein as a Share of Total Protein

42. Changing Business Climate: What to Watch - AgStar Dec. 2013
Closing Comments
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

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