Business Tools for Turbulent Times

By: Dr. David M. Kohl

It is not getting any easier to make a buck in farming. Rising input costs, volatility in prices, global trade issues, the value of the dollar, and issues with the domestic and global economy will divide the economic winners and losers in the next decade.

An individual producer cannot do much to shape macroeconomic and agricultural policy issues; however, one should not throw up their hands in frustration, but become an advocate for the industry. Producers have many opportunities to seize greater control of their destiny by using good old‐fashioned business planning. This starts by exploring why you are in business, where your business is now, and where you want it to go in the future. One must plan not only for the next two years, but also the next decade.

The future will present challenges and opportunities in the agricultural business environment. For example, 70 percent of American farmland will change hands by the year 2025 because of age demographics of the sector. The land ownership structure of agricultural businesses in the future will be much different than that of traditional farms, including rent and lease of land and other assets, and strategic alliances with major players in the industry. Many producers will control assets rather than owning them. This fact, along with the large capital investment involved in farming stresses the need for strategic business planning. Those with well thought‐out plans for success will be better able to communicate what they are thinking, planning, and anticipating. This forethought will allow them to present a more favorable case to lenders, accountants, and investors, and take advantage of opportunities as they arise.

Testing Scenarios

With the volatile economic times there will be much latitude for opportunity and success, but also failure. In these turbulent times, both beginning and established producers will need to test the agricultural business plan against “but what if” scenarios. This process is called scenario testing or economic game planning. Like a coach plots various scenarios before the game with a variety of outcomes, a business person should parallel this process.

Start with the operating budget and establish a broad set of assumptions, i.e. prices, costs, interest rates, currency exchange rates. Blend these scenarios together and come out with a most likely scenario. Then assign probabilities to several different scenarios, such as a 30 percent likelihood of an above average year, 60 percent chance of a reasonable year, and a 10 percent chance of a less than stellar year. The point here is to begin developing a strategy for what you would do in each situation. Finally, consult with your lender, accountant, production consultant, and business partner, who can bring a constructive, objective eye to the plan.

Business Planning Basics

As I travel across the country, many beginning producers inquire about the basics of business planning, which include choosing the most effective business model and selecting business partners. Choosing the best business model involves an assessment of individual abilities, resources, markets, etc. For some, it may be niche or value‐added markets including local, natural, and organic. To others, it may include the traditional model focusing on efficiency, but still being effective in balancing business, family, and personal lifestyle. Others may choose larger units with complex business models including enterprises outside of agriculture. Regardless of size and scope of the model, a sound business plan will not be an option, but a requirement for future success.

When people think about starting or transitioning a family business, there can be much initial excitement along with some apprehension. Recognizing partner material will be imperative in this process. Determining whether you need a business partner or employee who is a family member or someone outside of the family will be critical to the planning process. Do not assume a family member will be the most suitable partner. Sometimes your best draft pick is outside the family.

The bottom line is as an agricultural entrepreneur, you should seek partners and alliances that bring complementary strengths to the table. If your passion is production, consider a team member with strong financial, marketing, or operational skills. If you are a “big picture” idea person, you might want a detail‐oriented operations specialist. In the planning process, look for individuals to share the journey. The overall key is to choose partners who you can communicate with thru a shared vision, goals, objectives, and business plan outcomes.

Business planning is a tool for turbulent times that can put you a step ahead in business sustainability and the game of life.