Audio Transcript:

Brady Brewer: Hi, and welcome to the Purdue Commercial AgCast, the Purdue University Center for Commercial Agriculture’s podcast featuring farm management news and information. I’m your host, Brady Brewer, and joining me today is Dr. Michael Langemeyer, who’s a professor in the Department of Agricultural Economics here at Purdue University and is the Associate Director for the Center for Commercial Agriculture. And also joining us is Margaret Lippsmeyer, who’s a graduate student in agricultural economics here at Purdue University.

Before we get into today’s topic, I want to remind all the listeners, you can find the podcast on the Center for Commercial Agriculture’s website at purdue.edu /commercialag, or any of your major podcast providers. Today is a follow up to the 2024 Top Farmer Conference that was held here in West Lafayette, where both Michael and Margaret we’re presenters at the conference speaking on the topic of farm agility. I want to first welcome Margaret to the podcast. Margaret, since it’s the first time, do you want to introduce yourself to the listeners?

Margaret Lippsmeyer: Hi Brady. Thanks a bunch for having me here today. I am a second year master’s student here in the Ag Econ department at Purdue. And originally, I’m from out in Oregon. I grew up on a farm, raised livestock, was involved in 4-H, FFA, all that sort of stuff when I was younger. I worked on a grass seed farm for about four years and then worked at USDA Farm Service Agency doing farm loans before coming to Purdue.

Brady Brewer: Well, welcome, and we are glad to have you. Michael, I’ll pose the first question to you. Your talk was all about farm agility. Tell us a little bit about the project and why this was needed.

Michael Langemeier: Yeah, it was essentially what we’re trying to do is we’re trying to encourage people to think about strategic risk. Let’s define what we mean by strategic risk before we go any further here.

Essentially, strategic risk is associated with being out of competitive position. Many times firms will decide whether they want to be a low cost producer or where they want to be value added producer, whether they want to focus on a a particular set of customers, those would be examples of competitive positions. And so that’s essentially what we’re talking about. What kind of things would drive you out of competitive position, make you rethink what you’re currently doing in terms of your competitive position? And this is related to what we call strategic risk. What do these come from? Government policy changes could be a strategic risk. Changes in consumer preferences. For example, as consumers pay more for attributes or more willing to pay for, for attributes of vegetables, for example, that might change your strategy. Maybe you try to have a more value added strategy to try to capture the fact that consumer preferences are changing.

Obviously, weather patterns would also be a strategic risk. If the weather today is not the same as it was 30 years ago, which a lot of people don’t think it is, then that’s a strategic risk. Do you need to change your rotation? Do you need to change how you produce the crops on your farm in terms of this changing weather patterns?

The other big one here that’s huge is the technological revolution that we’re currently going through. How are farms going to use robotics? How are farms going to use artificial intelligence? All of that, those technologies are going to be very applicable to agriculture because production agriculture is very capital intensive. There’s a lot of things out there that could make you change how competitive your firm really is and maybe even change strategies.

Brady Brewer: Yeah, a lot options available. One of the key questions on your survey was about farm agility. What do we mean when we say farm agility?

Michael Langemeier: When we talk about strategic risk, if you look at the literature, and, and, uh, Margaret can talk a little bit more about this because she’s done more extensive literature review than I have. You typically have two major buckets in terms of how you think about strategic risk.

One is called agility. A farm’s ability to identify and capture business opportunities. And so paying attention to what’s going on in the environment, like I said, if consumer preferences are changing and that’s going to impact what you produce, you know, maybe you respond to that in some fashion. So that’s agility.

The other major one is called absorption capacity. And really what that talks about is what is our ability to withstand shocks? Brady, you and I talk a lot about liquidity and solvency on this podcast and also in publication. That’s essentially what you’re talking about. One of the things you can look at in terms of absorption capacity is, do I have a strong balance sheet? If the answer is yes. You’re going to be able to stand shocks much better than if you have high leverage, low liquidity, or both. Those are the two, uh, major things that we look at. Agility and absorption capacity.

Brady Brewer: Yeah. So agility would be a farm responding to increased demand for organics and saying, hey, we want to take advantage of this and making the strategic moves to take advantage of it.

And then absorption, I’m actually going to take us out of ag for a while, because I actually teach this in some of the finance stuff I do. It’s a little bit different concept in what I teach, but absorption is, as you said, the ability to absorb a shock to the system. We teach it more as the ability to cover fixed costs, which is the exact same thing, right? So if something unexpected were to happen, I know car dealerships actually use absorption as a measure of if we don’t sell a car, do we from a less risky revenue stream, such as repairs and maintenance that they provide, can they stay viable as a business and that’s what they call absorption. So slightly different concept, the same motive here. It’s the ability to absorb a shock.

That was kind of the overall of the research project. So you did a survey. Who did you survey?

Michael Langemeier: We’ve done several surveys here. Last April, April 2023, we did a survey of 400 U.S. producers very much styled after the Ag Economy Barometer, where we asked questions that related to producer sentiment, but in addition, we also asked some questions specifically related to agility, absorption capacity, management practices, adoption of certain technologies, farm growth – a lot of variables that might be related to strategic risk. That was the whole idea, is to find out the relationship between some of these other key resources in the firm, key practices that the farm might currently have adopted, and to see if that’s related to strategic risk.

Brady Brewer: Margaret, I’ll pose the next question to you. What were some of the takeaways from that April 2023 survey that you guys did?

Margaret Lippsmeyer: I’d say the biggest takeaways were the positive relationships that we saw within the data set. So when we looked at resilience, and the metrics for resilience, we found that farm growth, producer sentiment, and risk preference all had a positive relationship with a farm’s resilience level. And then on top of that managerial ability and use of production ag technologies like drones, yield monitors and other items also showed positive relationships.

Brady Brewer: So farm growth is positively correlated with resiliency. Does that mean that a farmer should go and buy more land they want to be more resilient?

Margaret Lippsmeyer: No, I wouldn’t say that would be the case. Just in general, the farms that farm more acres, generally are more resilient, more easily able to bounce back after some sort of external shock in the market.

Michael Langemeier: Another thing to think about there is there’s a tendency for farms that are good at one aspect of the business to be good at several aspects of the business. And so farms that adopted more of the management practices, written leases for example, but also had some of these resilient characteristics. We’re better managers, if you will. Therefore, they could grow. I think that’s not causation, but I think that’s the way the relationship really works, is I’m pretty good at this. Because I’m pretty good as a manager, I can grow my business.

Brady Brewer: Yeah. And I’m sure there’s a lot of other things in there

Michael Langemeier: And we have remember if you’re not resilient, you probably also, even though we didn’t specifically ask this, we kind of hinted at it in the survey, if you’re not resilient, you’re probably not thinking very much about your strategy either. And if you’re not thinking about your strategy, you’re probably not growing.

Brady Brewer: You mentioned the managerial capabilities plays into that as well. I would also suspect that larger farms tend to be more diversified. So therefore, if you think about a particular commodity not doing well, they may have other commodities, other productions at that farm that has that’s able to make that farm have a higher absorption factor that you talked about earlier to make them more resilient.

You also did a survey to the participants of the 2024 Top Farmer Conference. Compare and contrast the April survey to the participants results that you just got from the 2024 Top Farmer Conference.

Margaret Lippsmeyer: Sure, the main score that we use is our resilience score, so estimating how resilient farms are to strategic risks if they were to occur. In this most recent survey, we found that only 17 percent of the individuals at the Top Farmer Conference had low resilience to strategic risk. So they’re really sitting in a pretty good spot. Compared to the nationwide survey that we did in April of 2023, all these numbers are about the same with low, medium, and high resilience levels. There were no statistically significant differences between Top Farmers and between the nationwide survey.

Michael Langemeier: There was a difference between the producer sediment. In fact, it was quite different.

Margaret Lippsmeyer: Yeah, so we compared the Top Farmer Conference not to the April 2023 survey, but to our most recent Ag Economy Barometer Survey, which was December of 2023. In that we saw significantly, more optimistic responses from producers at the Top Farmer Conference. Their scores were 139 compared to 114 for the Ag Economy Barometer Index for December. In particular, their Index of Current Conditions was astronomically higher. They had a score of 191 compared to the nationwide survey which individuals scored of 112. That shows that producers at the Top Farmer Conference were much more optimistic about current conditions.

Brady Brewer: A survey that’s happened at the same time, you see two different audiences respond pretty differently. Do we have any insight into maybe why the producer sentiment for the participants of Top Farmer were a little bit more optimistic?

Michael Langemeier: I would point to a couple things perhaps. Even though we don’t have precise survey data to back this up, I would think those that are at the Top Farmer Conference tend to be larger farms. If you’re a larger farm you also have a tendency to want to grow. The percentage that we’re going to reduce farm size in the Top Farmer audience is really low compared to what we typically get on our our 400 U.S. producers, when we do the Ag Economy Barometer. And so that tells me were really looking at people that are mid to large farms that were growing. They’re probably going to be more optimistic than someone that’s thinking about reducing their farm size or can’t grow for whatever reason. They’re not able to grow. I think that’s a big part of it.

One of the things, we’ve talked about this before, Brady, on the podcast, but also it just in person, it never ceases to amaze me that given the same fundamentals that everybody has when they fill out this Ag Economy Barometer index, that the sentiment is so different. You get people that are very pessimistic. We even had a few of those at the top farmer that were quite pessimistic compared to really optimistic. That’s just amazing. I think that’s probably would be consistent with the Consumer Sentiment Index at the University of Michigan. Sentiment is not the same across people and the variability of sentiment, even though it’s higher for the top farmer group, is just as large as it was in the December survey. That just never ceases to amaze me that we see all these differences in sentiment.

Brady Brewer: If you look at the University of Michigan Consumer Sentiment Survey, that’s a broader survey. They survey thousands of people, but they certainly do get a broad range of opinions, and now they’re asking more macroeconomic stuff. What is interest rates doing? What is consumer spending doing? Labor force participation doing? But there’s people that completely disagree. So it doesn’t surprise me that there is disagreement in some of these producer sentiment surveys.

Michael Langemeier: And I thought the variability the Top Farmer group would be a little bit less because it’s more of a homogeneous group.

When we survey the 400 U.S. producers, there’s cotton producers, there’s rice producers, there’s corn producers, soybean producers, wheat producers, beef producers. You get the idea, there’s a lot of different people involved there, and all those enterprises aren’t doing the same. Hog industry had an awful year in 2023. The beef industry had one of their better years in 2023. I thought well that’s maybe helping explain this sentiment. No. Even if a fairly homogeneous group like the Top Farmer producer group, you still see a quite a bit of variability in producer sediment.

Brady Brewer: Yep. I do want to go back to your reasoning for the differences between the December Ag Economy Barometer and the survey results you got from the top producer group. And that really ties in with your results, right? The larger farmers are more resilient, so therefore they’re going to be a little bit more optimistic about the current economic conditions. I want to hone in on one particular data point just because this is something that I pay a lot of attention to.

First I want to ask a clarifying question to both of you. When you’re asking the farmer not resilient versus resilient, is this a self classification or did you guys classify if they’re resilient versus not resilient?

Margaret Lippsmeyer: We actually do the classification to decide what group they fall into. We use six different questions on agility and absorption capacity. So three on agility. Three on absorption capacity. To gauge how resilient the farm enterprise is. We ask questions on if the producer has low per unit fixed costs, how strong their balance sheets are, farm diversification, if they’ve got established goals, objectives, core values, and then if they look at opportunities that new and emerging enterprises provide. Across all of those different metrics, really we didn’t see a difference between the 2023 nationwide survey and producers at Top Farmer. Except on two of the metrics. So producers at Top Farmer had significantly stronger balance sheets than those from the nationwide survey, and then they were significantly less diversified compared to those on a nationwide scale.

Brady Brewer: In your survey results, you said about 17 percent of the farmers were classified as not resilient. That strikes me as really important because one of the things I follow is the non performing loans. I do a lot of work with ag banks here across the Midwest. And when I think of a farm being not resilient, I think of not being able to pay your bills. Non performing loans are at historical lows right now, below 2%. In some cases here in the recent past, they’ve been below 1%. So what’s your metric shows is that the non performing loans that gets reported from the banking sector doesn’t tell the whole story. That there’s some farms out there that when you look at the strength of their balance sheet and other metrics, risk metrics, that go into determining their resiliency, that there’s another, 10, 15 percent of farms that may explain why we see some of the producer sentiment results we do, because there’s some factors of their farm that may indicate that they’re a little bit riskier than just the banking data shows.

Michael Langemeier: I spent a lot of time looking at financial performance measures among farms and one of the things that’s very obvious is there’s a group of farms that react very well to shocks. And I think that’s what we’re picking up here. There’s a group that are very resilient. They’re paying attention all the time and responding to what’s going on in the environment. Kind of a proactive group, if you will. And unfortunately, there’s a group that is more reactive. And I think it’s the reactive group that in trouble sometimes because when they get thrown a curveball. I do a baseball analogy. I was a pitcher and was pretty good at throwing fastballs. But as a hitter, I was terrible at hitting curveballs. But if these people that are reactionary get curveball or knuckleball, they have trouble with it. And I think that’s what we’re picking up here in this survey is that proactive versus reactive. And what we’re trying to do with this strategic risk education is to try to get more people to be proactive and really think about their strategy and think about how their strategy might change as we get these big shocks.

Brady Brewer: It sounds like the ultimate goal is to make that 17 percent a little bit lower.

Michael Langemeier: To get that 17 percent down to zero.

Brady Brewer: Yep. I’m sure everyone, including the farmers involved, would be happy about

Michael Langemeier: It’s a win win.

Brady Brewer: You mentioned being proactive. Is there anything else that farmers can do? If you’re sitting there, and yes you didn’t take the survey, but you’re saying, okay, I think I would fit in that 17 percent group, the farmers that were classified as not resilient. What, can a farmer do to become more resilient in their farming operation?

Michael Langemeier: I’ll mention a couple things, if you don’t have a strategic plan, I’m not about a 40 page document here, okay? But if you haven’t thought about your strategy, and particularly if you have more than one person on the farm, you need to do that. I think that’s one of the number one things that we’re picking up here. Part of that strategic plan is the transition plan. You know, how am I going to phase out of this business if I don’t have someone coming back to it? And if I have somebody coming into this business, how am I going to phase that person in? That’s part of the strategic plan. And those are a couple of things that I think that would benefit everybody is if they have those two things.

Margaret Lippsmeyer: Yeah, and I’d say going along with that, when we think about resilience, it goes back to agility and absorption capacity. So looking at how farms can improve those two metrics, having established core values, goals and objectives for your farm. So really going through, spending the time to write these down and try to follow along with these goals as you move through your operation.

Another one was regularly assessing advantages and disadvantages compared to other farms. And I think producers can easily do that. It’s just a matter of setting aside time to really look at where their farm excels and where they might have deficiencies.

Michael Langemeier: In particular, this is a topic that we talk quite a bit the Farm Tour, particularly if there’s more than one person on farm, is something as simple as having regular meetings. Not to argue with one another, though there could be some arguing going on about the direction of business, but to talk about the direction of the business and not just the tactical, the day to day, you know, what is, Jane gonna do versus Michael? Versus Margaret versus, Brady. That’s really important. Don’t get me wrong. But also, talk about these shocks. Well, we see something coming down the pike here. How should we respond or do we need to respond to this change that might be coming down the pike? I just encourage communication. I think that’s really helpful in a family business. Family businesses, particularly small family businesses, have a real advantage if they get along because they can move quickly in response to a change. Think about big public corporation and you got a board, you have a CEO and all these people that have to agree on a direction. It takes longer for these big public companies to move. But that advantage goes away if there’s not good communication with the family members, if they don’t meet in a fairly frequent basis and talk about tactical and strategic plans.

Brady Brewer: Yeah, I know in all of the podcasts we did around farm transitioning planning, it seemed like everyone came back to this could be thwarted if you have good communication. I think the same goes here for setting good strategy for your farm. Good communication goes a long way. Even if you don’t have the perfect strategy set in place, communication can help make your farm more agile to respond to some of the events, or shocks as you put them, that they may encounter.

That has been a recap of the 2024 Top Farmer Conference where Michael and Margaret presented on farm resiliency, strategic risk and agility. I just want to remind all the listeners for more farm management news and economic information, please visit us at the Purdue Center for Commercial Agriculture’s website at purdue.edu /commercialag. You can also find us on Twitter with the handle @PUCommercialAg. On behalf of the Center for Commercial Agriculture here at Purdue University, we thank you for listening.