March 6, 2024

Positioning Your Farm for Long-Term Success | Commodity Classic 2024

The list of risks U.S. farmers face is long, ranging from market volatility and supply chain disruptions to erratic weather. Preparing for it all can be overwhelming and seem impossible at times. Being successful in the long run requires sorting out risks and developing strategies to manage and mitigate them.

Purdue ag economists James Mintert, Michael Langemeier, & Brady Brewer shared ways in which successful farms manage strategic risks live from Houston, Texas at the 2024 Commodity Classic Learning Center Session on February 29, 2024. The discussion featured clear-cut ideas on how to better manage strategic risks, making your operation more resilient and better positioned for long-term success.

Video Markers:

00:00 Intro
01:50 What is Strategic Risk?
09:06 Managerial Levers a Producer Can Pull
15:00 Output Price (Marketing) Lever
19:27 Yield & Production (Diversification) Lever
24:27 (Fixed) Costs Lever
34:03 Asset (Balance Sheet) Lever
40:26 People Lever

Audio Transcript:

James Mintert: Good afternoon everybody. Oh, come on. Come on. Good afternoon, everybody. One more time. Alright, super. My name is Jim Mintert. I’m the director of the Purdue Center for Commercial Agriculture and also a professor of ag economics. And I want to introduce my colleagues. Dr. Brady Brewer, who’s also a professor of ag economics at Purdue, and my colleague, Dr. Michael Langemeyer, who’s also a professor of ag economics and the associate director of the Center.

So we’re going to spend a little bit of time this afternoon talking about our topic, which is positioning your farm for long term success. And during the course of the afternoon, you’ll have an opportunity to answer some questions that will allow us to make some comparisons between what you think and versus what we found in a national survey.

So the QR code at the bottom there, if you’d pull out your phone, this is one of those rare sessions where I’m going to ask you to use your phone. Pull out your phone, shoot that QR code, and that’ll take you to the survey and give you a chance to respond to questions. And so I’m, I’m going to pause for a little bit and let you do that, kind of get you up to speed. And then there’ll be several points during the session we’ll ask you to, to give a quick response to a question.

So. With that, I’m going to turn it to Brady to kind of kick

Brady Brewer: this off a little bit. Yeah, so gone are the days that university professors tell students to put your phone away. Now we tell you to take your phone out, uh, as an interactive tool. So you can scan the QR code, or if you notice at the top, you can say, uh, go to minty. com. And then you can type in that code and that’s going to stay up there throughout so if you have connection issues. But uh, it should just be blank right now and when we get to the questions it’ll automatically pop up on your screen.


[00:01:50] What is Strategic Risk?

Brady Brewer: So as Jim said, we’re going to be talking to you about positioning your farm for long term success. And really what we want to think about is how do you manage through strategic risks that your farm is going to face. I’m going to turn over to my colleague Dr. Michael Langemeier to kind of set up what is a strategic risk.

Michael Langemeier: Essentially what we’re talking about here is the risk of being out of position. Many farms have a competitive position strategy either to be a low cost producer or a value added producer or something like that. And things happen. Uh, and, and things like government policy changes, geopolitical conflicts, disease, uh, change the consumer, uh, preferences, changing weather patterns, all this stuff happens. And does it cause you, uh, cause you to lose your, your, your competitive position? Do you fall behind, uh, others in the industry that may be reacting, uh, more appropriately, uh, to changes? And so we’re trying to, we’re trying to look at the in, internal resources and capabilities that we have and trying to respond to external forces.

Brady Brewer: Now, Michael, there’s several different ways we can think about a farm responding to strategic risk though, right?

Michael Langemeier: Yes, uh, there’s two, two major buckets here, if you will, or strategies, things to think about. I’m going to start with the bottom one. Absorption capacity. This is a farm’s ability to withstand shocks from strategic risk. And so do you have a strong balance sheet? We’re going to be talking about that a little bit, a little bit later. Do you have a strong balance sheet so that we have Uh, two, three years here of relatively low net returns, you can weather the storm. Uh, what if there’s a big shock, uh, to consumer demand or something like that? Uh, do you have a, do you have a strong enough balance sheet, uh, to weather the storm? So that’s kind of the absorption capacity.

There’s another side to, to strategic risk that’s more on the upside. Does your farm have the ability to quickly identify and capture business opportunities as they arise? Are you in position to rent that additional 160 acres that may be coming up for rent in the next year? Are you in position to buy that 160 acres that may be coming up for sale in the near future? And so you want to talk about strategic risk both from just being able to weather the storm but also responding quickly to opportunities.

Brady Brewer: So Michael has told us some of the ways, or what a strategic risk is, now we’re to the first interactive portion of the session. So I’m going to throw the QR code up again, if you haven’t scanned it, if you already scanned it, no need to do it again. But the first thing we’re going to ask you is what is the strategic risk you’re most concerned about for your farm? So we’re just going to go ahead and throw that up, and if you have multiple, it’ll allow you to enter three of them. Uh, so we just want to know, what are the strategic risks that concerns you most on your farm?

And while you guys are putting that in there, I do want to say, uh, the application that we’re using, uh, if you have questions, you are also have the opportunity to ask us questions in the chat, and they’ll come right up here to us, then we can answer them, uh, either at that moment or depending on timing at the end of the session. So feel free to ask us questions in this application as well. Uh, we will also hopefully have time for a Q& A at the end. Um, and there is a microphone there in the middle. So, as, as you see as you are entering, these are the strategic risks that people are entering and you can enter up to three, uh, different options if there’s multiple risks that you are concerned about for your farm.

So, Jim, I’m just going to pitch this first one to you as people are still entering. Uh, commodity prices comes to the top with this group. Does that surprise you?

James Mintert: No, it doesn’t. Especially given what’s happened to commodity prices these last couple of months. We’ve been experiencing a difficult time in both corn and soybean prices and even wheat prices as well.

So you see, think about commodity prices. One of the things you want to think about is what are you doing to manage commodity prices? What are you doing with respect to things like developing a marketing plan? Um, have you evaluated your performance from a marketing standpoint relative to peers? There’s lots of ways to do that.

One way would be to think about how your prices receive, for example, for corn and soybeans compared to national average prices published by USDA. That’s a starting point. You could also look at how your prices that you received on a net basis over the course of a year or for a crop year from your farm relative to some of the marketing advisory services. They published some of that information. But the key point is to start thinking about how you might manage that going forward. You know, what is your marketing plan? Do you have a marketing plan? Uh, do you have storage? Are you doing a good job of maximizing returns from storage? Have you been thinking about basis patterns in your area? And how you might do a better job of capturing improvements in basis that typically occur during the storage season? And are you developing strategies that you can use year after year after year? And I guess I think about, one of the things I’m doing right now is working with one of my students. who’s planning to go home to farm here at the end of the year after he graduates from Purdue.

His senior thesis is working on developing a marketing plan using different strategies and actually developing a portfolio of strategies that he could use, not from just a one year perspective, but from a long term perspective over the course of his farming career. So, think about some of those things as you think about commodity prices.

Brady Brewer: And it’s, uh, I think the next thing that comes up is interest rates and Michael, uh, you and I have talked a lot about interest rate risk and where we are currently in, uh, you know, what’s happening with interest rate policy. It, it does not surprise me that we see interest rate rise to the top as well.

Michael Langemeier: Not at all. In fact, in the Ag Economy Barometer, month after month, uh, the two biggest concerns have been commodity prices and input costs. And of course, the interest rates is part of that input cost.

Brady Brewer: Yeah, and you know, the one thing I am quick to remind people, interest rates, we’ve seen a pretty historic increase in terms of the rate at which interest rates have increased here over the past year and a half, two years.

But if you look at the Fed funds rate, we’re right, uh, between five and a quarter to five and a half percent from the Fed funds rate. The 20 year average is right at 4.9%, so we’re only about 25 to 50 basis points higher than kind of the long run average. So I would call the interest rate environment returning more to a normal environment. We are a little elevated. I don’t want to pretend that we aren’t in somewhat of an elevated environment, but we’re, we’re just slightly above the long term trend when it comes to interest rate. But, with that said, if you think about the percentage of gross revenue for a farm that now goes to interest rate. It was historically low, and now it’s going to come up pretty significantly on the income statement.

Michael Langemeier: Another way to think about it, Brady, is the interest rate today is very similar to what it was in 2007 before the big recession we had in 2008.

James Mintert: So Brady, let’s take a look and see what we found in our national survey.

Brady Brewer: Yes, so, uh, before we do that, Jim, I want to set up what we’re going to talk about in the national survey. Uh, and this is really just setting up what we’re, how we’re going to go through the rest of this presentation. So, we’re talking about strategic risk and positioning your farm for the long term success.


[00:09:06] Managerial Levers a Producer Can Pull

Brady Brewer: One of the things I’m a big proponent of is thinking about the strategic levers you can pull on your farm. And that’s how we’re going to organize the rest of this session, is thinking about, what are some Items that you can do within each of these strategic levers that can help you mitigate some of the strategic risk you may face.

So the, the five levers you see up on the screen. So output price, yield, managing your costs, managing your assets, managing your people. Painting with a broad brush. So broadly speaking, any decision you make on your farm is going to fall into one of these five broad buckets. If you’re choosing a new piece of equipment, that’s on the asset piece, but it also covers some of the other buckets as well, thinking about how that impacts maybe your variable or fixed costs, how that’s going to impact your precision or your yield that you have. Maybe your labor requirements that you have on your farm. So, any decision you make on your farm is going to be, uh, categorized into one of these five buckets.

So, now we’re going to start comparing your guys answers with maybe these five strategic levers to what the national survey and the Ag Economy Barometer said. So this is slightly different than the five buckets you just saw. This was a slightly different version of those strategic levers where we add in legal and then we separate people into kind of the strategic arm of your farm. And then there’s also the human side. So the question we want to ask is which of the following risks would you say is most threatening to your organization? And you have six options up there. Is it the marketing? Is it legal? Production? Strategic? Human? Which of these six broad buckets do you think is the most threatening to your to your organization?

We’ll give you a few minutes here to get your answers in. I should say there is no correct answer here. We’re just wanting to see how, with your management style of your farm, what do you feel is the biggest threat to your farm? So I guess, Michael and Jim, I will put you guys on the spot here. It looks like the majority of this audience, at least, is thinking that the financial risk of the farm is the biggest threat. Is this surprising to you?

Michael Langemeier: Not at all. When you look at the ’24 crop budgets, for example. I mean, it’s a classic margin squeeze. The prices are lower and the costs are still relatively elevated. We’ve got a little bit of help from fertilizer costs, but, but cost of production is still very high. Particularly, uh, compared to production cost before COVID.

Brady Brewer: And then the second bucket there is marketing. I think given some of the current commodity prices and the decrease in commodity prices, that’s not surprising as well.

James Mintert: So it’s not surprising, but one of the things that has been surprising on our surveys over the last two years really is the percentage of people who have been very worried about input cost, not just from a, from a level standpoint, but from a standpoint of the variability that they’ve experienced with respect to those, uh, input prices. And it’s really made people very nervous. I think it actually contributed to people having some relatively weak sentiment. So, uh, but marketing, a very traditional concern. And in our most recent surveys, we’ve been picking that up as people become more worried about marketing, which is kind of a return to normality.

Brady Brewer: And then human is third, and this is not surprising to me. Uh, if you think about some of the news headlines that you’ve seen out there, uh, there’s definitely labor shortages, not just in agriculture, but the labor markets, broadly speaking. I do think that this probably hits certain sectors of the ag economy, maybe a little bit more than others, but it’s not surprising to me that it is third.

So let’s go to what the national. survey said. Uh, so pretty, pretty similar to the farms that you guys surveyed, uh, nationally. And maybe, Jim, I’ll turn this one over to you. My first question is, uh, could you tell the audience a little bit about what’s the demographic, who are we surveying with the Ag Economy Barometer?

James Mintert: Yeah, that’s a good question. So every month, uh, we survey as a part of our Ag Economy Barometer project, uh, 400 people across the nation. Um, and it’s strategic with respect to the stratification of the survey. So it’s targeted at people who are engaged in production agriculture as their primary source of income. Uh, the stratification we use is people have an estimated gross farm income of $500,000 and up. Um, and then it’s also stratified with respect to the value of farm production based on the USDA Census of Ag. What that means is it’s oriented fairly strongly towards people who produce corn and soybeans. Um, every month at least 53 percent of the people in the survey have a corn or soybean enterprise. Um, I think 19 percent have a beef enterprise. Sixteen percent, I think, have a wheat enterprise and so on down the line. So we talk to people who raise corn, soybeans, wheat, and cotton on the crop side. And on the livestock side, we talk to people who are producing hogs, beef cattle, and dairy. So, again, representative of the primary commodities.

And, you know, when I look at the results, this survey was actually, these results we’re showing you right here, were conducted back in April. And so, no big surprise, Michael, that financial was less of a concern then than it is today, right?

Michael Langemeier: Yeah, that’s certainly the case. I mean, yeah, ’23 was, uh, you know, was even back then, looked like it was going to be a better year than what ’24 looks like right now.

James Mintert: And we were coming off a record very good on the 2022. So we’re seeing an evolution in terms of concerns. And I think a lot of you already recognize that we’re in a tough environment for ’24 and probably a tough environment for ’25 as well.

Brady Brewer: Yeah. So definitely some timing differences for why we may see some differences. And the answer is of this audience relative to your national survey.


[00:15:00] Output Price (Marketing) Lever

Brady Brewer: So let’s start going through the strategic levers that we can pull. So we’re going to start, uh, with thinking about the marketing side and the output price lever that farmers can pull. So I just want to clarify here, so you should be able to slide on your phone, uh, to answer from 0 to 100. What we are asking you is, is what percent of farmers do you think evaluate their pricing plan? So if you think about the farmers you know in your area. So if it’s 100, you would slide it all the way to the right. If you don’t think any farmers in your area, uh, evaluate their pricing plan, you would slide to the left and it would be right around, uh, well at zero. So what percentage of farmers that, you know, in your area, do you think on a yearly basis, evaluate the pricing plan they have for the crops that they grow.

So it looks like right now, the audience is somewhere around the 40 50 percent mark. So Michael, I’ll pitch this one to you first. Does this surprise you? Is this what you would have expected for, uh, this group right around a little less than half of farmers.

Michael Langemeier: I thought it might be a little bit lower, but one of the things I wanna focus on here is look at the distribution. Uh, I think that’s very remarkable. And, and that’s true of the Ag Economy Barometer questions in general, Jim. We see a lot of different, a lot of differences in how people answer questions, relative optimism and pessimism, for example.

James Mintert: Yeah. So you’ve got, uh, just so you know how to interpret the graph, those little mountains you see on there are essentially individual responses or, or small groups of responses. The average of all the responses right now is sitting at 46%. The 46% doesn’t surprise me too much relative to what we saw in our national survey. Uh, but as Michael pointed out, the distribution is huge. And again, as we look at not only the Ag Economy Barometer Surveys that we do every month, but also the other work we do with respect to things like the Farm Management Tour, the workshops that we do, we continually discover a lot of diversity with respect to people’s managerial ability and how much impact they’re having on their operation with respect to some of that decision making.

So Brady, go ahead and show the next. So we did the national survey, 60 percent of the people said they actually document and evaluate the crop pricing performance. 40 percent said they don’t. So we’re gonna say, if you haven’t been doing this, if you’re in the category that’s not doing it, you should be doing it.

Um, one of the challenges you have, of course, is how do you do that? How do you make the comparisons? Well, I mentioned earlier, you can compare your performance relative to the market averages published by USDA. That’s the first starting point. Um, you can look at performance of various marketing services, and if you don’t see those published, you know, you can actually talk to some of those marketing services and they’ll share some of their results with you. That’s one way to compare it.

Um, but from the longer term perspective, really it helps you think about what kind of a marketing plan do I have, not just for this year, but from a long term perspective. Can you identify an approach to marketing that helps you be more consistent over, over the course of the years? And the classic question to ask is, you know, is your marketing plan basically one where you’re trying to hit home runs all the time, right? Are you trying to store, decide, for example, in a particular year, I’m not going to sell in advance of harvest. Uh, I’m going to store almost 100 percent of the crop or the next year, I’m going to move a large portion.

The challenge with that is, and we’ve got lots of evidence of this, it’s extremely difficult to forecast what’s going to happen. Right? And you’ve all been through that with respect to looking at various marketing newsletters, marketing advisors, whatever. The key to success is to recognize that it is difficult to forecast and your plan has to admit that right up front and recognize the difficulty and start spreading out those sales based on long term seasonal patterns. Uh, and then spreading it across marketing tools in terms of how you manage things like basis to improve returns to storage. So, the idea, start off, do some comparisons, and use that as a launching pad to develop a marketing plan. Not just from one year’s perspective, but from a longer term perspective.

Brady Brewer: So that is the output price strategic lever.


[00:19:27] Yield & Production (Diversification) Lever

Brady Brewer: Now let’s go more to the yield and production strategic lever. So if you think about managing how much you produce on your farm, and what we want to hone in on here is the diversification of your farm. So we want to ask. So what we’re asking you is, is your farm enterprise more diversified today than it was five years ago? And you have four options. Do you strongly agree with that assessment? So this would say, yes, we are definitely more diversified with our farming operation today than we were five years ago. You could agree with it, be like, well, we’ve, we maybe plant something different. Uh, you could disagree or you could strongly disagree as well.

James Mintert: So, Michael, as I think about this, diversification can be kind of a double edged sword, right?

Michael Langemeier: Yeah, there’s no right answer to this, and, uh, let’s talk a little bit about that, Jim. Uh, you know, diversification, uh, has a couple possible benefits, uh, associated with diversification. I’ll discuss that first, and then we’ll talk about, uh, talk about the, you know, prop potential problem with diversification?

Well, first of all, diversification, uh, particularly for smaller, mid sized farms, is a good way to more fully utilize labor and capital. Uh, we, we saw, we’ve seen this all across the Great Plains and, uh, and, and the Corn Belt. Uh, that, that’s definitely the case, uh, for some farms. Also, think about a, a simple example. Uh, if you have a, have a swine finishing, and you have crops, you’re lowering your fertilizer costs. Uh, and so there’s, there’s things like that that are beneficial from diversification from a profitability standpoint. But the big benefit of diversification is reducing risk. That’s why this question was in this survey. Is this, this is a, farms are more diversified or more resilient, uh, in, in, in terms of, uh, in terms of their ability to, to respond or to react, uh, to shocks. And so that’s why this question was in there. Uh, so that’s kind of the upside of diversification.

The downside is, is if you’re more diversified, that means you might not be capturing the benefits associated with economies of scale. If you specialize, let’s say you’re a corn and soybean producer with no livestock, uh, and you focus on that, uh, maybe you have lower per unit cost because you focused on corn and soybeans and you’re not focusing, uh, some of your resources on a swine enterprise, for example. And so, and so like I said, there’s no right answer to this. There’s positives and negatives associated with diversification.

James Mintert: So Michael, when I think about corn and soybean production, I think most of us have focused on one aspect, right? And what is that?

Michael Langemeier: I’m not exactly sure what you’re, but you’re certainly economies of scale, yes.

James Mintert: Right. I mean, you could see that here at the show with respect to the introduction of larger and larger equipment. Uh, I think our host mentioned that he’s been coming to the show for 13 years. So think about the changes that have taken place with respect to scale economies, the size of equipment we’re using today versus what was available 13 years ago. And I don’t see that trend changing.

The other thing that I think about as you think about diversification, Michael, is one of the things we work with a lot at the Center for Commercial Agriculture is people who are interested in bringing back the next generation of folks into their farm operation. And oftentimes the answer there is to think about bringing in a new enterprise and having that young person or young family take on that role of diversifying the farm by bringing in a new enterprise, right? So, we’ve had some great examples of that in the last couple of years on the Farm Management Tour that we conduct every year, right?

Michael Langemeier: Yeah, swine finishing is the classic in Indiana, but on the last tour we had someone start a laying hen.

James Mintert: Laying hen operation.

Michael Langemeier: Laying hen operation.

James Mintert: We also had a farm that had previously, it had a small enterprise with respect to produce crops and dramatically expanded that both from a production standpoint and also from a retail standpoint and actually brought home several family members as they expanded that operation.

So think about diversification in terms of not only your ability to improve agility and respond to downturns, etc. But also think about it as a way to bring people back into the operation.

So let’s look at the national numbers.

Brady Brewer: Yeah. So here’s the national numbers. It’s almost the exact same number. So definitely, uh, some similarities between the national survey and what you guys here in this room are experiencing on your farms.

The only thing I want to follow up on. So Michael, you mentioned that, you know, the trade offs is what I’m going to call it. Is that, you know, when you think about the five strategic levers, anytime you pull one of them. They’re all interconnected, so you really have to be cognizant of, okay, if I’m going to diversify, typically diversification means you’re going to increase your fixed costs, um, in some capacity and makes you a little less efficient, right? Because you’re giving up those economies of scale that you’re talking about. So you’re gaining resiliency, but there is a cost to it. And that’s going to be up to you guys to kind of think about that trade off between how willing are you to give up some maybe efficiencies on your farm. But also bring in, uh, that resilience as well during, during the downtimes.


[00:24:27] (Fixed) Costs Lever

Brady Brewer: So let’s go on to our next lever, which is thinking about the fixed cost. So here, uh, we’re asking you to rate yourselves relative. Uh, to some of your most efficient competitors. So think about some of the farms in your area that you would consider peer farms. Do you have low per unit fixed costs relative to your most efficient competitors? So do you agree with the statement? Do you strongly agree? Do you disagree? Do you strongly disagree? Okay, where do you feel you fit in relative to maybe some of your more efficient competitors?

And we did get a question in the chat about the join code. I’m going to go ahead and throw up the QR code just in case some of you have to rejoin. So if you scan that QR code, you’ll be able to get to these questions or you can go to minti dot com and the code is at the top of the screen.

So Jim, it looks like. Right around 22 percent strongly agree about half the people in the audience say, yeah, you, they have lower per unit fixed costs relative to their most efficient competitors. And about a quarter of the people, they say, well, maybe we’re a little bit higher on the fixed cost. Does this, does this surprise you in terms of this distribution?

James Mintert: It doesn’t surprise me in terms of the responses. But my first question is you think about this is how accurately are you actually computing those fixed unit costs? Are you really computing your fixed cost per bushel of output, for example, of corn and soybeans? Um, again, as we’ve worked with a lot of farms over the years, a lot of farms haven’t actually done a good job of making that computation. So my first question is, are you really putting the effort in to figure out where you’re at there?

The second question is, um, you know, from a longer term standpoint, this is a classic benchmarking question, right? The whole idea of benchmarking is, first of all, to look at how you’re performing over time, so track how your, uh, for example, your per unit fixed cost, your per bushel fixed cost are changing over time. Uh, then the second thing is, as the question kind of implies, always compare yourself to the best, right? Or at least your, your estimation of what the best might be. And then think about what the best firms in the industry are doing relative to what you’re doing. That’s really the classic use of benchmarking is to compare yourself to the best, think about what they’re doing versus what you’re doing, and how you might be able to change your operation so that you can lower your cost.

Michael Langemeier: Let me explain why we focused on fixed cost rather than some other cost. A lot of producers like, like to compare seed, fertilizer costs on a per unit basis. We’re focusing on that, on a per unit basis, uh, repair costs and fuel costs. And I’m not saying that’s not important. It is important. But in my experience, uh, there’s a lot more variability, uh, in, in per unit fixed costs. Here I’m talking about labor costs. There’s a lot of difference across farms. And so you want to compare your labor cost per unit to other, other similar farms. Uh, the same with capital costs. Like, uh, are you calculating machinery investment per acre? Are you calculating machinery, uh, cost per acre? If you’re not, if you’re not, uh, we have some publications on our website. Uh, that, that talks you through, uh, how to do that. And so that’s why we’re focusing on the per unit cost, because those vary, uh, tremendously across producers.

Another thing I, I want to point out here is maybe it’s an obvious point, uh, but it’s very important to bring this out. Um, let’s say you’ve invested a lot in machinery because, because you’re, you’re, you’re thinking that that’s gonna save labor. We’ve done that for decades in agriculture. We’ve bought bigger machines, uh, so we have, so we can use less labor per acre? Are you calculating both of those costs? If you’re spending a lot of money on machinery on a per acre basis, do you have a low labor cost? You better have, because you spent all this money on capital, uh, because you, you don’t, you, you want to, you want to be able to, uh, use the same amount of labor for more acres, uh, the proof’s in the pudding.

Uh, and so those two in particular are very important to benchmark, uh, and see, where am I at with respect to machinery costs? Where am I at with respect to labor costs? And when I talk about labor costs, you want both operator and hired labor included in there.

James Mintert: So, you know, Michael, I think based on your experience looking at farm records, and Michael Ram was a direct, executive director of the Kansas Farm Management Association for many years, there is a huge variance in those machinery costs per acre. You might share the dollar values on that just a little bit.

Michael Langemeier: There’s tremendous, let’s talk about machinery investment per acre. Anywhere from 500 to excess of 1500 per acre. And you can make the 1000 per acre work if you have very low labor costs, but that’s my point. You typically want to benchmark those two together. And labor costs is the same way. For crop farms, for example, I’ve seen labor account for less than 10% of all costs, all the way to 20%. Well, think about that. That’s a lot of difference in labor costs.

James Mintert: And you might just share with them with respect to, if you’re going to try and track labor costs on your farm, you’ve got some hired labor, but the main component of labor is actually the operator draw with, against that farm. How do you handle that when you’re, when you’re trying to make those computations?

Michael Langemeier: Well, for operator labor, I like to use the labor draw and, and here we’re talking full time farms. And so my occupation, my occupation is primarily agriculture. So, so I take a look at that operator withdrawal as the operator labor amount.

James Mintert: Yeah, I think a lot of people have a tendency to forget that. Yes. And that’s a huge component of those computations if you want to do a good job on it. Brady, let’s look at the national numbers.

Brady Brewer: Yes, so before we do that, we actually had a question come in that I want to show here real quick.

James Mintert: Okay.

Brady Brewer: So the question was, in regard to fixed costs, how do we know what our competitors are for comparison?

Michael Langemeier: There, there is, there is some sources, and, and these sources tend to focus more on, on, on, on mid sized farms, I, I would say. Uh, the University of Minnesota FinBIN, uh, data bank has, has, uh, has fixed cost information for about every crop you can think of, every crop and livestock enterprise you can think of. Obviously the Kansas Farm Management Association, if you’re in the plains, uh, that’s a very good source of information. Uh, if you’re more in the Eastern Corn Belt, uh, the Illinois, the University of Illinois also has, uh, FBFM. Uh, is there, is there a, uh, Farm Management Association. They also publish some information, uh, that would be very helpful.

And I would encourage you to do this both on a whole farm basis, that’s what I was saying, the percent of, uh, the percent of total expenses by, by labor is, is a very quick and dirty number, uh, to see where you’re at. But also, of course, doing this on an enterprise basis, and, and the enterprise, you look at some of the Illinois data, not to belabor this too much, but you’ve got to be excited here, Brady. I really like this topic. Uh, the, uh, the cost per acre for corn, for example, anywhere from thirty to over a hundred. I don’t need to tell you guys that a hundred’s probably too much, uh, and so you really need to know where you’re at.

Brady Brewer: So another question that came in, and I think we have time to answer these before we move on, because we’ve only got two strategic levers left. Uh, what do you include in machinery investment costs? So I’m, so Michael, I’m going to turn this over to you.

Michael Langemeier: Tractors, combines, discs, whatever you have for machinery, I include everything in there. The, the, the difficult part here is if you do have crops and livestock, you have to kind of, you kind of have to take a look at your total machinery investment. Uh, and then you need to decide what percent goes to the livestock and what percent goes to the crop. Uh, and then, and then, uh, and then do the calculations accordingly. But, but I would include everything in, in there. Uh, you can do a separate calculation for building the grain bins and so leave those out. Uh, but all machinery could, could be included in there. Uh, and you can, uh, the best way to do that is probably take, uh, take your values off your balance sheet.

Brady Brewer: Yeah, I would also say be very careful about when you’re calculating your machinery costs, do not forget the cost of repairs, maintenance, and the overall cost of ownership of that piece of machinery, right? That’s probably something a lot of us underestimate when we’re thinking about the true cost of that machine.

Michael Langemeier: And there is, I have been a little bit loosey goosey here, I apologize for that. There really is two benchmarks, you’re talking about crop machinery investment. That’s the amount off the balance sheet divided by your acres, and that’s what I’ve been focusing on here.

But machinery costs itself, yes, Brady, you want to have machinery ownership in there, repairs, and fuel. Those are the main items that would be in that machinery cost. And again, I’m going to refer to a publication I have on the Center for Commercial Agriculture website that goes through an example that takes a look at costs for a case farm. Uh, and goes through the calculations.

Brady Brewer: Yeah. And then the other thing I would say, Michael’s on the flip side, definitely think about where, how that equipment impacts those other levers. If you’re buying a piece of equipment, that means you’re going to use less fuel or, uh, less fertilizer. That’s a cashflow back to the ownership cost of, you know, a positive cash flow back to the ownership of that equipment. And we’ve got to be careful. We don’t want to overestimate it, but we also don’t want to ignore it.

Michael Langemeier: And there is such a thing as too low machine reinvestment. If you got, if you’re running junk, I mean, it’s pretty obvious you’re running junk. That’s probably not gonna be efficient either. And so there is a possibility to be, go too far with that. And so everything, everything’s a balance when you’re talking about these benchmarks.

Brady Brewer: So we’re going to move on for the sake of time. There’s some other questions in the chat. If we have time, we’ll come back and get there get to him because there’s some really good questions on investment in machinery in the chat right now.


[00:34:03] Asset (Balance Sheet) Lever

Brady Brewer: But we want to move on to the balance sheet. Thinking about pulling the balance sheet lever and managing your assets so. So here we’re just gonna ask you, do you have a strong balance sheet for your farm? Do you strongly agree, agree, disagree or strongly disagree with this assessment? So it looks like the right now, the strongly agree. Most of the people in the room feel that they have a strong. Balance sheet with slightly more just saying agree rather than strongly agree. And I’m going to take this one first and then I’ll let Jim and Michael comment on this.

This doesn’t surprise me at all that this is how you guys feel if you think about, uh, one of my main extension appointments at Purdue University is working with the agriculture lenders in Indiana and the surrounding states. And what I’ve heard from them when I go talk to them is farmers have some working capital and the equity portion of the balance sheets is pretty strong, uh, in, uh, agriculture right now.

The one comment I’m going to have there is if you think about the word cloud that we put up, right? People are worried about commodity prices. People are worried about, uh, the margins that are going to be had here for the 2024 crop season. Uh, thinking about what I call burn rate. So if we expect negative margins, or if we expect a downturn in an economy, burn rate is thinking about what’s your runway. What, how long can you last at the, this lowered rate? I think building up what I’m going to call the war chest or the cushion, right in on your balance sheet to say, okay, 2024, if, if the worst case scenario in 2024 comes to fruition, how long can I last if that goes through 2024, 2025. I think that’s a really important exercise when looking into strategic risk. How can your balance sheet be a buffer for this downturn? That’s one thing, especially when I hear, talk to the bankers, and I hear with the interest rate argument that some farmers may go to working capital. Rather than, uh, take out a larger loan, maybe on the operating side, I think keeping that war chest as full as possible for maybe a, a prolonged down period in, uh, commodity prices. And just know that’s not what I’m predicting. I’m just saying if that were to happen, I think that is a good, uh, move on the balance sheet to kind of combat some of this strategic risk.

James Mintert: So just following up with what Brady had to say. If you think about it, it’s no big surprise that most of us are coming into 2024 with both a strong balance sheet and a strong working capital position. That’s the good news. The bad news is the next couple of years look like both of those are likely to erode, especially the working capital. So the challenge is to make sure you’re managing that in a way that you can, in fact, use it, as Brady just said, to kind of weather the storm, because it looks like we’re going to have a tough year, uh, from a cost return standpoint in ’24. ’25 might turn out to be a little better than what it looks like right now for ’24, but it’s probably not going to be a return to what we experienced in ’22. Or even ’23. So the challenge is to manage that and use that for what it’s for, which is a buffer, right?

Michael Langemeier: We purposely didn’t define strong balance sheet before we had you answer this. And so let’s talk a little bit about that. What we had in mind there was a strong current ratio. So certainly liquidity, but also solvency, low solvency, low debt to asset ratio. And so I wanted to say that.

But another point I want to make here, yes, we need liquidity to weather the storm. That’s what. Uh, that’s what every business, uh, needs liquidity for. But you also need liquidity to res to, uh, take advantage of opportunities. I want to go back to that upside, uh, that, that, you know, upside of strategic risk. Uh, if all of this stuff’s going on, and you’re, and you’re in position, and other firms are not in position to expand, uh, to take advantage of maybe an opportunity to, to grow a specialty crop, that’s a very good thing. Uh, and so think of liquidity as, as is both weathering the storm and risk and being able to respond quickly to a new opportunity.

Brady Brewer: So looking at the national distribution here, not, uh, too much different than what you guys in the room, probably a little bit more on the strongly agree here. You know, I think the question really that the question of the day is, what does this question look like if we’re going to ask you next, uh, this time next year, right? Or this time in two years, what does this question look like in this room? And I think this is where we get to that war chest and that, that buffer of, of making sure that this doesn’t swing too far, uh, to the right.

We did have one question come in the chat that I want to bring up here real quick. Uh, so strong equity. Yes. Uh, but what they’re saying is below liquidity is causing a squeeze and financing with banks receding to lessen their risk with low loan to value loans. Would you suggest leveraging equipment equity in the short term?

So I’m going to give my opinion here first. That equity is going to be there. Um, I don’t think that the equipment market is going to soften, um, that, that equity is going to be there in the long term. And, you know, while I, at the beginning of this talk, I said interest rates were just a reversion to more normal interest rates or slightly elevated interest rates. Uh, I don’t think I would recommend at this point going and using that equity that’s there in equipment.

I would use that as more of a last resort type of item. Maybe there’s something I’m not seeing, so the person who put this question in the chat, happy to talk after, but I would say that this is more of a last resort type of strategy, uh, to use that equity, uh, you know, later on and keep that, uh, in the equipment right now.

Michael Langemeier: I would, I would concur, uh, with that, and, and one of the things you’ve got to be very careful, and it goes back to my having liquidity, uh, for new opportunities. You don’t want, just because you have the money to make a huge down payment on a piece of machinery, doesn’t mean that’s the wisest, wisest thing to do. Uh, and so you always have to think about, You know, do I, do I need this liquidity not only to weather the storm, but for these other purposes? Uh, and so you always want to keep that in mind. And also, when you’re looking at equity, uh, you really want to draw on that equity when things get really tight.

Brady Brewer: Yep.

Michael Langemeier: And we don’t know the situation of the person that was asking that question, but you don’t want to draw on that because you can’t draw on that well very long, and the water’s gone.


[00:40:26] People Lever

Brady Brewer: Uh, so unfortunately we’re running a little short on time, so I want to move on to the last bucket, which is people, which we’re going to kind of divide from strategic, uh, and people at the same time.

So real quick, we asked this question nationally, we’re not going to pose it to you guys. Does your farm have established goals, objective, and core values? Uh, so one of the things we think is really important, uh, core values may seem like a pretty trivial thing for a farm to do, but core values can really be a guiding light. Uh, for how you manage your farm. I think, especially if you think about succession planning in agriculture. If one of your goals as a farmer or farm is to bring on the next generation, uh, to the farm and ensure that it’s viable with the next generation. Making strategic management decisions that lean into that core value, right? And don’t shy away from, from that. And it may be costly. Maybe there’s mistakes made, but you’re providing a training ground for the next generation. Making sure you’re actually managing the farm to that core value and letting it be known and improving that communication, I think is really important. And that’s just one example of why core values are important for the farm.

James Mintert: We’re kind of stressing core values because particularly with respect to succession plans. We’ve worked with a lot of farms over the years that have said they want to see the farm survive into the next generation, and they imply that that’s a core value. But then when we look at the decision making process that they’ve gone through and some of the decisions they’ve made, They’ve not been true to the core values.

So if you haven’t thought that through, I’d encourage you to think about it some more and ask yourself, as you’re making decisions, if one of your core values is to bring that next generation back into the farm, are you making decisions that are consistent with that core value? Most of us find it easier to talk about things like goals and objectives. I want to reduce my cost per bushel. I have a goal of seeing this business grow maybe three to five or 7% per year. Those are a little easier for most of us. It’s a little tougher to think about those core values and maybe live those core values on a day to day, year to year kind of a basis. Michael?

Michael Langemeier: Yeah, and this is difficult because, because it varies tremendously. It depends on the person, person that’s part of that next generation. And, and one of the things I talk about, uh, with succession planning is transferring management. Well, that, that, that’s, it’s difficult because you really have to think about what strengths does that person really bring into the operation? And, and, and how fast can we transfer some management responsibilities to that person? The key thing there is regardless, don’t necessarily ask how fast, ask what management responsibilities, uh, in the short term, should, should we be able to transfer to that person. So they start get some, some experience, uh, managing, managing the business.

Brady Brewer: Yeah. So on the screen right now, we wanted to kind of put you guys, uh, we’re talking a little bit about succession and the core values. Uh, and we want to see how, uh, if you guys brought the next generation here to, to this conference and we realized maybe you answered no, because there is no next generation or life circumstances prohibited. So we realized that those are the case. But we just wanted to stress like If succession planning is important, maybe not this event, but learning sessions, putting the, the next generation in the shoes of, of the current, uh, management of the farm is important.

James Mintert: Stated another way, are you allowing that next generation to do some professional development that would enable them to be a successful operator of that farm operation?

Um, and if they’re not, and if you’re not from a farming standpoint, from a farm family standpoint, you need to think about that. How does that next generation get the skills that they’re going to need to be successful? Whether it’s some of the topics we’re talking about here today, it could be technical topics, it could be a variety of different topics. But are they doing that professional development over time that helps them become more successful?

Because one of the things this conference really points out is the pace of change in agriculture is accelerating. And if you’re not doing professional development on an ongoing basis, you’re going to be falling behind. And if that next generation isn’t doing it, they’re falling behind as well.

Brady Brewer: Yep, so with that, we are out of time. I just want to remind everyone for more farm management news and information. Jim mentioned at the beginning that he is the director of the Center for Commercial Ag, if you want to go to our website, purdue.edu/commercialag. There’s a host of information there. We also have a podcast that you can find on that website or any the podcast providers where we discuss topics like this but in a podcast format. Go take a listen to that. So with that, we thank you all for listening to us today.

James Mintert: Thank you very much.

Michael Langemeier: Thank you.

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