Ag economist offers strategies for weathering tough times
MADISON - Dairy farmers facing the current market challenges need to have a certain set of skills to survive until times get better. “You can’t just worry about defense, you have to have an offense,” Dr. Mike Boehlje advises dairy producers.
The agricultural economics professor from the Center for Food and Agricultural Business at Purdue University was a keynoter at the business conference of the Professional Dairy Producers of Wisconsin (PDPW.)
Dairy businesses will need to have financial resiliency and agility to survive these tough times, he said, adding that people involved in agriculture tend to ignore or overlook business concepts, like understanding and creating value for the customer. “Agriculture is a growth industry; we need to make sure we’re not road kill.
“Focusing on a value-enhanced product,” he said, “is one way to give you a sustainable, competitive advantage.”
Producers need to focus on a strategy — it could be what he called “operational excellence” or it may be a closer understanding of the customer. That’s how organic milk and even almond “milk” producers have increased their growth — by focusing on customers who want more than just standard milk. Another business concept that might work is to be a process or product innovator.
Being an early adopter or enhancing value chain linkages can position the business for future success.
Boehlje told the farm audience that “margins are important but what’s also important is how we use our assets.” Asset turnover and utilization can be a key to getting through this milk price trough. It might mean leasing machinery rather than buying or getting into a joint venture and sharing machinery with another farm. Another option would be to outsource the work by hiring a custom operator.
Assets like farm machinery are generally poorly utilized in agriculture and it would be an important step. “We need to think about asset utilization — make them gush rather than drip,” he said.
Cost control is another area where farmers can sharpen their business skills. “Now is really the time to get costs under control. When we’ve had good times we get a little lax. Cost control is the mantra of going through tough times.”
Farmers need to know their costs intimately. He sees 30 to 40 percent differences between various dairy farms on their cost structure. The first step in improving here involves “buying right,” he said.
Knowing what goes out of the business for inputs, veterinary supplies, nutrition, are big determinants of the farm’s cost structure. “You need to build a procurement mentality; it’s what other kinds of businesses do.”
Another idea is to talk to the customer and find out what they want and then do that. In doing so the farm could also grow volume and sales, perhaps increasing productivity. “You need to get better before you get bigger. It’s a trite phrase but we frequently forget that in agriculture.”
If the farm can produce more volume with less investment that will help the bottom line by building gross revenue so there’s a chance to get a net increase on the bottom line. “Every dollar you invest in this business needs to generate more profit.”
Boehlje said managing money and capital in the current dairy climate are critical. He urged farmers to use debt carefully, consider leasing over buying equipment, enhance their financial skills, focus on their management, hire skilled employees and develop standard operating procedures (SOPs.)
Think like a CEO
He also urged farmers to “think like a CEO” and hone their skills on managing people, money, relationships and strategies. They need to work carefully on the relationships with rental landlords and the farm’s lender.
In the past, renewing a loan has generally been more of a social event but today it can be a really tense conversation. It’s no longer just the loan officer’s decision.
“Your job is to sell your credit-worthiness to your lender. You need to document for that lender your understanding of the business. Loan officers today are not the same as five or 10 years ago. Someone else is above him and he has to be your representative to that person.
“Put yourself in your lender’s shoes — would you give this loan to you?”
Working capital, which is current assets less current liabilities, should be about 30 percent of gross revenue. “This used to be 20 percent but now we’ve put it at 30 percent. We need to have excess capital because we’re burning it up. You want to be able to say to the lender, ‘I know it’s not where we want it and I’m looking at things to do to improve it’ and he’ll be pretty impressed that you thought about it.”
One option may be to refinance the loan on the land for a longer period of time. “All that does is give you a window of opportunity to solve your problems. If you continue to operate the way you did, all you’ve done is delay the pain.”
Smart management of the dairy at this point means using consultants and “professionalizing your team,” he said. Getting better at business means improving data analytics at the farm level and networking with successful farm and non-farm business people.
Boehlje said that the USDA has forecast a downturn in farm income for the next two years. “This has lasted longer than anticipated.”
As more people around the world achieve better income levels, they invariably add animal protein to their diet and Boehlje sees a strong future for agriculture. “Agriculture is a phenomenal growth industry. When people make more money they eat better and the percentage of animal protein in their diet goes up.
“I don’t know a single person in China who’s a vegetarian by choice.
“If we continue to have income growth in the world we’ll continue to see growth in animal protein consumption. We have challenges ahead but also awesome opportunities.”