Following business fundamentals and observing ‘green shoots’ will result in a higher probability of success in ag banking

Changes & opportunities in agriculture

Following business fundamentals and observing ‘green shoots’ will result in a higher probability of success

The agriculture industry is now moving into phase 2 of the elongated downturn. Phase one exhibited margin compression, which impacted cash flows and financial liquidity. Farm equity has been resilient through phase 1 due to stability in land values. Refinancing and restructuring of operating losses onto longer-term debt has been the mode of operation for some agriculture producers. Others have made proactive adjustments to garner profits and financial competitiveness.

Over the next few years, phase 2 of the cycle will exhibit more structural changes in the agricultural industry. Trade negotiations and expectations will more than likely be temporary, resulting in very calculated and conservative strategic adjustments in business models.

Climate and weather change, along with political uncertainty, consumer demand shifts and demographic changes in agriculture and society, will result in challenges and opportunities for the strategic leader. Managing expectations and a focus on fiduciary fundamentals or ownership of the numbers will be a key element in the producer’s and lender’s game plan.

Global economics

Anxiety in any corner office can be linked to changes worldwide. Globalization accelerated early in the century with the rise of the Chinese economy. Free trade agreements and the great commodity super cycle added fuel to any economy in reform. In 1990, China’s gross domestic product (GDP) was 2% of the global economy. Three decades later, the country’s GDP is registering at 12% of the global economy and ranks as the second largest economy in the world.

The rising middle class in the emerging nations, known as the “BRICS” (Brazil, Russia, India, China and South Africa), increased export growth for nations in North America, Europe and Oceania. The formation of the European Union, the Trans-Pacific Partnership (TPP), the North American Free Trade Agreement (NAFTA) and China enjoying favored nation status were all stimuli to growth of the world economy.

The corner office critical thinker must contend with another trend that has emerged in recent years known as “decoupling.” The recent trade wars, tariffs and currency challenges are causing disruption in global supply chains for manufacturing, technology and agriculture.

The breakdown of trust, which is critical in the free flow of goods and services, has resulted in the major world economic powers reconsidering the best options for their critical industries and even considering new trading partners to fulfill their needs.

This lack of trust caused by socioeconomic and political posturing has resulted in a global manufacturing recession and has heightened the anxiety of the farm and technology sectors due to the possibility of loss of markets and the threat to return specific critical industries to the home countries.

The next 12 to 18 months will be critical for any CEO. The United States-Mexico-Canada Agreement (USMCA), if ratified by all three countries, should pay dividends The Westin Galleria Dallasto farmers and ranchers. Will Brexit be executed? Will The Westin Galleria DallasChina continue to expand their influence by making The Westin Galleria Dallashuge investments in the Belt and Road Initiative, while others are following a populist regime throughout the world?

In the United States, close monitoring of social and political changes in California and Texas or “Texifornia” is important. As standalone nations, California and Texas would rank as the fifth and 10th largest economies worldwide, respectively.

It will be important to monitor the outcomes of the elections and legislation in these two states. California tends to be more liberal and leaning socialist, while Texas tends to be more conservative and leaning capitalist. The world will be watching changes in these two states and their implications on the future direction of not only the United States, but the global economy.

‘Green shoots’

One progressive agriculture leader asked me an intriguing question concerning phase 2 of the agriculture economic cycle: “Are there any ‘green shoots’ or ‘rays of sunshine’ in the agriculture industry?” From a macro standpoint there are a number of areas that appear to be emerging.

The value-added sector is growing in importance. The key in this business model is alignment of the land, labor and capital resources to optimize the management and talents linked to the marketplace.

To be successful, one must offer a product or service that is transparent, customized, personalized and marketed as an experience. Whether an agricultural entrepreneur is launching a new business, or a traditional commodity-based agriculture business is seeking diversification, the value-added sector can represent an opportunity regardless of the geographic location or agricultural enterprise.

Another “green shoot” is the emergence of younger and beginning farmers and ranchers. They come in all sizes and shapes. Some enter through a family business. Others are “boomerangers” who have moved away from the industry and returned to boost their entrepreneurial spirits and seek work-life balance. Still others are new to the industry and bring a skill set that is outside the box.

More women, minorities and veterans with a wide range of skills and demographics populate this group. One must observe FFA, 4-H and other youth organizations and leadership groups to see the future players and talents of the agricultural industry.

Although stressful, another major area of excitement in agriculture is family business transition, which will accelerate over the next few years. The 40/20/40 rule will play out with this group. Forty percent of businesses in transition will not have the mindset, processes or timeliness to execute a transition plan. These businesses will offer opportunities for others in the industry to expand.

Twenty percent will be in a constant state of confusion between multiple generations, draining the energy, capital and talent needed for the business to be a peak performer. The other 40% of businesses in transition, often in the fourth through seventh generations, will emerge stronger.

Business formality with consensus in managing the business and the possibility of cousins managing with cousins, outside family business partners and investor capital will frequent this group. This will represent “hybrid vigor” for a very industrious business model.

Another quickly emerging segment is the “gig” economy. Often innovative and adaptive owners will use both capital and human resources to provide products or services to meet demands. Whether it is a towing business, trucking company, drone service or consulting venture, entrepreneurs will devise methods to allocate time and profitability to these ventures. A successful side gig provides profits and cash flow to the global portfolio of the overall business.

Another promising group within the agriculture industry is producers who are “dialed in.” Some utilize biotechnology, engineering and big data technology to drive efficiency, often scaling up in size. Other producers are very resourceful by utilizing their talents with a low investment approach that aligns with the resources and the marketplace. To the corner office visionary, one or a combination of these business models can be successful.

To be successful, one must offer a product or service that is transparent, customized, personalized and marketed as an experience.

Business IQ

The corner office challenge will require constant development and upgrading of business IQ where producers and lenders will work side-by-side. The farm crisis of the 1980s decades ago eliminated the average and below average production managers. This cycle is moving up the scale and culling the average and below average business managers. What are a few of the key business IQ attributes?

Price, cost and market trend volatility will require a strong working capital position. Analogous to the queen on a chessboard, stellar working capital provides flexibility in strategic and tactical moves that garner incremental profits. Working capital also brings a sense of confidence in controlling the destiny, if possible.

A drive toward efficiency will be a part of any corner office leader’s business acumen. Knowing cost metrics, allocating resources toward profit zones and a calculated balanced approach will be very important. Capital and human asset utilization will be the great divider in the successful business models.

Life is often very lonely at the top for producers and lenders. In the business environment, burnout is often observed. Employing a network of positive, passionate people as a support team can be very important. As with other business cycles, adhere to the work-life balance and maintain focus on the fundamentals.

Following a fundamental marketing and risk management plan, with the assistance of a team of advisors including lenders, is analogous to assistant coaches on the sidelines providing and interpreting information that will be critical for a successful game plan, which the producer must execute on, monitor and accept the outcomes.

Following the business IQ attributes is not going to guarantee success. However, following business fundamentals and observing green shoots in the agriculture industry will result in a higher probability of success.

Whether you are a CEO, management team leader or business owner, the corner office can be challenging in the age of anxiety. Clarity of vision and transparency in strategy, action and execution can be daunting tasks in an environment of accelerated change.

Dr. David Kohl is professor emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech in Blacksburg. He has traveled more than 9 million miles in his career, conducted more than 6,500 workshops and seminars for agricultural audiences, published more than 2,250 articles and writes for many leading publications. Dr. Kohl was recently inducted into the Virginia Tech College of Agriculture and Life Sciences Hall of Fame.

Texas Bankers Association’s 100th Agriculture and Rural Affairs Conference.

Few businesses and entities endure to reach the century mark. TBA’s Agriculture and Rural Affairs Conference will kick off the new decade by setting the standard for longevity in April as the longest continued state agricultural bankers’ conference in the nation.

Dr. David Kohl has worked with the conference administrators and dedicated agricultural bankers through this conference and various banking schools for four decades. He will be speaking on the “Convergence of the Big Three in Agriculture: Ag Economy, Ag Technology & Ag Experience.”

Join your fellow ag lenders at the historic Driskill Hotel in Austin April 1-3 for an information-packed and action-oriented Texas Bankers Association’s 100th Agriculture and Rural Affairs Conference. Register at www.texasbankers.com/store.

We’ll step back and examine the state of the agricultural industry and various factors that lead to success from the vantage point of a corner office.