by Deborah Jeanne Sergeant
LIVERPOOL, NY — As with any industry, the future of agriculture lays in the hands of young people. Dr. David Kohl spoke on the topic at the recent 2018 Corn & Soybean Winter Expo, hosted by the New York Corn & Soybean Growers Association. He emphasized the top reasons young people should enjoy many opportunities going into agriculture now, along with tips for their success.
“The top economic indicators for agriculture include economic growth of export partners, the value of the dollar, growth of the U.S. economy, interest rates and Federal Reserve actions and farm records databases,” Kohl said.
Kohl travels worldwide to speak on agriculture. He said many elements affect agriculture, including commodity surplus worldwide, the rate of growth around the globe, a weaker U.S. dollar versus monetary central bank policy, the effects of oil and the drive towards efficiency, and trade agreements and geopolitical economic factors, some of which involve China and Europe.
Kohl listed several “black swans” of agriculture: immigration, international trade, disease, cyber attacks in technology, satellite, and air travel, weather, market disruption, and government policy.
Kohl said the U.S. economy has experienced eight years of low and modest growth, but the effects of debt from auto, credit card and educational debt, stock market losses, and other debt point to a “farm land asset bubble.”
“Half of farmers made it through the 1980s,” Kohl said. “The Baby Boomers build equity and working capital. We don’t trust stocks, so we buy real estate.”
Though land value may dip, it tends to bounce back eventually. In the meantime, Boomer farmers who own plenty of land hope to make up for losses by farming more.
Kohl compared the top 40 percent of producers to those in the middle — “tweeners” — and the bottom 30 percent of producers.
“You have to remember the critical point on a farm balance sheet is operating expenses,” Kohl said. “If you don’t have it, you will have to liquidate assets or get a loan.”
Those at the top can seize opportunities to expand or open up new revenue streams by using their profits.
Tweeners, he said, hold grain to make a profit. They use their working capital to keep the farm going, but they make it. The bottom 30 percent “are burning through land equity and don’t know it,” Kohl said.
He chided farmers who hand over the money managing to others and fail to keep track of what’s happening.
“Watch the cycle of refinancing,” Kohl said.
Prices for commodities were good in 2012.
“Even the bottom one-third made money just throwing seed in the ground,” Kohl said.
But the bad times aren’t when many farmers get in financial trouble; it’s the good times that do it, since that’s when they grow too fast or expand in the wrong direction.
“Then there are businesses that got big but marketing and finance didn’t keep up,” Kohl said. “When we had $8 a bushel corn and soybeans in the high teens, we saw who was a good manager. Business and financial management skills are very, very critical.”
Kohl said the top 40 percent of proactive producers, “greenliners”, use what he calls the “five percent rule”, which means that they set a goal to become just five percent better in three ways.
“Don’t pick any more than that or you can’t do it,” Kohl said. “There’s no magic, silver bullet, but you have to put together a system that’s compatible to you.”
Greenliners also dedicate 10 to 25 percent of the budget to marketing. They seek lower rent cost per acre they rent, decrease crop input costs, live modestly, set up a sound financial system and run the farm with a systems approach.
“Whether you’re a top 40 or a bottom 30, you’re in control,” Kohl said.
The bottom 30 percent — “redliners” — possess marginal resources. They put equity in devaluing machinery.
They lack financial and marketing systems skills. They also possess a mentality that if they can spend more, they’ll pay less in taxes, rather than actually spending less so they keep more money.
“Don’t cut the wrong costs,” Kohl warned, “like crop insurance or health insurance. Keep modest family living expenses. Young farmers, you will not have to live like paupers. But I see several families living on a farm that should support only three.”
He said a family living on $95,000 to $145,00 is high maintenance; $40,000 to $70,000 is low maintenance. Every two or three years, redliners refinance, oftentimes owing to their high maintenance living.
“Remember, family living cost will track the price of a new Corvette,” Kohl said. “When you bring another partner in, can you afford a new Corvette? That’s the cost of a new partner.”
He added redliners lack the HUT principle: Hear, Understand, Take action.
“Few hear, fewer understand and even fewer take action,” Kohl said.
Kohl chided redliners for possessing a know-it-all or victim mentality as a “toxic personality” that drains energy from others around them.
Farms need people of all ages.
“The older generation brings their experience, tenure and equity. Youth bring energy and opportunity. You need the younger and older generation.”
Kohl wants the older generation to offer transparency to the younger generation so they know what they’re getting into during farm transition.
“Be very careful,” Kohl said. “You need a third party auditor to see if assets are worn out, faded out or rusted out. That includes management!”
He advises any farm to conduct a “drop dead” exercise where each of the farm management’s names are pulled from a hat and then declared dead. Does the farm have a contingency plan to ensure others know how to do their jobs?
Kohl has noticed numerous trends while globetrotting. One is “boomerang” children who return to the farm years after completing their education.
“They’re really bringing innovation to the farm,” he said.
But sometimes, farm workers — even family members — may need to be let go because they don’t bring profit to the farm.
“We sometimes don’t hold family members as accountable as others,” Kohl said.
He said some farms are farming fewer acres and making more money because they’re focusing on crops that sell for more or soil that is more fertile or better suited to what they’re raising.
He calls planning, strategizing, execution and monitoring business and lifestyle the “four cornerstones of success.”
But that’s not happening for many in agriculture. Only 14 percent of 400 producers in a recent survey Kohl cited have written long-term and short-term goals. Just 9 percent have a written business plan and 19 percent have a projected cash flow statement. A mere 17 percent have an accrual income statement, 23 percent know the cost of production of major enterprises and 19 percent hold an annual strategy and planning session.
Keeping working capital can help farms succeed. Kohl said working capital offers a secondary line of defense with issues of cash flow and profits; helps farms stay flexible in marketing; garners cash discounts negotiated on cost of inputs; allows for capital expenditures for machinery, land and livestock; and funds self insurance and risk management.
Kohl said he has observed 12 practices common among successful young farmers and ranchers:
- Know cost of production via enterprise.
- Invest in productive assets.
- Low to modest family living withdrawals.
- Focus on managing the controllables and managing around the uncontrollables.
- Asset light; collaborative
- Manage taxes versus minimize taxes. Businesses don’t go broke by paying taxes.
- Strong character, understanding “better is better before bigger is better”
- Use profits by the 60-30-10 rule: 60 percent is for improving efficiency; 30 percent is working capital; and 10 percent is for having fun (life is short).
- Build and maintain working capital and cash.
- Strong group of mentors/people. Net worth (financial and mental) equals network of people.
- Best crop you will ever raise is your children and grandchildren. Invest in aspiring youth, including neighbor kids.
- Get it, want it and have capacity for it.
He also encourages new farmers to know how to manage data, think critically about data, and meet with a lender and financial advisor. They should watch trends for marketing their products instead of giving up when the market changes.
“Disney hires for attitude,” Kohl said. “Some people there make just $10 an hour, but they love working there and do so for years. Sometimes, it’s not about the wage.”