“Your business is like a chess board, with a series of moves. The most important player on that chess board is the queen. Cash and working capital are the queen,” began Dr. David Kohl, Professor Emeritus, Virginia Tech, as he addressed a room of dairy producers at the recent Great Lakes Regional Dairy Conference in Frankenmuth, Michigan.
“If you have cash and working capital you have blocking moves and then on the other side it helps you to be proactive,” he said.
The landscape of agriculture is in an accelerated change mode. Macro factors such as tariffs, trade wars, global and domestic economics are creating a surprise around every corner. According to Kohl, the farmer of the new decade will experience more change than in the past seventy years driven by consumers, technology and management. To stay competitive, the producers of the future will require a high business IQ and be proactive in positioning the business for success.
A Fresh Look at 2020
Looking at a fresh start for 2020, Kohl presented five positives in agriculture:
1). low, stable interest rates,
2). stable energy costs,
3). proactive base hits,
4). land value stability and
5). accelerated generational transfer.
“You take the equity of the older generation and the innovation and entrepreneurial spirit of the younger generation, that will take your family business to a new level,” commented Kohl.
He added that the ego of the older generation has the potential to kill any new business ideas of the younger generation because the fathers or grandfathers want to make all the decisions. “When this happens the only winners are Uncle Sam, the lawyers and McDonalds,” he said.
Kohl outlined the challenges facing agriculture in 2020: dependence on government income, loss of international markets, global political posturing, alternative agriculture and consumer demand shifts, and consolidation backlash.
“Alternative agriculture hit me harder and faster than anything else,” Kohl said. As alternative meat and dairy products are developed and fine-tuned, Kohl said it’s not the share of the marketplace that matters, it’s the rate of change. Momentum matters with these products and as they gain favor, and gain 10-15 percent of the marketplace, they can sway the urban public.
There will be more change in the next ten years than in the last seventy years maintains Kohl. There will be more technology, the consumers will continue to change, and management will need to be fine-tuned. “There will be more advisory teams,” Kohl said. “They are just like assistant coaches, constantly feeding information to the head coach so they can make better decisions.”
The business IQ will increase over the next decade. It will be the common denominator of success. “If you stay focused and follow the fundamentals you will be successful 80 percent of the time,” he said.
Kohl also mentioned the domination of technology. “I can tell someone is a good leader or manager if they stay off their technology at least two-three hours a day,” he said. He mentioned that one important skill is to avoid being distracted, do not let technology control your life. According to Kohl, when a phone receives a notification every four to seven minutes this leads to losing your attention span for a half hour.
Looking at the economic radar screen, Kohl said one of the most important policies passed was the United States Mexico Canada Trade agreement (USMCA). The U.S., Mexico and Canada make up 28 percent of the world economy, making it imperative to have a working trade agreement with our neighbors.
“Farmland is like having a baby, you know you can’t afford it, but you do it anyway,” Kohl said Farmland values have gone up or stayed the same from 1910 – 2017 and it’s a good investment and can be a great bridge over economic troubled waters. But he warns young farmers that buying farmland will “stretch you.”
As an industry, Kohl stressed the importance of being proactive rather than reactive. He says dairy needs to be three products and services ahead of the curve when it comes to plant based milk substitutes.
Crucial Business Conversations
According to Kohl, there are several critical questions for crucial conversations that progressive businesses need to ask:
- Know the cost of production by enterprise
- Know how changes in price, production, cost and/or interest rates affect the bottom line
- Understand financial ratios
- Work with an advisory team consisting of a lender, crop or livestock consultant and possibly a financial planner.
- Attend or take five educational seminars or courses a year.
A struggling business attempting to turnaround will have done the following:
- Written business, family and personal goals
- Projected cash flow
- Work with an advisory team and exhibit a willingness to be coached by an advisory team and lender
- Take modest family withdrawals and have a family living budget
- Develop and execute a one-page written plan on how they will improve cash flows, profits and what is the likelihood of the turnaround of business.
Management strategies in the 2020s will include writing down core values, remembering that a business plan is not set in concrete and when executing the plan, you need to hear, understand, take action and evaluate consequences. He concluded that being a leader and in leadership is about uplifting others, quoting Hall of Fame Basketball Coach, Tom Murphy: “Watch how people in position of power treat the front line people.”
This article was originally published in the March/April 2020 issue of the Milk Messenger. Subscribe »