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Dr. David M. Kohl

By Dr. David Kohl

Recently, during a seminar for young farmers and ranchers, a tough question was posed by one of the engaged participants. He asked, “How can a young and beginning farmer be competitive with a larger, pro-growth farmer with plenty of equity?” Well, this is not a new issue for American agriculture and is a legitimate concern. In many cases, the more experienced and larger producers benefited from the recent commodity super cycle, have more access to updated technology in new equipment, and can retain management that is well trained. Nevertheless, there are several habits and practices accessible to young producers that while they do not guarantee success, they certainly increase the chances significantly. Let’s examine some of the top practices of today’s young and successful farmers and ranchers.

First, when asked, successful young producers know their cost of production by enterprise, if multiple operations exist. Of course, this is foundational to a profitable marketing and risk management plan; and to allocating land, labor, and capital in the most productive ways.

Next, these young producers are investing only in productive assets. This includes livestock, machinery, equipment, land, and even human assets. Further, they do not buy into the one-size-fits-all approach. Depending on skill sets, some businesses opt for the high-tech route, while others may use less technology but focus on a market niche based on specific production for consumer preferences.

As many are entering the industry with a higher-education degree, these young producers understand the business principle that sacrifice will be required to build equity. In addition, because of the technological presence in their lives, many utilize online financial programs like Quickbooks or Quicken to track their expenses. These advantages naturally predispose them to the idea of budgeting, and more specifically, modest family living withdrawals. Often, young producers can outline their living costs as measured per pound of meat or bushel of grain produced.

One significant practice of successful producers at any age is the ability to manage those things that can be controlled, and manage around the factors outside of their control. In today’s world of social media and extreme world events, it is easy to be distracted or lose focus from one’s main goals. The ability to zero-in on practices such as marketing and risk management will undoubtedly strengthen one’s financial flexibility.

A new emerging trend among young producers is the “asset-lite” approach of collaboration. For instance, three young producers currently share one CFO, who is responsible for most of the financial decisions. Three other young producers, all in different locations, are sharing one of the industry’s top combine to harvest their crops. The producer on the West Coast starts with the equipment and then, sends it to across the country, ultimately reaching the third producer on the East Coast. Of course, this reduces fixed costs for each, and also allows each of them to benefit from today’s best technology.

Even those just entering the agricultural industry have heard the various horror stories related to taxes and farms. A critical practice of today’s young producers is managing taxes instead of strictly minimizing payments. They understand that paying income taxes is a necessity for businesses building working capital and cash. In many cases, minimized tax bills tend to build higher amounts of overhead costs as well as assets that quickly depreciate. In the end, taxes must be paid and this younger generation has shown the willingness to factor in that obligation.

Another attribute of all successful young producers is character. As part of the “Five C’s” of credit, this element requires one to follow through on that which has been committed. In other words, it is crucial for young producers to do what they say they are going to do. For example, using borrowed money only for its intended purpose is a matter of character. And when financial problems arise, open communication with lenders and suppliers is also a necessary element in building honesty and integrity in business relations.

A profit plan is also a high-priority practice for successful young producers. Profits are first used to build efficiency, and then, growth. In other words, the familiar phrase of “better is better before bigger is better” is being implemented with this group.

Along with profits, this group of young business leaders is building and maintaining working capital, and strengthening the top half of the balance sheet. They are experiencing the economic reset in a way that shows them the importance of building cash reserves during more profitable years to use as a bridge or self-insurance for circumstances like today. And as those looking for opportunities, they see the value of cash and liquidity in negotiations and flexibility.

Next, this group demonstrates a willingness to collaborate and cooperate with others. Specifically, these individuals often utilize mentors to help guide the decision-making process. Increasingly, mentors are outside of the producer’s locality with some even benefiting from the international perspectives of their mentors. Similarly, these young producers are building professional networks that not only include industry mentors, but other professionals outside of the agriculture industry. These groups are being used for formal brainstorming, as well as informal sharing and discussions. There is an old saying that one’s net worth financially and emotionally is directly correlated to one’s network of people. It certainly appears that today’s young leaders believe in this “power zone” of people and idea collaboration.

In my travels, I have observed both the desire and pursuit of better balance among the more profitable young producers. They understand the contribution of business, family, and personal endeavors, but also incorporate the demands of each in balance with the other. Much like the older generations, they are beginning to realize agriculture has something unique and special to offer in raising a family, which makes the balance even more regarded.

Finally, this emerging group of young, successful agricultural entrepreneurs exhibits the “G.W.C.” approach, which means they get it, want it, and have the capacity to get it done. Of course, all three are necessary to be sustainable and viable as a business, family and individual.

Thus, it is true that younger farmers and ranchers face formidable challenges as they set out in a capital-intensive industry with larger and more experienced competitors. However, these practices are common among those that are most successful in profits, production, and business management. Ultimately, it is not the amount of land, make of equipment, or even the enterprise that brings success. Sustainability is the result of consistent practices and habits that bring logic, balance, opportunity, and return to one’s life.

Dr. David Kohl energizes agricultural lenders, producers and business professionals with his keen insight into the agricultural industry through extensive travel, research, and networking around the globe. He is a Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech, Blacksburg, VA. Dr. Kohl has traveled over 8 million miles in his career and conducted over 6,000 workshops and seminars for a variety of agricultural audiences. Additionally, Dr. Kohl’s personal involvement with agriculture provides a unique perspective into the future trends of the agricultural industry and economy.

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