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 Knowledge for the CommonWealth

Silver Anniversary Reflections!

Farm Business Management Update, December-January 2002/2003

By David M. Kohl

I attended the 50th Agricultural Bankers Conference in Indianapolis, Indiana, November 10-13. This year marked my 25th consecutive address. It was stimulating to be around 500 agricultural lenders, and to be informed and motivated by some of the top speakers in the agricultural field. The following are some of the information highlights and perspectives from this year's conference.

The low stocks in most commodities, depleted soil moisture in highly productive regions, strong global demand, and tough competition will influence commodity price outlook globally. South America will out-produce North America in soybeans by 2005. Argentina's financial and political unrest and Brazil's debt are clouds on the horizon for that area of the world.

The outlook for land values finds that values far exceed the capitalized earnings from agriculture. The three risks of owning farmland include low commodity prices, politics, and environmental regulations.

There are trends toward mass consolidation of the food industry. Five entities - Walmart, Kroger, Albertsons, Safeway, and Alhold - now account for 38 percent of the market share. In Canada and Europe, the top five represent 71 percent and 80 percent of food sales. Speakers were in agreement that the same could occur in the United States within the next five to ten years.

A speaker on bio-terrorism indicated that increased risk will occur as agriculture consolidates. Prime targets are regions of high livestock and crop concentration. Terrorism could occur from external forces and discontented internal factions within the United States.

When consumers purchase food and agricultural products, they should consider six basic factors: location, marketing, shelf life, variety, packaging, and basic product quality. These factors are grouped into three levels of consumer motivations; the "must haves," the "nice to haves," and the "oh wows!" Quality, packaging, variety, and shelf life are the "must haves." Brand labeling and promotions are the "nice to haves." The "oh wows!" are the locations that appeal to the senses smell, feel, and touch. An illustration of the "oh wows!" was seen as the Conference offered free coffee on a floor above Starbucks. The line at the expensive Starbucks was ten times longer than for the free coffee because the smell of the Starbucks coffee and the location appealed to the conservative lenders' senses.

Two speakers indicated the possibility of a double dip recession. The uncertainty of terrorist attacks, possible war with Iraq, and slow consumer demand is hindering long-term investment by businesses. One speaker was bold enough to indicate that the Dow would be 12,000 by 2005 and 20,000 by 2010 if these uncertainties are taken out of the global economic equation. Oil appears to be the Achilles heel of the United States economy with 5 of the 6 most recent recessions being directly correlated to the oil price shocks. Forty percent of the world's production is within a 200-mile radius of Iraq. Maybe a national energy policy is needed to reduce U.S. dependence on imported oil, which represents 54 percent of total use.

Finally, I moderated two panels: one on agricultural policy, the other with two Indiana producers. The two farm policy speakers were in agreement that if the economy suffers a setback, adjustments could be made in the recently passed farm bill. Both indicated that subsequent legislation for agriculture will be very "green payment" oriented with more emphasis on environmental and conservation payments.

Both producers farmed over 10,000 acres. However, one had operations in Indiana and South America. The three biggest challenges they said they face are competitiveness in the global marketplace, labor and management succession, and being part of a coordinated production system with major agribusiness players.

The strategies to position the business included dividing the business into earning engines and profit centers and examining each for short and long-term profit. Both were forming strategic alliances (input and output firms) and requiring more highly educated employees and management.

Surprisingly, both producers indicated that the human side of their lender is more important than interest rates. They expect the lender to know their industry, provide information and problem solving, and be available in good and bad cycles.

The Conference numbers have declined from 2,100 in 1981 to 500 in 2002, which reflects the changes in agriculture. However, one thing that has not changed is the sincerity of the agricultural lenders to their industry and a chance to be informed and challenged about the future.

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