Sharp Management Needed to Go From ‘Good’ to ‘Great’ Agri-View: Dairy News

Dairying and all of agriculture is in a “time of turbulence.” That makes sharper management and wise use of technology all the more important if a farm is to become “good,” and if it is going to move from “good” to “great.”

So said David Kohl, professor emeritus of agricultural economics at Virginia Polytechnic Institute and State University, Blacksburg, Va. Kohl spoke during the recent Midwest Dairy Expo at St. Cloud, Minn. He pointed out that turbulent times are not entirely bad. For one thing, they create opportunities.

Among those opportunities are possibilities for vastly greater crop yields. Kohl included those in his remarks titled “views from the road.”

By some accounts, he said, corn yields are projected to double during the next 10 years. With a U.S. average yield of 158 bushels per acre this years, that doubling would produce corn output of 316 bushels per acre by 2017.

What will that mean to dairying? What will those higher yields do to agriculture as a whole?

Kohl did not offer answers. But he did urge his audience to think about the possibilities.

Are those yields just pie-in-the-sky dreaming? Kohl noted that already researchers have produced 150-bushel-per-acre corn yields using just three inches of water. True, he acknowledged, those “sub-Saharan” results came in research plots, but many crop breakthroughs germinate in plots first.

Soybean yields will rise, too. Kohl said those yields are projected to climb 17 percent in just the next two years.

Those yield jumps are largely due to improvements in technology. Said the economist, “Technology will really start kicking in during 2010 to 2020.”

Higher land prices

One result of sharply higher corn and bean prices will be higher land prices. Some farmland in northwest Iowa that sold for $3,000 an acre just a few years ago is now fetching as much as $8,000, Kohl reported.

That trend likely will not stop. The economist said to look for prices for some cropland to shoot up to $10,000 per acre by 2010.

However, higher land prices are not chiseled in stone. Kohl said there’s a chance they could take a “buffalo jump” after 2008 or 2009. A “buffalo jump,” Kohl explained, is a cliff that Plains Indians drove bison off, making comparatively easy to kill large numbers at a time.

How high might that economic cliff be? The economist only offered this comment: “The longer the plateau, the steeper the cliff.”

In many states strong land prices are not closely linked to an acre’s productive agricultural value, Kohl pointed out. In Minnesota, the site of the Midwest Dairy Expo, half the value of land “has nothing to do with agriculture,” the economist said.

The situation is somewhat different in Wisconsin. There, 36 percent of land’s value is not attributed to agriculture.

Changes to federal tax laws could lower land prices somewhat. Kohl mentioned the provision that provides a tax break if land is sold but another parcel of similar value is purchased.

Kohl emphasized that he was not saying that land is not a good investment. But he urged caution when considering buying land if the price is way off the mark compared to the parcel’s productive value. “There’s more downside risk than upside potential,” he remarked.

As far as crops, look for cotton to become a “hot commodity,” Kohl continued. That’s because some ground that traditionally grew cotton was switched to corn, because of ethanol.

In addition, demand for cotton is expected to rise. That’s because people in developing countries have more money to spend on things like more clothing, Kohl explained.

During times of turmoil and opportunity it’s more important than ever to “keep your eye on the consumer,” the economist said. That means not only developing new products, new packaging and new delivery methods, but giving people what they want.

It’s also important to “strategize and execute,” he continued. So besides developing a marketing plan, put it into action.

Kohl recalled a visit to a farm in Saskatchewan, Canada some 20 years ago. A farmer there asked Kohl if he thought there was any market potential for bottled water. After remembering seeing a few professors on the Blacksburg campus drinking bottled water, the economist replied, “Yes.”

The Canadian farmer developed a business plan and launched it by tapping the springs on his land. “He farms for a hobby now,” Kohl reported.

Good managers will continue to do well, Kohl said. He noted that the return on assets (ROA) is above 10 percent annually for the nation’s top farmers. That gap, he added, will only widen.

What hallmarks are there of a “good manager?” Kohl said these people possess the ability to “manage the manageable” and “manage around the unmanageable.”

What’s more, these producers have “good people skills.” Those skills will not diminish in importance, he assured. Rather, their importance will grow.

The importance of “what-if” planning will also grow,” Kohl predicted. One of the “what-ifs” farmers need to keep track of is energy prices.

The economist said the U.S. could see a “wide range in oil prices during the next couple of years. Those swings could amount to as much as $40 per barrel.

Agriculture will probably not be insulated from the home mortgage shakeup. Kohl said one out of every 197 U.S. homeowners will have filed bankruptcy before 2007 is finished. That will likely tighten lending standards for home buyers and agriculture.

Dairy factors

Kohl outlined what he called “five vital factors for operating the 2010 dairy.” First, the top dairy operators will be excellent managers of land, water and livestock.

Also, a dairy farm’s location could become even more important. Some near “metroplexes” like Minneapolis-St. Paul, will sell their land for development and start anew elsewhere, Kohl said.

He used the example of a California dairyman who sold his 450-acre farm for $150,000 an acre. That farmer used part of the $67.5 million from the sale to start from scratch in West Texas.

The best dairy managers will work to place themselves in the “top 10 percent,” the economist continued. They will rank in the top 10 percent in terms of milk production, low somatic cell count, reproductive rates, cow longevity, and the cost of producing 100 pounds of milk.

These top dairy farm managers will also be able to “harvest the wins,” Kohl said. That means they will have and use marketing plans, come up with good ideas, and put those ideas into play.

What’s more, top dairy managers will be excellent financial managers. Kohl said these farmers will hire accountants “who understand agriculture,” use business analyzing and benchmarking, and plan the growth of their operations.

Finally, these best dairy managers will be good “people managers,” Kohl said. They will be “interdependent versus independent” and will work closely with their lenders, suppliers and marketers.

And, by 2010, the best managers will widen the gap over their counterparts. Kohl referenced a survey of 2,400 U.S. farms and ranches.

It found that those with the lowest net farm income lost an average of $19,000 per year, while those with “medium” net farm income made $61,000 a year. Operations in the “high” net income category earned $300,000 or more per year.

Looking at return on assets, the results were, from low to high: negative 2.7 percent, 9.1 percent, and 14.4 percent. For operating margin, the results were: negative 7.6 percent; 17.36 percent, and 28.3 percent.

Wrapping up, the economist asserted that the next several years will be filled with “turbulence and volatility,” but they will also be marked by “a lot of opportunity.” During those times, Kohl concluded, it will become “very important to go from good to great.”