The Business Climate for Farm and Agribusiness Managers

Michael BoehljeCenter for Food and Agricultural

BusinessPurdue University

Three Critical Issues

• Structural change in agriculture

• Land values, incomes and government policies

• Managing the growing farm business

Structural Change in Agriculture

Dimensions

Size andSpatial Distribution

Business/V

alue

Creation A

ctivity

Workforce

DemographicsResource

Ownership/Financing

Val

ue C

hain

Lin

kage

s

Determinants/Drivers

Technology

Market Forces

Hum

an Capital

Fina

ncia

l/Eco

nom

icBusiness/Family

Life Cycle

Tran

sact

ion

Cos

ts

Determinants/Drivers, Continued

• Technology• Types

• Biotechnology/nutritional technology• Process control technology• Monitoring/information/communication technology

• Adoption/diffusion

Determinants/Drivers, Continued

• Human Capital• Management capacity• Time allocation (work/leisure)• Career path opportunities• Employment opportunities (non-

farm jobs, part-time, etc.)

Determinants/Drivers, Continued

• Financial/Economics• Economics of size/scope/learning• Risk• Rental and outsourcing• Capital structure• Land and resource ownership and operation

Determinants/Drivers, Continued

• Market/Industry Forces• Global competition/rivalry• Supplier power• Buyer power• Availability of substitutes• Entry prospects• Government/public interest impacts

Determinants/Drivers, Continued

• Business/Family Life Cycle• Entry/establishment• Growth and expansion• Maturation• Continuation/permanence• Exit

Determinants/Drivers, Continued

• Transaction Costs• Asset specificity and hold-up• Incentives and shirking• Information asymmetry• Quantity/service/quality mismatches

Impacts

Firm

Industry

Market Area/Community

Impacts, Continued

• Firm/Individual• Reward/profits• Risk• Efficiency• Control• Buyer responsiveness• Innovation• Market share• Flexibility

Impacts, Continued

• Industry• Market share• Global competitiveness• Market power

• Size• Position

• Distribution of risks and rewards among participants

• Share of wallet

Impacts, Continued

• Market Area/Community• Environmental impacts• Employment• Income• Stability/viability• Tax base/public services

Land Values, Incomes and Government Policies

Determinants of Land Values

• Urban development/housing prospects

• Farm income prospects

• Capitalization factors– Interest rates– Risk– Growth rate

• Investment portfolio considerations

Income Capitalization Model

V = i + r + g

I

V = Value

I = Annual Income

i = Interest Rate

r = Risk Premium

g = Growth Rate

Government Policy and Land Values

• 2002 Farm Bill increased income for many

• 2002 Farm Bill and subsidized crop insurance reduced risk

• Fed Reserve Policy (and slow economy) lowered interest rates

Higher Land Values

Direction of Variables

Recent Past Future

I Up Flat/down

i Down Up

r Down Up

g ? ?

V Up Flat/down

Managing the Growing Farm Business

Premise 1

• Changing perspective on availability and utilization of resources

LABOR CAPITAL

MANAGEMENT

LABOR CAPITAL

MANAGEMENT

Traditional New

Premise 2

• Disaggregation of resources (or exits altogether) will result in unprecedented opportunities – to rent land– to buy, operate, or manage livestock facilities– to align or integrate in the chain

Premise 3

• Growth is frequently most limited by management (not capital)– Essential to be able to scale the business

model/management with limited use of capital– Many businesses fail pursuing growth that

surpasses their management skills

Premise 4

• Many expansion/growth opportunities will be new ventures (M&A’s), not incremental or greenfield.

• M&A’s have different challenges than incremental endogenous growth.– Short/steeper learning curve– Larger resource commitment– Inherited problems– Resource redundancies– Different cultures

New Models of Management in Agriculture

Traditional New1. Walk around, hands on

managementRemote, hands off management

2. Operations oriented CEO mentality –people, money, relationship, strategy

3. Do it all Leadership, delegate

4. Little/no compensation Well compensated

Traditional New5. Internal

expertise/capacityOut-source/hire capacity

6. Can add activities without giving up any

Trade offs—can’t add without giving something up

7. Closed information system

Open access information system to get right messages and incentives

8. Need not scale or replicate

Must scale or replicate

9. Family personal dynamics important or dominant

Business relationships dominant

Traditional New

10. Personalities not critical Personalities and differences critical

11. Organization structure not critical

Organization structure essential

12. Closed communication style

Open communication style

13. Incenting right behavior not critical

Must get the incentives right

Traditional New14. Monitoring systems

embedded in managerPersonal performance monitoring systems critical

15. Convergent thinking Divergent thinking

16. Sustaining innovation Disruptive innovation

17. Skill of hiring people not critical

Selecting/hiring the right people critical success factor