Paul Stoddard. Lecturer in Agribusiness University of Illinois College of ACES

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2 Paul Stoddard Lecturer in Agribusiness University of Illinois College of ACES

3 Paul Stoddard Lecturer in Agribusiness Department of Agricultural & Consumer Economics Copyright 2017, Paul B. Stoddard 3

4 #1: Think Long Term Stoddard & Levitt & Dubner say Stoddard says deciding WHAT TO DO means deciding what NOT to do Levitt & Dubner ( Think Like A Freak ) say Three reasons we keep doing things that aren t working We ve been told our whole lives not to quit Sunk cost fallacy We pay too little attention to opportunity cost 4

5 #2: Think Long Term Think about, worry about, and plan for multiple types of risk Price risk Yield risk Financial risk Counterparty risk 5

6 #3: Think Long Term Different Generations have big differences in 1) Goals and 2) Risk tolerance, therefore 3) Willingness to take on debt Discuss em! 6

7 #4: Think Long Term Don t forget the #1 goal: Be here to farm again next year so play defense 7

8 #5: Think Long Term Don t make long term decisions based on short term indicators 8

9 #6: Think Long Term Remember that the cure for low prices is low prices And the cure for high prices is And unfortunately, the cure for high prices is high prices Price rations demand Eventually Always. (Even though it takes a while sometimes.) The demand for $7 corn is not the same as the demand for $3.50 corn. Nonetheless, we often seem surprised when demand is rationed by price. And the good news is: low prices help rebuild demand! 9

10 #7: Think Long Term Some of the biggest risks to your long term survival aren t what you might expect Addiction to drugs Addiction to alcohol Addiction to gambling Contentious divorce Uninsured medical Imprudent use of debt financing NOT JUST YOU YOUR STAKEHOLDERS TOO 10

11 #8: Think Long Term Remember that it all comes down to people Relationships with landlords Relationships with employees Relationships with family Relationships with lenders Relationships with other stakeholders Emotional Intelligence matters as much as IQ Maybe more? Relationships take work; you wouldn t expect your planter to work year after year if you didn t put BOTH time and effort into maintenance 11

12 #9: Think Long Term I ll betcha 5 bucks I ll survive this! Don t Confuse Luck with Brains: You know someone Don t confuse profitable with prudent he made a bunch of money, therefore it MUST have been a prudent thing to do 12

13 #10: Think Long Term Estate and Succession Planning (There s a difference) Git er done! Close DOES NOT count Tell everyone the details and why Atty s + Accts + Lender + Professional Facilitator Lengthy process And expensive too Be sure your landlords know too! 13

14 #11: Think Long Term The younger generation in your operation Needs to develop relationships with your landlords NOW NOT AFTER YOU RE GONE And the landlord s kids/heirs if possible 14

15 Communicate How to know what is going through someone else s mind: Don t assume 1) Ask 2) Listen 15

16 #12: Think Long Term Your lender should be a LONG TERM trusted partner If not, get a new one Banks are plentiful 16

17 #13: Think Long Term WORRY ABOUT THE CYCLE OF BUSINESS FAILURE Jim Collins: How the Mighty Fail Stage 1: Hubris Born of Success Success as an entitlement; forgetting what got you there Stage 2: Undisciplined Pursuit of More Overreaching we re so great we can do anything! Stage 3: Denial of Risk and Peril Ignoring early signs of problems; good external results mask internal issues Stage 4: Grasping for Salvation Instead of returning to disciplines that brought success in the first place, grasp for dramatic new strategy Stage 5: Capitulation to Irrelevance or Death of business Giving up 17

18 #14: Think Long Term Diversify: Over time, move some money out of agriculture 18

19 #15: Think Long Term Don t forget that non-economic considerations Matter a lot Have an impact on economic decisions Identify and be explicit about noneconomic goals 19

20 #16: Think Long Term Benchmark your farm Know how your financials compare 20

21 #17: Think Long Term Seek expert advice: accountants, attorneys, etc. Your experts should be experienced specialists 21

22 Use experts, but as Buffett says, Never ask a barber if you need a haircut 22

23 #18: Think Long Term Are you developing a debt structure in this low interest rate environment that will be sustainable in a higher rate environment? Rate 36 YEARS Source:Schnitkey, G. "Rising Interest Rates and Farmland Prices." farmdoc daily (6):236, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 20,

24 Watch those spreads Consider converting variable/adjustable rate loans to fixed rate What if spread widens as rates rise? 8% Rate Fixed 5% 5% Var. 3% Time 24

25 #19: Think Long Term Remember: Not getting anything from insurance is a good thing.. I sure hope you don t use your crop insurance this year! 25

26 #20: Think Long Term Learn to Look at your operation like a lender does Most lenders would much rather say yes if they re saying No! or Whoa! Slow down! Sometimes being turned down is the best thing 26

27 #21: Think Long Term And the experts say marketing matters more than interest rates 27

28 Top third/bottom third? Big implications!? 28

29 We only recognize trend changes in hindsight That means, if you say the trend is my friend, you ll sell in a falling market you ll miss the top But most people don t want to sell when prices are falling And they don t want to sell when prices are rising There are only two types of people which are you?? 29

30 If you can t tell me What the risk is in your marketing strategy, Then don t do it 30

31 Learning from ADM/Ford Consider linking input costs and output prices when you can Industrial companies wouldn t dream of locking in input costs without locking in some output prices or vice versa LOOK AT COST OF INPUTS PRICED IN TERMS OF OUTPUTS For example: on 9/2/08 with NH3 at $1150/T and corn at $5.22, a ton of NH3 cost 220 bu of corn. But on 12/31/10 with NH3 at $672 and corn at $6.09, NH3 only cost 110 bu of corn. Now $500/T and $3.62 fall corn = NH3 costs 138 bushels of corn per ton But ADM makes money at everything they do 31

32 Thank you for your time! 32