the business climate for farm and agribusiness managers michael boehlje center for food and...
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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