‘Control the controllables’: Planning to succeed in even the most difficult times

For the Basin Business Journal | May 1, 2022 1:00 AM

BLACKSBURG, Va. — There’s a lot that farmers cannot control: costs, prices, market conditions, the weather.

But they can prepare to deal with the uncertainties and volatility that inflation, war and a rapidly-changing global trade environment bring, according to David Kohl, a retired agriculture economist at Virginia Tech, during an hour-long online presentation in early April sponsored and organized by Northwest Farm Credit Services.

“I call it managing the controllables,” Kohl told attendees. “We can’t manage what comes out of Washington, D.C., Moscow, Beijing, Brussels, but we can control the controllables like our marketing, our finance, operational management, and our production management.”

Between domestic inflation and international instability, Kohl said conditions are likely to be challenging for U.S. agricultural producers for the next few years, so the best way farmers can get ahead of any potential challenge they might face is to build up working capital — cash on hand — to create a cushion and take advantage of potential opportunities that might present themselves.

“Did you build profits? Or did you build working capital through profits, particularly when you received those government checks?” Kohl said. “Or was the working capital built through a refinance type of structure? Of course, we’d prefer the first one.”

Kohl says he tells farmers to try to keep enough cash on hand to pay 25% of expenses. A lot of that cushion of reserves is going to have to be built up the hard way — by exercising tight control over planning and costs and mastering complex spreadsheets so a farmer knows exactly where and how every cent is spent.

Kohl said he also advises farmers to keep a close watch on their ratio of working capital to debt service payments, both principal and interest, and keep it between 5:1 and 3:1 if possible.

Farmers need to plan carefully and prioritize future capital expenditures, Kohl said, making sure not to spend too much working capital on future investments, in order to keep “their powder dry.”

“I would suggest that you spend 5%-10% of your time in planning. This is one of the things we got away from in the late 1970s,” Kohl said, referring to the last bout of sustained inflation in the United States. “We had a run-up in asset values. Things were real good, and the folks didn’t plan. They got hit with a ton of bricks.”

According to a history from the U.S. Federal Reserve, the nation’s central bank, the period from 1965 to roughly 1982–83 is informally known as “The Great Inflation,” when the annual inflation rate topped out at nearly 15% in 1980, driven largely by sustained increases in federal spending and two major rises in oil prices brought about by war and revolution in the Middle East.

Land prices boomed during the period, Kohl said, and a lot of farmers borrowed heavily against the rising value of farmland, only to find themselves unable to service their debts when commodity prices collapsed in the early 1980s.

“Things can get out of control very, very quickly,” Kohl said.

Kohl said he tells students that 80% of their business plan should be handling cash flow and thinking through production, marketing, finances and operations, and that acting and not acting both have consequences.

“The key in cash flow planning in this type of environment is to keep your business within the financial guardrails,” Kohl said. “Remember this: good and bad decisions compound over time.”

Kohl said at the family business that he partly owns, Homestead Creamery in Wirtz, Virginia, cash flow is managed weekly, and the farm’s longer-range plans are tweaked regularly to keep atop changing conditions.

“It has been one of the best management practices that we’ve done, because what we’re doing is we’re actually making little changes in our business as those weekly results come in,” he said.

Homestead is then able to pass on those changes — for good or for bad — to customers quickly, Kohl said. And being able to precisely know the cost of production helps the business make better long-term plans as well by allowing managers to create better and more accurate scenarios to quickly adjust to or take advantage of future conditions.

Financial transparency is also key for large operations that hire professionals to keep their books, Kohl said.

“Even if you turn it over to an accountant or a CFO, you’ve got to take ownership of the numbers,” he said.

Kohl also said even small farms and businesses can benefit from a focus on ESG — environment, social and corporate governance concerns — as retailers more and more look to satisfy consumer demand for ethically-produced farm goods. Homestead Creamery does about $13 million a year in business, Kohl said, and has benefited from taking an ESG inventory and promoting it.

“We sell our milk in glass, which is recyclable. We gave a profile to our workforce, which is 52% male and 48% female and 35% minority,” he said.

Kohl noted Homestead has developed conservation plans for each of its six farms and after tornadoes tore through western Kentucky in early December 2021, Homestead Creamery donated several truck loads to disaster victims.

“I’m going to throw this challenge out to each and every one of us,” he said, “for all of our industries, whether it’s crop, livestock, fruit or vegetable, hey, let’s develop a proactive ESG strategy. Because I think agriculture is one of the leaders in this.”

Finally, Kohl said long-lived businesses focus on core values, are frugal and are always planning for transitions. Successful farms also focus on building and sustaining long-term relationships with employees, buyers, suppliers, processors, insurers, bankers and other farmers.

“What are some of the lessons that I’ve learned five decades being in this business? Get people started young. Business and financials are very, very critical. I actually started when I was involved with FFA and vocational agriculture, and boy, has it paid dividends in life,” he said.