Strategies for Surviving and Thriving in 2017
Experts advise long-term planning to help elevators, co-ops manage through the year
By almost all accounts, 2016 was a hard year for crop producers and other U.S. agricultural segments, and many experts predict somnolent commodity prices in 2017. An already high carryover from 2015 and record 2016 yields likely will continue to put downward pressure on commodity prices, but other trends and market dynamics may be favorable for the long term.
Industry leaders say that managers of elevators, ag suppliers and cooperatives will have to “manage through” the next year operationally, but also suggest that 2017 may be a good year to focus on strategic planning and take steps to assure long-term survival.
Could 2017 be worse than 2016?
In the past, everyone in agriculture would celebrate a great crop. But today, prices are suffering because of high carryovers, record 2016 U.S. crops, and high production worldwide. The U.S. came into 2016 with a high carryover of corn, soy and wheat from the previous year. The same situation is likely in 2017.
The USDA’s World Agricultural Supply and Demand Estimates report, issued Dec. 9, 2016, projected large increases in U.S. grain stocks. The WASDE report projected that U.S. stocks of corn would grow to 2.403 billion bushels at the end of the 2016/2017 marketing year — the highest since 1987/1988 — from 1.738 billion at the beginning. Soybean stocks are expected to grow from 197 million bushels to 480 million bushels by the end of the 2016/2017 marketing year — the highest since 2006/2007. Wheat stocks will grow from 976 million bushels, to 1.143 billion bushels.
Grain prices at the farm level were low in 2016. At the end of the year, average wheat prices ranged from $3.60 to $3.80/bushel, corn from $3.05 to $3.65/bushel, and soy, $8.70 to 10.20/bushel. Many experts predict little price movement for 2017.
Globally, high stocks and low prices mirror the U.S. situation. The U.S. could face strong competition in export markets, with high corn production in Brazil and Argentina, and a potential record soybean harvest in Brazil.
Low oil prices have stalled efforts to inflate corn prices for ethanol, though new ethanol blend mandates in other countries may stimulate ethanol exports.
Low commodity prices also rippled through the agricultural economy. Farm income has fallen 43% since 2013, putting pressure on farmers to trim household spending and farm- and ranch-related capital outlays. Bankers report that many growers are unable to make payments. Growers are borrowing more to pay their bills, and the debt-to-income ratio is the highest in 30 years. Bankers are tightening credit by reducing loans against cash flow, and instead requiring collateral at the highest levels in 25 years.
The cure for low prices is … low prices
Max Fisher, director of economics and government relations, National Grain and Feed Association, says that while 2016 finished with comparatively low commodity prices and there is less money to go around, the good news is that low prices and high volumes stimulate demand for feedstocks and exports.
“This year was phenomenal for crop production and there is hope for good market opportunities,” says Fisher. “At some point, prices can rebound. Low prices build demand — we’re certainly experiencing that now with soybeans — which is good for the ag economy in the long run.”
Fisher points to several factors that could drive commodity prices for 2017. “There is a buildup in the demand base on exports and domestic feed. Most growth will be on the feed side, both domestically and internationally.”
Global grain consumption is at an all-time high, according to USDA. Global corn consumption is expected to exceed 1 billion metric tons for the first time. Soy consumption may reach 328.7 million metric tons, also the highest ever. Wheat consumption is expected to be 7,233 million metric tons.
Grain and oilseed production has been high, even record-breaking, in several countries this year, but Fisher says history tells us at some point there will be a production hiccup in a major grain-producing country, and markets will rebalance to fill in for the lost production.
Going into 2017, Fisher advises grain and feed buyers to know their customers, and know their markets.
“Many grain and feed buyers are in the same communities as growers. They know what’s going on. They are well positioned to help their customers take advantage of the market tools and opportunities and, hopefully, capture as much value as possible,” says Fisher.
Chuck Conner, president and CEO of the National Council of Farm Cooperatives, agrees. NCFC members include grain handlers and processors, and those who sell ag inputs.
“At the end of 2016, things on the farm were great for growing conditions and yields, but farmers faced declining prices and, in most cases, prices were lower than the cost of production. This situation impacts greatly on cooperatives,” says Conner.
He adds that much of the grain harvested in 2016 was dryer than normal. It was great for producers, but bad for cooperatives, as they sold less propane.
Conner suggests co-op managers work closely with their customers and patrons. “What is the producer’s objective going to be when planning for the 2017 crop year? With low prices, will they plant another crop requiring fewer inputs, or will they alter production practices? When farmers don’t have money, input sales decline. Perhaps they will use less fertilizer or lower production goals. There may be no benefit for super-high yields. Analyze what may happen next.”
Build new relationships and new market channels
Both Conner and Fisher agree on the importance of understanding the changing marketplace, and finding ways to adjust to new market needs.
“We’re seeing diverse demands in national and international markets, says Conner. “We’re part of food systems, and there is a need to supply everyone who wants a unique combination of inputs, and to do so at competitive prices. There is a lot of action for demand based on identification of products to fill unique needs.”
Fisher also emphasizes relationship building, both with producers and in new markets. “U.S. grain handlers and feed manufacturers have been aggressive in seeking new markets and responding to customer preferences for organic and non-GMO products. Some of these market opportunities may be nontraditional, but they may have higher margins. Our industry excels in being responsive to shifts in customer demand.”
Sustainably produced crops are a growing market, as well, says Fisher. “Some producers are changing their management practices to seek more sustainability — economic, social and environmental. It’s a change in supply chains, presenting some opportunities. Some downstream market customers are working with feed companies and, in turn, grain companies on Field to Market sustainable supply arrangements.”
The Food Safety Modernization Act is a new wrinkle for the grain and feed industry, says Fisher.
Congress passed the FSMA in December 2010 and it was signed into law in January 2011. Current Good Manufacturing Practice regulations enforced by the FDA provide for systems that assure proper design, monitoring and control of manufacturing processes and facilities.
Grain handlers are exempt from FSMA’s requirements to conduct a hazard analysis, implement preventive controls, develop a written food safety plan and keep records, but they have supply relationships with feed companies and processors that are subject to these FDA requirements. Under a broad umbrella, the law applies to feed and feed ingredient and pet food manufacturers, grain processors, biofuels producers manufacturing co-products like distillers dried grains for use as feed ingredients, and importers of grains, feed and feed ingredients, and processed commodities.
“The grain and feed industry is at the beginning of the implementation process for FSMA, and the impact on the supply chains is not yet fully known,” says Fisher, “but we anticipate that FDA’s supplier verification regulations will have an impact on contractual relationships between grain elevators and those regulated companies to which they sell.”
Keep public policy on the radar screen
With the election of a new president and potential changes in regulatory philosophy, Conner and Fisher say public policy issues could be significant this year, in both favorable and unfavorable ways.
In light of the agricultural economic issues of 2016 and evolving views among legislators, Conner anticipates aggressive debate on the next farm bill. He predicts passage of a new farm bill, even though some groups, such as the Heritage Foundation, were calling for an end to farm programs during the last election and have been meeting with the transition team for the incoming presidential administration.
“The potential impact of public policy needs to be analyzed carefully,” says Conner. “With a new presidential administration, there could be significant efforts to address issues such as pay [overtime pay], and environmental regulations.”
Ag groups are likely to continue pressing for changes to Clean Water Act (CWA) rules. “CWAclearly and directly provides for our efforts to protect upstream waters without making them Waters of the United States. Yet, the final WOTUS rule issued by the U.S.
Environmental Protection Agency and Army Corps of Engineers makes many upstream waters and drainage features part of WOTUS, which is unlawful in our view,” says Conner.
Fisher agrees that upside regulatory changes could be favorable to the agricultural business environment and reduce business costs, but he also notes the need for agricultural groups to engage with the new Trump administration as it formulates trade policy to preserve the positive economic impacts of trade for agriculture and rural communities. “There was a lot of pressure during the presidential campaign to change trade agreements, or pull out of them,” Fisher says. “We believe there will be an opportunity to work with the new administration to modernize and build on existing trade agreements, such as the North American Free Trade Agreement, in a way that is mutually beneficial and further spurs economic growth and efficient trade within signatory countries.”
Strategy, talent management crucial to navigating change/building for future
Along with the economic situation coming off the 2016 crop year, the changing marketplace and technological advancements are forcing dramatic change. The need to manage employee talent is greater than ever before and should be an area of strategic focus going into 2017.
“In the next 10 years, technology and other factors will have a greater impact than in the past,” says Conner. “With fewer farmers, the changes are dramatic, even today. Our business structure needs to adapt and change.
“Fundamentally, there will be a greater need for training, and recruiting and retaining the best talent,” he continues. “There is a lot more sophistication — GPS, yield monitors, big data. There is a lot of grain to find homes for, which requires a great deal of national and international savvy — it requires a highly skilled workforce.”
Harvey A. Meier, Ph.D., CMC, is a certified management consultant and president of Harvey A.Meier Co., a Pacific Northwest management consulting firm. Meier has been a consultant for 46 years, with the last 25 focusing on coaching and facilitating strategic business planning, best governance practices, and leadership development and execution at the CEO, board, and senior management team levels, primarily for cooperatives and other agricultural businesses.
Meier is also co-author of The D’Artagnan Way, A Tale of Purpose, Passion and Team Commitment. The book and philosophy are designed to help leaders create and sustain teams that are inspired, passionate and committed. The book espouses seven principles:
Commit to a shared dream. Create strategic alliances. Respect each other’s differences. Maintain a positive attitude. Choose to trust. Do the right thing. Celebrate success.
Meier says co-op managers and boards should be asking questions. Where do you see yourself in the next three to five years, strategically and operationally? What information do you need to influence decision making? He adds that many factors may influence those decisions, and impacts may not be immediate. Those who position their businesses strategically will be the last ones standing.
“Ask whether to maintain the status quo business model, or what you want to see in three to five years,” he adds. “Think about the best, most likely, and worstcase scenarios, and look at what is happening globally, as well as the economic and political impacts.
Ask yourself if you need to make a paradigm shift. At the end of the day, it’s about risk management. Pick the most likely case.”
Meier also recommends looking for strategic alliances and partnerships. “This trend, including mergers, is becoming more prevalent for both strategic and economic reasons. While there was a big upturn in mergers 15 to 20 years ago, and then they fell off,they may pick up again. Position for long-term survival.
“At the farm and co-op levels, leaders who are successful must be good at planning and executing. They are strategic, build alliances and manage talent well,” he adds. “The real challenge will be talent management and business plan execution. Identify the type of people who have strong agriculture and ag business backgrounds, with a commitment to purpose, passion, teamwork and getting the job done.”