In the heart of the U.S. farm belt, Michael Boehlje looks around him and knows that what he sees is fast disappearing. The future is almost here.
What will the future look like? More important, how can you build for success in that brave new world… or decide if you should just get out of the way?
Based at the Purdue University, Boehlje is one of America’s pre-eminent ag economists. He specializes in studying the big forces that are transforming agriculture, and he has been helping farmers and agribusinesses figure out how to map their route through those changes by developing their own strategic plans.
Read Also
Youth focused on keeping Quebec’s dairy industry strong
In part two of our Making the Future series, Country Guide spoke with Béatrice Neveu from Rawdon, Que. (Read part…
Farmers don’t have to be helpless deer in the headlights, Boehlje believes. Strategic planning can identify trends and events that could impact your sector. Then the planning process can assess how likely those changes are to occur, and what they will mean for your farm. From there, the next step is to develop an action plan so your business can take control of its own destiny.
The curves are coming, Boehlje says. It’s time to grab the wheel.
1. NORTH AMERICA LOSES GLOBAL DOMINANCE
North America’s commodity farmers are increasingly in competition with low-cost regions around the globe, and that competition is only going to intensify.
Those farmers aren’t trying to be as good as farmers here. They aim to be better. That’s the point we often miss.
The world’s farmers now have essentially equal access to the latest technology and production systems, and increasingly they also have the capital to acquire them. It’s how Brazil has overtaken the U.S. in soybean trade, and it doesn’t take a lot to imagine other developing countries doing the same thing with other commodities.
As well, our competitors are pumping money into infrastructure and they’re solving the limitations that are holding them back. Again, they don’t want to be as good as us. They want to be better. For example, the water transportation system in Brazil now allows ocean-going vessels to go up the Amazon River and be loaded directly by trucks and rail cars. It’s enough to make the U.S. Mississippi barge trans-loading system look downright backward.
Nor is Brazil alone. With its access to the Black Seas, Ukraine has a great transportation advantage over North America’s landlocked wheat belt.
“Our infrastructure in the U.S., especially our water-based system, is really old technology,” says Boehlje.
STRATEGIC QUESTIONS How does our cost of production compare to other producers globally? How can I differentiate or add value to my crops and livestock to reduce my exposure to global commodity competition?
2. WORLD HUNGER DRIVES FARM CONSOLIDATION
An expanding global population is often touted as the most significant driver for agricultural growth. However, Boehlje says there’s more to it than how many mouths we have to feed. It’s also how much our customers have to spend on foods. “Everyone’s talking about nine billion people by 2050,” he says. But the key part of the equation is income growth in countries with huge populations.”
The world’s most populous countries, China and India, are at income points where diets can move from vegetable to animal proteins. As long as incomes continue to go up, so will demand for animal protein.
Historically this switch to meat has been a major source of growth for agriculture. If incomes stagnate, then money for meat isn’t there.
“With 2.4 billion people in China and India today, agricultural demand depends on how much money those people have to buy food,” says Boehlje.
However, food inflation is now at double digits in China and overall consumer inflation exceeds five per cent. Beijing is responding with higher interest rates and tighter credit, and by allowing China’s currency to slowly appreciate against the U.S. dollar.
This opportunity has to be balanced with the fact that large global processing companies dominate the animal protein industry. For example, with the purchase of poultry giant Pilgrims Poultry, JBS, a Brazilian privately owned company, is now the second-largest meat company in the U.S.
Moreover, this consolidation in processing has led to more farm consolidation and contracts. “Part of the reason we’ve seen consolidation in the meat-processing industry, is that we’ve seen consolidation in the retail industry,” says Boehlje. “And that just goes farther down the channel.”
Strategic Questions.How can my farm take advantage of the demand for meat? How is our farm improving margins and relationships to compete with large-scale integration and consolidation?
3. Technology Favours The Large
“The trend to automation and precision has really advanced,” says Boehlje. “Increasingly human labour is being replaced by machines and automation.”
As decisions become more information based and equipment can run all day and night, the payback on technology speeds up. “The move from labour to capital investment is changing how we farm,” Boehlje says.
For example, Boehlje knows potato producers with goals to operate harvesting equipment 22 hours a day with two hours a day for field transport and maintenance. That’s a different type of agriculture than we’ve had before. It’s more like an industrial plant with double or triple shifts.
All the major equipment companies have robotic tractors in development and are working on ways to have three, four or five modules work independently or in unison.
Using GPS-driven application equipment, seed, chemical, fertilizer, and irrigated water are precisely placed and there’s more controlled production through improved genetics and information management.
Moreover, there’s real-time monitoring of the growing process. For example, irrigation can be triggered by meters that measure plant stress, and ventilation and cooling systems can be turned on automatically at temperature set points.
In general, Boehlje says new technologies are more readily adopted on larger farms, decreasing the cost per unit of those technologies. “Those that can use these technologies to lower costs will be competitive,” he predicts.
Strategic Questions.What technology will help my farm fully use its resources, manage inventory, control processes and market production? Does my farm have the skills, knowledge and attitude required to rapidly identify and adopt the best technology?
4. Consumer-Driven Change Hits The Farm
By 2015, Wal-Mart will be listing its products’ carbon footprints on product labels. That’s a big move by the biggest food retailer in the U.S., but Wal-Mart isn’t alone, Boehlje says. “We’re seeing large retailers demand more credence attributes.”
Private-sector expectations like these require more documentation at the farm level. Plus, we also need to expect an overall increase in legislation on environmental and animal welfare issues, which means that farmers will need to adapt their management on the go.
Strategic Questions.Are there opportunities to build niche markets or to direct contract with retailers who require sustainable farming attributes? What are the ecological risks on my farm?
5. Value chains demand more traceability
Supply chains will continue to become more closely linked, from farmer to processor to retailer, says Boehlje. When the stages work together, the costs associated with transportation and inventories along the value chain should be minimized.
Meat processors are using contracts to co-ordinate supplies. Slaughter timing, inputs, special traits, and food safety controls are being done to order for processors and retailers. Traceability techniques proving a product is produced in a certain way are improving and becoming more common.
Such chains may drive farm profitability, but they also impose costs and they change the job of farming. Their success is tied to generating, analysing and acting on constantly flowing information and then using records and traceability to document everything you do.
Strategic Questions.How strong are my networks, alliances and business linkages? Can I manage a rigorous tracking system?
6. Price volatility is only beginning
A decade ago, Boehlje predicted that the swings in commodity prices would get bigger, and that farmers would need to get better at managing price risk. However, even Boehlje didn’t forecast the incredible double bumps in the last four years. “Price volatility has increased by an order of magnitude we have never seen historically,” he says.
Weather events, disease outbreaks, government policy and fund investors are adding uncertainty to an already skittish commodity market. In the last year, weather events had even more impact because of tight grain supplies and low world carry-outs.
There’s also more strategic risk. Other outside factors such as a change in government policy or a sudden health risk can and will continue to affect the whole industry. Examples range from the Star- Link corn recall to theE. colidebacle in U.S. spinach. Although such food safety events have low probability, their significance is huge.
Strategic Questions.What are the greatest market threats to my farm? Do my risk management resources match my risk?
7. Finding Your Own Business Model
“There’s no longer a typical farm,” says Boehlje. There used to be more commonality among farms in a given area. Most farm businesses were also sole proprietorships. Now a single region can have large contract growers, independent producers, small-scale specialty growers and many different business models, and we’re seeing a lot more corporations, partnerships and joint ventures with extended family and non-family members.
Within that mix, it will be essential for individual farmers to determine which business model will work best for them. They can’t simply do what their family has always done, or what everyone is also doing.
Their production model has to be wisely chosen too. Today’s specialized farms produce a portion of the production cycle, such as a feeder barn or a weaner facility. Other farms produce specific traits or differentiated products within a sector, such as canola with a specific oil content.
Organic, local and natural are becoming big players. More importantly, these products generally produce higher profit margins. “They’ve moved from fads to fairly established markets,” says Boehlje. “There are still growth opportunities in those markets.”
Not only do farms vary in what they produce but also in how well they produce it. The differences among farms in terms of size, volume, efficiencies, skills, leverage, production, leasing and technology used are all increasing.
In other words, everywhere you look, the future is all about identifying which decisions you need to make, and then making the best decision every time, says Boehlje. “These changes provide opportunities for some, but threats for others.”
Strategic Questions.Which enterprises and activities make the best use of your resources, your production skills and your marketing strengths? Which business structure is the best fit for your circumstances, your management capabilities, and your goals?CG
