Edition #4

May 14, 2023

Good morning and welcome to The Agri-Business Braintrust newsletter. We’re like my 3 year old’s favorite unicorn stuffed animal… a little puffy but a trusted friend who only wants the best for you.

A few notes to begin:

• Thank you to everyone who has been asking how they can get more involved & offering feedback on how to bring more value… keep the comments coming. ([email protected])

• There’s a few tools in the Resource Library from Michigan State University. Most land grant colleges produce some type of free tools for folks to use. Unfortunately, I find most of them challenging to use. Our goal is to create more user-friendly tools, so until we can do that, we’ll provide you links to some of the University resources.

• Exploring ideas for some scheduled, live, member connection discussions, so keep your eyes out for some trial ideas coming soon.

Alright, let’s get to the topics that will help you build a strong, sustainable agri-business.

-Clint

Here’s what we have this week:

• 📃 Business Plan (Part 4 of ?)

• 🌱 Seeds

• 🤝 Partnerships

• 📊 Short Hedging

• and more…

BUSINESS PLAN SERIES - Week 4

We are on week 4 of diving into how to create a comprehensive business plan for your ag operation. As a refresher, successful farms and ranches don’t just happen by mistake.

They are the result of a well thought out plan that allows for growth and flexibility designed to reach a distant goal.

Whether you have been running a farm for years, are looking to start one from scratch, or are somewhere in between, you ought to have a business plan.

Here’s Part 1: Business Description

Here’s Part 2: Products & Services

Here’s Part 3: Marketing & SWOT Analysis

Now let’s look at the fourth part of building out our business plan…

Reminder: we’re working through this Google Docs template to build out our example. If you didn’t already do so for your homework last week, download and save a copy to build out your own business plan.

Part 4: Operational Plan

We need to outline what we’re trying to accomplish and how we intend to accomplish it. Again, it’s helpful for us, but also helpful for third parties who we may share this with: lenders, investors, consultants, etc.

One thing to note on this Operational Plan is that it will necessarily cause us to create supplemental spreadsheets & documents that feed into our overall plan.

We’ll tackle those once we’re done with the general business plan…

First, we’ll detail out our production intentions and how we think we are capable of putting the crop in the ground.

This section can be extremely detailed, but the necessary things to include are how and what you plan to produce with your seasonal business.

Think of it as an overview of considerations and steps you will take to put a crop in the ground (or create whatever product/service your business plan is designed to do)

Here’s how we positioned it:

Next, need to consider making a plan for mid-season and harvest. So, we highlight steps needed to be done that will ensure our success.

These are overview topics, that will need to be comprehensively detailed in our supplemental operational plan spreadsheet…

Then, we outline what personnel needs we anticipate, and how we might meet those needs.

This could be significantly more detailed if you are operating/planning a business that has high labor needs throughout the year.

Next, inventory considerations and suppliers who we will be sourcing that inventory from/selling to ought to be considered.

No matter the type of business, you will have inventory needs that should be planned for. (Even online/digital businesses have suppliers to be identified)

Finally, we’ll make a list of advisors who we will be relying on to make this venture a success.

I listed some must-haves when it comes to your advisory team (think of them as an unofficial board) but your business may want more specific advisors who are there to support & champion your operation.

Now it’s your turn!

Homework: Over the next week, spend some time outlining your Operational Plan. Think about the unique challenges you may encounter to produce the goods/services you’re planning on selling.

The more detailed the better.

I’ve had a few folks sending me their business plans to get my take on them, and that’s awesome. KEEP ‘EM COMING! [email protected]

Next week, we’ll get into the meat & potatoes many of you have been waiting for: the financial considerations. Startup expenses & deal structure.

SEEDS

• 🐻 WASDE Report: The World Agricultural Supply And Demand Estimate (WASDE) came out this week. Here’s a good summary article discussing the results. The gist? Corn and soybeans are bearish…

• 🍅 Best Practices: Farmers Markets are great ways to sell your specialty produce and value added products at a higher margin. If your community doesn’t have one yet, Nebraska put together a comprehensive resource if you consider starting one. (The full 110 page Handbook is in the Resource Library)

• 📈 Land Prices: Here’s an article discussing the “wealth effect” and how rising land prices impacts your balance sheet. This unearned equity may be viewed differently by various lenders when pledging collateral.

• 📝 Conservation Program: USDA is making changes to a conservation easement program designed expand eligible areas, grant more access to land owners, and provide higher payment values for ACEP recipients.

• 🐘 For Fun: Farmers in Michigan found a 15,000 year old, wooly mammoth scull with 9’ tusks buried in their soybean field. Here’s the story…

LEGAL

Last week we looked at the second of 5 business entity types that agri-businesses could fall into, Limited Liability Companies (LLC).

To recap, there’s:

• Sole Proprietorship

• Limited Liability Company (LLC)

• Partnerships

• Corporations

• Cooperatives

Each has their own best uses along with their unique pros and cons. This week, the focus is Partnerships…

Alright, now that Investopedia defined it, let’s look at some pros and cons of a partnership.

But first, it’s important to point out there are many different types and purposes of partnerships, and almost any individual or entity type (private, public, governmental, etc) can be involved in a partnership.

For our purposes, we are going to focus on the three main categories of for-profit partnerships: general partnership, limited partnership, and limited liability partnership.

General Partnerships

All parties share legal and financial liability equally. Profits are also shared equally. The individual partners are personally responsible for the debts the partnership takes on.

Limited Liability Partnerships

Commonly used for professionals such as attorneys, accountants, and architects, this arrangement limits partners personal liability in case one of the partners gets sued for malpractice.

Limited Partnerships

These are a hybrid of general partnerships and limited liability partnerships. Here, at least one partner must be a general partner with full liability for the partnerships debts. At least one other partner is a “silent partner” where they have no management of the day-to-day operations of the business.

Now to the Pros & Cons of partnerships…

Pros:

✓ Pool labor, capital & expertise

This allows the ultimate objective or goal to generally be advanced quicker and more efficiently. Often times, one partner will have a specific skillset and resources while the other partner(s) will have unique and complimentary connections and resources.

✓ Pass Through Entity

A pass through entity means you pay personal income tax on the business profits. In other words, your profits are not “double taxed.” (Once at the corporation level & once at the personal level.)

A partnership ought to obtain an EIN for hiring employees & other official partnership business.

✓ Flexibility

Partnerships can take many different forms and be used for many different business types.

The “Partnership Agreement” (which should be completed & memorialized) is generally flexible with how work and resources are delegated, and how profits are shared among the partners.

Cons:

👎 Partner Debts

Partners are personally held liable for any business debts of the partnership, so creditors can pursue personal assets in the event of default by the partnership.

👎 Management Issues

Unlike a Sole Proprietorship or LLC, because partners are treated equally, there is a greater chance of disagreement on management of the business.

👎 Resale

Partnerships are not ideal for a business that may be hopefully sold in the future. If looking to sell the business down the road, often times a different entity structure will need to be adopted.

This comes at considerable negotiation, cost, and time headaches.

Summary

A partnership is a legal arrangement that allows two or more people, companies, or other entities to share responsibility for a business.

The partners share: ownership, profits, work, responsibilities, and losses.

A properly planned partnership can give the business new resources, expertise, and opportunities to succeed, but a poorly planned one may result in mismanagement and disagreements.

RISK MANAGEMENT

Over the past few weeks, we’ve been learning about Risk Management (RM) from our ESP Devin Patton.

Now it’s time to see a real world example of what he’s been teaching us…

Refresh. A futures contract is for a specific quality and quantity of a specific commodity. 5,000 bu. of number 2 Yellow corn is what a corn futures contract represents. A short hedger example:
 
A 50,000 bu corn farmer in the western corn belt decides to hedge 15,000 bushels of his normal production early in the season. He shorts (or sells) 3 futures contracts on December delivery at $5.25/bu and deposits $5,000 into his hedge account for initial margin capital.

As harvest approaches, the regional Ethanol plant suddenly bumps their Basis bid from it’s typical –20 to +10 for harvest delivery. He calls and sells the 15,000 bushels he hedged at +10 basis for fall delivery and then lifts his hedge by buying his 3 contracts back at $4.80/bu.

By using futures contracts to hedge against a price drop for some of his production, he was able to capitalize on the 30 cent/bu basis bid increase, without risking the flat price. If he had not hedged at $5.25, he would have lost 45 cents/bu before gaining the 30 cents on the increase in basis, a net negative of 15 cents/bu. Had he simply sold instead of hedged his net cash sale would have been $5.05 ($5.25 futures and –20 cent basis.)

Instead, he was able to get $5.35 ($5.25 futures and +10 cent basis) as a result of hedging futures market and waiting for an opportunity to sell a stronger basis.

While this example does demonstrate a good net result of the hedged 15,000 bushels of corn, the remaining 35,000 bushels of his expected production went unhedged and lost 45 cents of futures market value.

This is a better net result than being 100% unhedged, but it is the risk tradeoff of being partially hedged and hopeful for higher prices.

In a perfect world, we would be 100% hedged when we know the market is going down, and 100% unhedged when we know the market will go higher.

The reality is that we don’t know anything with complete certainty, and can only make risk tradeoffs using the tools we have available.  

Want more?

Devin is ready and willing to answer any questions and further go down the rabbit trail with you. Shoot him an email here: [email protected]

Disclaimer

Trading futures and options involves substantial risk of loss and is not suitable for all investors. An investment in futures contracts involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of their margin deposits. You should carefully consider whether futures trading is appropriate for you in light of your investment experience, trading objectives, financial resources, and other relevant circumstances. Past performance is not necessarily indicative of future results.

INSURANCE

How Life Insurance and Estate Planning affected me…

Steve Hasche, Endorsed Service Provider (ESP)

My dad was 40 years older than me and I always knew that if I was going to be able to buy land and other assets it was going to take a bold move on my part. Both my dad and I had a realistic view of life insurance. It was a business decision that we were making at the time.

I had researched life insurance and had figured out what kind of dollars it was going to take to make a dent in the future purchases.

We worked with an attorney to form an agreement of what was going to happen in the case of his death. We thought we had a good plan. There are many factors that go into estate planning and it is always important to have good people on your team helping you out.

Here is what I have found out after going through it…

1) Making the payments on a policy can be hard sometimes. The markets in agriculture aren’t always agreeable with what you have going on in your plan. My mindset was that I was buying tomorrow dollars at a discount.

2) The day you get handed a check from a life insurance company is not a very happy day. It means someone has died. Like I said before, it’s a business decision that was made in the past.

3) Hindsight is 20-20, and I can honestly say that it was worth the sacrifices made to make the premium payments. You are buying your future and most times you are securing the future of the generations to follow you.

Steve’s real world experiences help him provide insurance solutions to farmers and ranchers every day. For more information on how to protect your assets or how life insurance could be a tool for the next generation, send him a message: [email protected]

MEME OF THE WEEK

That’s a wrap, folks.

Until next week, thank you to everyone involved in ag. Let’s grow profitable agri-businesses together.

Don’t forget you’re able to leave comments on the post on the website. Looking forward to reading people’s feedback!

Referral Program:

Want $50 cash? Just refer 3 new members, and you’ll get paid!

DISCLAIMER: All content, communications, and resources provided by Agri-Business Braintrust, its principals, operators, or members is intended to merely be educational and entertaining. Nothing published by Agri-Business Braintrust should be relied on as legal, financial, investment, or other professional advice. Investments and legal matters involve substantial risk and are not suitable for all individuals. It is recommended to enter into a client relationship with an ESP for obtaining professional advice.