Growth, Transition and Succession Strategies for Multi-generational Farms

Welcome

Multi-Generational Growth Strategies

Tremendous Opportunities in the years ahead

• Increasing demand

• More middle class consumers

• Ingenuity, Innovation and Appetite

• New Fortunes made in Heartland

• Entrepreneurs will emerge world wide

Increased demand

World grain inventories are tight

Your greatest asset

•Your entrepreneurial Skills•The Empires of the Future are the

Empires of the Mind•Multigenerational opportunities•Mapping the DNA of successful farmers•Commitment•More money to be made farming than any other industry

Profitability Not a Function of Size, Type of Operation, or Location

Operation ROA ROE

860 acres & custom feeds2,206 head pig space, 12 yr aver

9% 14.0%

3160 acre corn & soybeans 10 year average

14.0% 21.1%

12,000 acres corn and soybeans33 year average

15% 21%

650 sow farrow to finish 10 year average

10.5% 14.5%

900 acres & 4,800 pigs spaces6 year average 297M – 1,571M

16% 28.8 %

ROA (Return on Assets) ROE (Return on equity)

Growth in Net Worth

• $500,000 NW• Grow 7% for 10 years• $983,000

• $500,000• Grow at 17% for 10• $2,403,000

A Look at History

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1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

NFI

$ (B

illion

s)

Year

Historical Net Farm Income

NFI (Current Dollars) Average Adjusted NFI (1915-2004)

Hog Industry Returns

Bullet Proof your balance sheet

• Working Capital

• 50% of revenue

• Overall equity > 60%

• Keep fixed costs low

• Take a profit

Land Value Trends• 1850 to 1900

– Land values rose from $6.09/acre to $43.31

– 4% Average annual increase

– Four depression periods of low prices and foreclosures

– 1858-60, 1871-72, 1876-79, 1894-98

1900-1950

– Land Values rose from $43.31 to $218

– 3.29% average annual increase

– Two depression periods of low prices and foreclosures

– 1921-25,1931-35

Land Value Trends• 1950 to 2000

– Land values rose from $218/acre to $1,857

– 4.38% Average annual increase

– One depression period of low prices and foreclosures

– 1982-87

2000-09

Land values rose from $1,857 to $4,371

10% average annual appreciation 2010 15.9%

1850-2010

4.20% average annual appreciation

Risk Management Trends• The attitude, skills, knowledge, and profit gap

among producers is getting farther apart, by the day.

• We are entering a whole new wave of consolidation in production agriculture.

– No Safety Net

– Volatility

– Technology

– Demographics

– 40% of production from 2% producers

Risk Management Observations

• Good times do not last long (cycles occur)

• Increased volatility and risk

• Very wide profit gap

$33 to $220 acre

U of I $100

• Everyone is down loading risk to the farmer

Risk ManagementRecommendations

• Contingency Plan w/o Government Payments

• Partnering With Input Suppliers

• Seek, Hire, Train, & Retain Top People DITH, SITG

• Get Green, Stay Green, Grow Green

• Have a PR Plan

• Bullet Proof Your Balance Sheet

Have a Plan

• Determine the gross dollars per acre you need for:– Term Debt payments– Operating Expenses– Living – Depreciation– ProfitThe problem is tracking

www.russellconsultinggroup.net GrainBridge

Having a Plan

• Makes farming easier and more fun• Reduces stress• Worry less about competition

– John Wooden- won 10 NCAA championships

– Never had opposing team scouted

New Breed in Production AgOld New

• People are a cost• Do everything yourself

so its done right• Own equipment• Valuations based on asset

values• Overhead a necessary evil• Limited working capital• Get things done• Source Scott Hazlett Machinery Link, Inc.

• People are assets• Know what you don’t know and

hire it done.• Lease equipment• Business value based on

multiples of net earnings.• Overhead reduction as a

source of capital• Working capital > 50% of

revenue• Manage relationships

Management Traits of Growing Farms& What Landlords Want

• Trust• Honesty• Transparency/Communications• Financial Stability• Money• Look like you can farm it• Stewardship• Extra Effort• Agronomic management

Mapping the DNA of Successful Farmers

• Attitude• Interpersonal Skills• See the big picture

– urgent and important

• Planning• Thirst for Knowledge• Network with other top producers• View Problems and Challenges as

Opportunities

Crop ShareAcres

JasonFranck

ChrisBarron

RickMatthiesen

T.JMatthiesen

Carson & BarronFarms Inc.

Multi- Generational Model for Growth

LL A

LL B

LL Z

LL XLL Y

Landlord 2 LL 3 LL 4

1000 acresKS 2010

Landlord 1

Trust, Shared Goals and Common Vision

• 5 years or < KS will rent to CB • In 2009, traded equipment line for planter

and field cultivator.• Leased purchase agreement back to CB

Farms on equipment• CB Farms KS 1000 acres for fee with labor

offset • KS still owner operator

Benefit Values on 1000 Acre Farm

Revenue enhancement• $.25 / Bu. Market Corn• $.05 / Bu. Trucking• $ .30 / Bu. Corn Total• 160 bu./ac * .30 = $48• 500 ac. = $24,000• $.60 / Bu. Market Soy.• $ .05 / Bu. Trucking• $ .65 / Bu. Soy Total• 50 bu./ac. *.65= $32.50• 500 ac. = $16,250• Total Gain = $40,250

Expense savings• Seed $ 70,000• Chem. $ 45,000• Fert. $ 40,000 • NH3 $ $37,500 • Equip. $ 30,000• Total $ 222,500• Save 4% = $8,900• Plus $35/ ac Agronomic• Overall Value Enhancement• $84 per acre

Win/Win

KS Advantages• Less Stress• More Free Time• Better Job Farming • Peace of Mind.• More Profits

CB Farms Advantages• Captive Growth• Controlled Growth• Less Risk• Quality Labor• Leverage Current System

Attitude is Key“The world gives to those who give

The world takes from those who takeIt has a perfect accounting system”

Trust, shared goals and common vision

Production Ag in North Americais a Great Business

A Look at the rest of the world

ROE of Fortune 500 in 67 Industries

• Household & Personal 35%• Food Services 28%• Beverages 25%• Pharmaceuticals 21%• Chemicals 21%• Information Technology 21%• Food Consumer Products 21%• Healthcare & Pharmacy 20%• Medical Prod & Eq 20%• Aerospace & Defense 20%• Computers & office equip 19%• Healthcare & Medical Facilities 17%• Internet Services 17%

Source: May 3, 2010 Fortune Magazine

Fortune 500 Companies

• Median ROE in 2009 was 10.5% • Walmart, Kmart and Target

all started in 1962• Blockbuster and Netflix• Same economy and conditions, but• Different plans and strategies, produce• Different results

The Bell Curve

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Examples

Airline industrySouthwest Airlines is included in the top ten most respected companies in America. Most others in the industry are struggling

Lesson-do not benchmark your business with the average.

Part IV

• Leverage Points for maximizing profit• Benchmarking your operation with the best

What Should Top Producers Focus On?

What are the mostimportant leveragepoints to reachingincome targets?

Leverage Points of High Profit Farms

Marketing $0 to $315/acre RealisticEquipment Cost Mgmt $22 to $180/acreLabor Management $15 to $127/acreAgronomic Mgmt $0 to $165/acreInput cost Mgmt $0 to $85/acre

Total $/ acre $100

RCG Client Base

• Machinery cost/acre Range $17 to $180 Ave $61.26 $78.90• Labor cost per acre Range $10 to $127 Ave $33.66 $39.36• Combined average machinery & labor Ave $94.92 $118.26

• Return on Assets (2009, 2010) Ave 11.47% 8.62% • Return on Equity (2009, 2010) Ave 18.12% 14.54%