Edition #3

May 6, 2023

Good afternoon and welcome to The Agri-Business Braintrust newsletter. We’re like the smell of freshly turned springtime soil - or is fresh cut alfalfa better? We’ll let you decide.

A note to begin:

Apologies this was not sent earlier this morning. A hard drive crash was not on my list of fun things to handle this week, but we’re entrepreneurs… we overcome.

In fact, it’s a good lesson for your agri-business as well as any business in general.

Thankfully, I had most things saved online/backed up, but it still leads to a tremendous headache of reclaiming passwords, retrieving content, and just a general nuisance.

So, the takeaway here is this: in today’s digital age, most of your important documents, content, financials, business records, customer notes, etc. are digital. Always have things backed up and a way to retrieve them when the annoyance happens.

What’s that saying, “Proper planning breeds success?”

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 3 of ?)

• ⚖️ LLCs

• 🏦 Loan Terminology

• 📊 Hedging

BUSINESS PLAN SERIES - Week 3

We are on week 3 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 I: Business Description

Here’s Part 2: Products & Services

Now let’s look at Part 3 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 3: Marketing Plan & SWOT Analysis

Diving right in - we need to define how we will spread the word about our products/services and do an analysis of why it may work and why it may fail.

Now, the example Marketing Plan is for a traditional crop farm, so it is much less detailed than a start-up direct to consumer company that may be selling services or products directly.

If this plan was for, say, a fencing company, I would detail my customer acquisition techniques, my pricing strategies, my product offerings, and how they all fit within the industry as a whole.

So, keep that in mind as we look at what amounts to an “abbreviated” marketing plan for Sample Farms.

First, we’ll fill out the section on industry trends.

Things to consider here are age, size, reach, and historical growth or shrinking of the industry as a whole. In our case, commodity crops have been around for centuries, so it is a very established industry with solid infrastructure.

Here’s what we highlighted for industry trends:

Next, we identify the barriers to entry. Within ag, there is a common sentiment that it is impossible for a young person or a non-returning person to break into agriculture.

Here at the Agri-Business Braintrust, we don’t subscribe to that theory. But, it is quite challenging and it requires some out-of-the-box thinking.

The barriers we listed most likely will not come as any suprise to you, and keep in mind that if you’re building out your business plan for an “ag-adjacent” business, it might have much different/easier barriers to entry.

Then, once we’ve identified those barriers to entry, and we have a plan to overcome them, we look to identify ongoing challenges we will face.

It’s important to put down all the potential challenges in writing, because it’s much easier to plan for a challenge and not need to use it than to react to a situation we could have planned ahead for.

SWOT Analysis

This brings us to the part where we consider what are our strengths, weaknesses, opportunities, and threats.

Now, we could fill up page after page of each of these considerations, but to keep things somewhat concise, we’re just identifying some of the high level SWOT needs.

That being said, it would be a good idea to dive deep into each section, because the more you can think about how your business impacts and is impacted by the industry you’re in, the more able you are to strategically plan for success.

The table in the template is helpful, and it breaks considerations down by each section.

Here’s our Strengths & Weaknesses:

And here’s our Opportunities and Threats:

If you’ve never done a SWOT analysis before, it’s something that ought to be incorporated within a new business plan, as well as strategic planning for your ongoing operation.

The more we, as business managers, can think critically about how our business health is, the better we can plan for challenges and capitalize on opportunities.

If you’ve been following along and building out your own business plan, this week is your turn to tackle the Marketing Plan & SWOT Analysis.

Homework: Over the next week, spend some time thinking about how you plan to market your product/service, what the challenges and barriers to entry may be, and definitely perform a SWOT Analysis on your business.

The more detailed the better, as you will come across potential future issues and opportunities you may not have considered before.

Next week, we’ll cover the Operational Plan. This is where things really start getting good… We’re going to dive into how we can pull this business off and identify our keys to success.

Questions? Ask them. [email protected]

LEGAL

Last week we looked at the first of 5 business entity types that agri-businesses could fall into, Sole Proprietorships.

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 Limited Liability Companies (LLC)…

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

LLCs are the most common step above a sole proprietorship. LLCs are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.

Pros:

✓ Limit Liability

When treated properly, an LLC prevents its owners from being held personally responsible for the debts of the company. If the company goes bankrupt or gets sued, the personal assets of the owners cannot generally be pursued.

✓ 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.)

✓ Flexibility

LLCs can be used for almost any type of business. The flexibility of LLCs allows for multiple owners and different investment amounts, creative profit sharing structures, and single member or single purpose companies like holding real estate.

There are state laws governing the formation & governance of LLCs, but these guidelines are generally more flexible than corporations and some types of partnerships.

Cons:

👎 Can’t Last Forever

Unlike a corporation which can last in perpetuity, most states regulate LLCs that they must be dissolved upon the death or bankruptcy of a member.

This can generally be planned for within the Operating Agreement, but must be drafted properly to comply with state laws.

👎 Going Public

Because LLCs have members as opposed to shareholders, it is very difficult to take an LLC public. If a founder’s ultimate goal is to go public, typically the business will start as an LLC and then go through the costly process of converting it to a corporation for the Initial Public Offering.

Summary

LLCs are important legal structures for forming a business. Limited liability means that the assets and debts of the business remain separate from the personal assets and debts of the company's owners. If a company goes bankrupt, creditors cannot therefore go after the owners' personal assets, just that of the business.

LLCs also have several beneficial features including simplified taxation and a relatively straightforward process to establish one. This is part of the reason why LLCs are the most common type of business in the U.S.

Their flexibility is a key component, just be sure it’s being treated as a stand alone business and are complying with state statutes. Email [email protected] with questions on your current or future LLC.

FINANCE

One of the most common perceptions of agriculture is you’ve got to take on tons of debt to make a go at it.

You’ve probably heard things like, “The bank owns everything, I just manage it for them.”

Well, sometimes that is the case, but that’s not necessarily the path to success. Debt is a tool just like any other financial product… it can help if used effectively, and can really hurt if not used wisely.

After all, 100% of foreclosures happen on property with debt.

So, over the next few weeks we’re going to explore debt, what are the pitfalls, how to be smart about it, and how to get loans that will help & not hurt your operation.

We’ll be using terms that are commonly referred to in lending circles, but may be foreign to those who don’t work “banker’s hours.”

That’s why this week we will be looking at some common, need-to-know terms when taking out a loan.

Definitions

AMORTIZATION - Fixed payment schedule to repay a term loan.

• Your monthly/quarterly/annual payment is consistent because of the amortization schedule.

ANNUAL PERCENTAGE RATE (APR) - Total yearly cost of taking out the loan.

• Includes interest & other financing charges.

BALLOON PAYMENT - Significantly larger final payment on an installment loan.

• Not every loan has a balloon payment.

BORROWER - Person or legal entity on the hook to repay the loan.

CLOSING COSTS - Fees associated with the underwriting & other services necessary to advance the loan.

COLLATERAL - Assets pledged by the borrower to give the lender security of repayment.

• Often secured by a mortgage or security agreement.

COVENANTS - Specific terms the borrower agrees to fulfill to stay compliant.

• i.e. Deposit Accounts, Minimum Cash Balances, DSCR, etc

DEBT SERVICE COVERAGE RATIO (DSCR) - Amount of free cashflow from operations available to make the loan payments.

• Shown as a numerical value - i.e. 1.5

DEFAULT - When the borrower doesn’t repay the loan as promised.

• Or, if the borrower violates any of the covenants.

DOWNPAYMENT - Amount of cash brought by the borrow to purchase the asset.

• Difference between the purchase price and the loan amount.

GUARANTOR - Individual who promises the borrower will repay the loan.

• If the borrower fails to, the guarantor is on the hook to make the lender whole.

INTEREST - Cost of borrowing money, paid to the lender.

LOAN TO VALUE (LTV) - Comparison of the value of the loan to the value of the collateral.

• Shown as a percentage i.e. 60% LTV

NON-RECOURSE - Type of loan not requiring a personal guarantee.

• If the borrower is an entity and fails, the lender cannot get repayment from personal assets.

PREPAYMENT PENALTY - The cost to pay off a loan earlier than originally agreed upon.

PRINCIPAL - The amount of debt, not including interest, remaining on the loan.

There’s more terms that may come up as we explore the use of smart loans and debt within ag operations, and we will handle those as we talk about them.

Now that we have some basic understanding of the terminology used in loan documents, we’ll begin diving deeper next week.

RISK MANAGEMENT 101: Part 2

We’re discussing what market risk is, how it’s in every producer’s life, and how to better understand Risk Management (RM) to improve our chances of success.

Last week, ESP Devin Patton, introduced futures contracts (if you missed it, here’s the link.) This week, he’s focusing on helping us understand Long Hedging.

Here goes:

Short hedging is done when the operator produces or otherwise owns the physical commodity (Long) and they would be taking an opposing short position as a substitute for a sale.

Long hedging occurs when the operator uses the commodity and needs to purchase more of it in the future.

Examples of this could be an ethanol plant, flour mill, or a cattle feedlot.

Cattle feedlots purchase light cattle and feed and sell bigger cattle. So, they might have an interest in Long hedging future purchases of feeder cattle and corn, and then short hedging Live Cattle contracts further out.

Once they make their physical purchases, they would lift their long hedges or possibly roll them forward again for future purchases, unless they deem, they are more comfortable carrying the risk in the cash market.

For a long hedger, taking a long position means that they transfer their risk from being cash “short” (or in need) to market neutral. Since they would rather pay less for something than more for it, they want to protect from rising market prices. 

They buy futures contracts (remember last week) that will offset their increased cost of future purchases if the market rises, and likewise their lower costs to purchase in a decreasing market will be offset by losses on their long hedge.

This is to create certainty of costs for materials in the future. Even if they would have been better off after a market decline, increasing certainty is worth accepting that risk in exchange for eliminating the risk of added cost from a rising market.  

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.

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.

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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.