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Level 5 Producer

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Dr. David Kohl
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Hi. I'm Dr. Dave Kohl, Professor Emeritus agriculture economics at Virginia Tech, Blacksburg, Virginia. And welcome back to the macro clinic. Well, just got done reading the book, 'Good to Great' and of course many people have read the book. Are you a level five producer? It's interesting in the book, 'Good to Great', they talk about level five businesses and some of the characteristics of a level five business. Course, that was a famous book and they looked at companies, actually 15 companies, that were level five producers. Well, I got thinking the other day, what are the characteristics of level five agriculture producers? Well, number one, I can always ask them a question, do they know their cost of production? If they do not know their cost of production, often times they're just focused on production and forget many of the other parts or components of the business that makes them successful.

 

Number two, we find that level five producers often invest in productive assets. Whether that's land or whether that's equipment, whether it's livestock. But, most importantly, whether it's people. There's an old saying, "Do you have the right people on the bus and do you have them in the right seats and do you have the right bus driver?" And I find, probably the human component is going to be the differentiator of agriculture over the next five to seven years.

Here's another element of a level five agriculture producer, they're often modest in their family living withdrawals or dividends from the company. In other words they don't live paupers but they don't live high maintenance and too high off the hog. And one of the things is people that are surrounding them have the same philosophy as well. And again, those withdrawals can be very, very critical, particularly when we're looking at the growth of the business.

Another element is that the top level producers are always seeking knowledge, attempting to get better. And often times we will see them at educational events, they're taking notes, their spouses are there, their partners are there and again they're always trying to get better.

Another element is they'll surround themselves with a team of advisors. Now, this could be a crop consultant, livestock consultant, agricultural lender, or a facilitator, and occasionally they meet and they share ideas. And one of the things we are starting to see nationwide is pure advisors, in other words other agriculture producers where they go out visit the business and do a critical analysis looking for areas of improvement.

Finally, it's one of my old favorites, folks have heard me speak over the years. Generally speaking, the level five companies keep themselves very financially liquid. One of the things is they will keep excess cash as dry powder around. One final metric I'll give you on that, when you look at current assets are tens of 20% of your current assets in cash so that you can use that cash to get through a down cycle but also position to jump on deals and discounts when they happen.

Well, those are the characteristics of the level five producer. Now size your business up and we'll see you back at the macro clinic a little bit later.

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