Mind Your Farm Business — Ep. 113: Real options thinking: Thriving in volatility with Trey Malone

Foreign. Business on RealAgriculture.com is brought to you by RBC Royal Bank. Welcome to another episode of the Mind you'd Farm Business podcast, brought to you by RPC Royal Bank. I'm your host, Shaun Haney of RealAgriculture.com when markets are uncertain, policy is unpredictable and technology is changing faster than ever, making confident business decisions can feel. Well, it can feel impossible. But what if the key isn't about predicting the future? It's about prepping for it? What if success comes from making small bets that expand your options instead of locking you into just one path? To explore this, I'm joined today on the Mind you'd Farm business podcast by Dr. Trey Malone. He's an agricultural economist at Purdue University. Trey's research focuses on how farmers and agribusinesses can thrive in times of volatility by using what he calls real options thinking. It's an approach that prioritises learning, adaptability and testing ideas before betting big in the farm business. In this episode, we'll talk about how small, smart experiments can strengthen your decision making, how to recognise opportunity and uncertainty, and how to build flexibility into your business strategy without losing focus. Let's get to my conversation with Dr. Trey Malone of Purdue University. Doctor Malone, welcome to the Mind you'd Farm Business podcast. Well, thank you for having me. I prefer not Dr. Malone. I'm the kind of doctor that doesn't actually help people, you know, so, like, Trey's good. We can go with Trey. There you go. Well, I disagree. I think you do help people and we're going to try to do that in today's podcast. You know, these. There's a lot of uncertain times and we talked about volatility in agriculture, but this moment in time, when it comes to trying to figure out our operational or just our longer term strategic vision for our farm businesses, this is a difficult one. I mean, that's an understatement. There are a bunch of really fancy economists who try to measure policy and trade and economic uncertainty. Their index in April hit, I want to say it was 80 times what the uncertainty was during the pandemic. So from an economic policy perspective, we are in a place that makes the Great Recession look like a hold my beer event. So we're, I think, in a time where, you know, it's just going to be uncertain for a while, I don't. I don't see any difference in that changing. So when it comes knowing that and if that's a given and we don't know the Duration of how long this period lasts for, does it get worse? Does it get better? The uncertainty kind of continues here. How does that impact our, the formulation of our operational strategy? Okay, so I, I was with a bunch of ag bankers the other day and the phrase that somebody threw out that I really connected with was change fatigue. I think we're so tired of change at this point that, like, we don't even know what to do. And so from a psychology perspective, I think we're all just wanting some certainty. And that's natural. Right. But I think that for as much as you want to have a perfect model, regression model, or whatever it is, to know what's going to happen and your crystal ball is super good, I think that that is not necessarily what's going to win the day. I think that what matters more is as an organisation, as a farm business, as an agribusiness, how do I position myself in a way that I can adapt on the fly? And that's a different model than I think what we really want to anchor to. We want to have a 0 to 100% certainty model where we're like, I know or I don't know. Well, welcome to the grey zone. And I think in the next three years it's going to be a lot of grey. Yeah, because, you know, sometimes you'll go to a workshop on this topic and you'll hear, you know, you need to go through the strategic planning process, you know, do the SWAT and do all this kind of, you know, what are the critical success factors and all this stuff. You got to know what you're good at, formulate the strategy, and then you hone in on that hyper focused and you forge ahead. Kind of what you're saying here, this is a little bit of an alteration from that. Okay, so strategy is like one of those words that everybody loves to say, but nobody really knows what it means. Like, I think it's we lead workshops who are like, okay, this is what a bad strategy is and this is what a good strategy is. The first part of good strategy is effectively diagnosing a real problem. So part of the strategic planning process that people really struggle with is they throw a lot of fluffy words into a bunch of goals and then they think it's a strategy. That's not what a strategy is. The first thing is actually effectively diagnosing what the issue is. And the issue that we're talking about right now is uncertainty. Now, uncertainty can be bucketed into its own thing. So volatility is part of uncertainty, but it's not the same thing. Complexity that's part of this. I mean, it's a very complex world that we're living in right now. And then even more than that, ambiguity is kind of the last part of uncertainty. And I mean, frankly, what's the tariff rate between the US and Canada right now? I don't know. Just wait till tomorrow. Maybe somebody will release a commercial and we'll change it. That's where we're at from the ambiguity of what the policy perspective is. So a good strategy in this moment is what I would call real options. So be thinking about how we maximise the options that we have from a business strategy perspective, as opposed to committing to one direction. How do we invest in learning in the current moment? Because there might be some opportunities out there. I think over half of all Fortune 500 companies were founded in a recession. So there are opportunities, but we cannot think that they're going to be the same opportunities as there are in a more certain place. Now, when we're talking about those real options, what I think of right away is how do. Okay, that makes sense to me, but how do I make sure I'm not scattered right where one is over here and option two is over there, and they're not even closely. Like, there's a difference. Option one being here and option two being here versus like this. Right. So I guess talk about that. That's a lot, right? So, I mean, I think that we spend a lot of time thinking about our core business, and then we have all of this noise that's out there. But when we think about that core business, I don't know that we ever spend the time to really think about what makes our core business unique. So what is it that, like, is, in Warren Buffett speak, what is the moat? What is the economic moat that's around your business? And once you identify that moat, then it's easy to start thinking. All right, I know this is what I do. There's uncertainty in the market space. I don't know what that world's going to look like on the market side. So maybe I need to invest in learning things that are in that market space. There's uncertainty in the technology side. I mean, AI is this thing that literally you can't get away from people talking about AI. That creates a lot of uncertainty, too. So what does that mean to a farmer? What does that mean to a person selling to a farmer? What does that mean to the farmer selling to a processor? Well, those are uncertain things, too. How can I invest in the learning side of that as well. And ideally what you're thinking more about is thinking like a scientist as opposed to thinking like, like Henry Ford. Right, so, so we're trying to make investments in, try out the, the AI to help your decision making. Maybe try, try to invest in something that you're like, this is interesting, but I don't know what it, what, what, where it's going to go. But I, I think that there's something in that market uncertainty that allows me to say, huh, I grow soybeans. There's a really exciting opportunity in protein right now. Maybe I need to be thinking more about how to invest in learning for protein production as opposed to invest in learning in some of the other traditional soybean attributes. Do you sort of. Well, no, maybe not sort of. Do you, do you think that we've had so much focus on specialisation that we've lost some of that curiosity for adapting our business? Okay, so there's a book called Range that came out about 10 years ago. I think it's an awesome book and I think that. So in economics we generally assume, and really the foundation of economics was that there are two guiding principles that create wealth. The first thing is the division of labour. Specialisation. Right, so that is exactly what you're saying, specialising. The second is trade. Right. And so once upon a time what that meant was in the United States or in North America in general, we were going to specialise in producing one thing and then we were going to trade to a different place. That's still, I think, true. But where I think we've changed or the, the pivot that's happened is the trade is not as obvious anymore. Right? So it used to be that I could just grow Red Delicious apples and know that somebody would buy them. Now Red Delicious apples are the things that you get in Santa's stocking and then you throw them away because they're garbage apples. Not to offend my Red Delicious people out there. Right, but do you see what I mean? Like the, the, the perspective of the trade has changed and so ideally you know who your customer is and you find a way to meet those customers with little small bets to see if they'll pay a little bit more of a premium, a little more of a premium for this. Maybe they won't. Maybe I don't bet the farm on grass fed beef, but maybe I dabble in it and I see maybe there is a market there or maybe it's, I don't know, lavender, I don't know, like, it depends on what your farm is, Right? Yeah. Almost running. Like you mentioned, being like a scientist, like little side pilot projects, some people would call them, stuff like that. Exactly, yeah. And so there's kind of this idea called the Lean startup, that what you're really trying to do is create a minimum viable product and then you test that product and you learn based on what you find in the product. So I think a good example here would be some of the work that we did in hops in Michigan. So Michigan in the United States became kind of the fourth of three hop producing states in the country. But the challenge was that they grew public cultivars, Cascade, Chinook, et cetera. And the large players in the Pacific Northwest grew the Publix, but also a lot of proprietary cultivars, Citra Mosaic. And so we basically got our lunch eaten for quite a while. One thing that we discovered was that there is some unique characteristic in the wine world. They call it terroir. But there's something unique about how our Chinook hops were coming out. So Michigan Chinook just had this consistently different flavour profile than Washington Chinook or anywhere else. And so what we decided was, what if we try to leverage that? So our economic mode is that Michigan has this unique flavour profile for the thing that we're growing now. We just got to pour gasoline on it. So we created this big competition. And so the Michigan Chinook cup was where we'd bring in a lot of high profile brewers and the brewers would judge the Chinook and the winning farm would get this giant trophy. And it was really exciting. And we could dominate the news cycle in a way that you couldn't if you were just trying to compete on that public cultivar space. And so it worked so well that when I moved down to Arkansas, I went into a small brewery in the middle of nowhere and I asked, you know, where do you get your hops for this Chinook ipa? And they said, well, we always buy Chinook from Michigan. The rest of it, we kind of buy wherever we can. But Michigan Chinook is something that we really covet and cherish at this brewery. And that was unsolicited. I didn't. And that's in a random hole in the wall Brewery in Siloam Springs, Arkansas. So this is the way, like, find the thing that you want to dabble in that you think makes you unique and test it out a little bit. Make small bets, you know, but don't oversell. We'll get back to more of the Mind you'd farm business podcast. But first, A word from our sponsor, RBC Royal Bank. This episode of the Mind you'd Farm Business podcast is brought to you by rbc. Your idea of tomorrow's success happens here. When it comes to growing your operation, making strategic investments, or securing the future of your farm, RBC and their team of experts are ready to help you chart the course. They'll work with you to develop a personalised plan that sets your goals in motion. Ready to take the next step? Visit rbc.com agriculture and get started today. To do the proper test, though, what are some behaviours or things that you need to do in order to give it the fairest chance? Like duration comes to mind, you know, giving the attention it deserves. Like, those things. What are some other things that come to mind? Okay, so, so smart quitting is what you're describing, right? So, like when we make these investments, the most important thing to do when you start is to set really good goals that have states and dates associated with those goals. If by blank we haven't achieved blank, then we need to quit. You know, in, in human nature, we really get stuck to the status quo and we just keep doubling down on what can oftentimes be bad investments. So, you know, as an example, we, we adopted a dog four weeks ago and it was from the Humane Society. We adopt this dog and the dog wasn't doing well. So, you know, he was peeing all over the house, he was jumping all over my daughter. Like, it just wasn't working. And so my wife and I, when we adopted the dog, we said all if by three weeks this dog has not improved its behaviour, we have to take the dog back. And, and it's, it's hard to do. Right? Like, but if you don't have a date to that, it's much easier for me to get committed to that dog and not want to walk away from a problem. And so a week ago, we had to take the dog back. It was hard, but if I had to do it this week, it would have been harder. And if I had to do it next month, it would have been harder. So. So, like, I mean, sometimes you just have to set the right goals with those experiments where you're actually committed to walking away if it doesn't work. I'm assuming, you know, a lot of times when people do sort of like. Well, a lot of times people call like a side hustle to our business, or that's a phrase that's used lots, but, or, you know, sort of a side passion project, does it need to be that or Is it more like there's an opportunity? There's an opportunity, other end of this and we're working towards seeing if we can take advantage of it. Does it really matter? That's a good point. So the side business thing is related, but not the same thing. Right. So a side business is you trying to do something that diversifies your income stream at some level. I think that the word passive income comes to mind and that's not at all what I'm talking about. What I'm talking about is that I have a core business and I'm actively exploring ways to expand my core business. And if it fails, I still learn something that I can bring back to the core business. You know, I think the. Again, there's maybe this misconception that, that you have to just double down and do only what you know, always what you know. No, the way that you move forward is that you kind of push outside your comfort zone just a little bit. Not, not a lot. Like, I'm not saying like. To the hemp example, there was a farmer who thought he was going to make his millions on CBD infused tampons in China. This guy just grew hemp in Northern Michigan. It's unclear to me how he thought he was going to make his millions in this space that he'd never even been to China for, but that was what he committed to. That sounds like a side business that probably isn't a good idea. Now maybe he starts with the business that he originates in and he finds some type of interesting thing on the periphery of that business to leverage into. A good example is Tyson. So Tyson Chicken, famous for its chicken. Did you know that they are one of the largest investors in plant based proteins? They were the people that spent a lot of money on Beyond Meat to try to explore the alt protein space. That does not mean that Tyson thought that their chicken business was going to get replaced by plant based meats. What it does mean is that on the periphery of the protein business, they saw some interesting action going on and they wanted to learn more. So to them, a few million dollars is a pretty small bet. So they tossed that small bet in and they tried it out. They tried so many weird things in protein that they're also one of the largest investors in cricket protein. So they put money. Tyson Chicken is a big investor in very weird proteins because they want to learn on the outside of that market in a way that might be able to convert into business profitability. When we're developing our real option strategy and giving ourselves flexibility, is this Easier to do based on some of the demographics, like small farm versus large farm or like close to a city, not close to it. Like, I guess probably it depends on what you're doing. Right. So, I mean, yeah, it would be easier. I mean, I'm not that far from Chicago. It would be easy for a farm to try to invest in selling local foods to Chicagoites or Chicagoans. I don't know how you say that. It would be easier than if I was back at my family ranch in the panhandle of Oklahoma, because the population density in Harper County, Oklahoma, is very limited and there are no big cities anywhere near Wichita. Kansas is the biggest city, and it's about 500,000 people. So that just means you have to find something else. Right. So the way that we've leveraged La Verne is so we lost our last restaurant in town, and so we now have a food cooperative that is USDA rural development, partially funded, and we're really trying to do new things. So we got the governor of Oklahoma to sign on to name La Verne or Harper County, Oklahoma, the Sandhill Plum. Yeah, the Sandhill Plum capital of the world. And so now we have this Sandhill Plum Festival, and we're selling Sandhill Plum jelly at a premium. You've never heard of Sandhill Plum? My guess is most of your listeners have never heard of it. But I'll tell you what, you go to Tulsa, Oklahoma, and Oklahoma City, this is a whole new ball game. And so we've leveraged something that we have that's unique to us in a small bet. Again, we're not telling every rancher in Harper county to switch over, but in a way that we might be able to diversify some income and create some unique value to the place. Well, I'm going to be in Tulsa, Oklahoma, in February, so now I know what to look out for. Make sure you go to Kane's Ballroom, too. I don't know if you've been there, but it's a game changer. You got to go find a way. I'm writing it down. Is the management skill level or just the competency level currently? That's currently on Farm? Are we equipped to employ this strategy? I think the minimum thing that would make sense from this perspective is to be very comfortable with the question of what would it take for me to change my opinion. I think that all too often we all were raised on John Wayne movies or Clint Eastwood or whatever, and we think there's going to be the choices between a guy in a white hat and A guy in a black hat. And it's just not how it works. So at the small farm or at the, like, we're stretched to our limits level, and we're not looking to try to find some new profitability in this uncertainty churn. The big question to ask yourself is, what would it take for me to change my opinion and direction for where I'm going? So the way you do that is try to make sure you're getting information that is kind of inside and outside views. It makes sense to be thinking about underreacting and overreacting evidence. Like everything. Everything you think about, I think, has more value if you think about it between a 0 and 100% probability. So. So from the options perspective, from the thinking and bets perspective, if you don't want to go chase some new weird thing, be just thinking constantly between 0 and 100, how confident am I in blank? And that can change easier. And that allows you, I think, a little bit more flexibility in your thinking when you think as a. Or when you're working as a farm manager in that space in an uncertain environment. Yeah, it's. You know, one of the things that I remember going back at the beginning of the pandemic, I remember interviewing from Purdue, Dr. Minter, and we were talking about, you know, this is, you know, the whole. Like this, you know, this is a big event, and there's a lot of uncertainty, and it's easy to take the negative side of it in terms of, you know, what are we going to do? And I remember he kind of corrected and said, like, okay, when we have, like, a black swan event or anything where it feels like the market's working against us, there's also an opportunity side of it as well. Inside of all of the chaos and the uncertainty and the fact that probably a lot of your competition is a little bit numb. They're paralysed. They don't know what to do because things don't look very good. And that kind of feels like the way we are right now. That's exactly. That's a great way to put it. Um, so I. I think about how many people did you talk to at the beginning of the pandemic that were like, we're not investing in anything right now. We're just gonna sit on it and wait for a minute. How many people out there were like, wait, interest rates on farmland just drop below 3%? Holy crap. We need to buy as much as we can. Like, there. There was a difference in mindset that I. I think, speaks to this. Now. Now at that point in time, you know, hindsight being what it is, the investment in farmland was obviously a wonderful choice. Now, in my kind of small bets real options thinking perspective, I'm not saying over leverage yourself and set us up for another 1980s farm crisis, but what I am thinking is what is the core value of your business strategy and how do you leverage that into things that everybody else is a little bit numb to looking for that new opportunity in? Yeah, great stuff, Trey. This has been fantastic. I we got to have you back on the Mind you'd Farm Business podcast. Great perspective, especially given the times that we are currently trying to operate in when it comes to farming and ranching. So thank you so much. Oh, so happy to be here and looking forward to talking again. That wraps up another episode of Mind you'd Farm Business Podcast. A big thank you to Dr. Trey Malone from Purdue University for joining us here. Really, really timely conversation. Trey reminded us that in an unpredictable world, the strategy might be, well, it might be a flexible one. Real options thinking means testing new ideas, gathering feedback, and learning from small bets before before scaling up and investing a whole bunch of capital and money. It's really about being curious and experimenting and creating room to adapt. Because sometimes the biggest risk is really doing nothing at all. For more episodes of the Mind your Farm business podcast, visit mindyourfarmbusiness.com A big thank you to RBC Royal for supporting this series. If you have any questions or feedback, you can reach out to me at ShaneyaAlagriculture.com is my email or call the RealAg Feedback Line 855-776-6147. Thanks for listening to this episode. Until next time, keep on minding your farm business.