Agricultural Chemical Marketer and Entrepreneur – Mentor, Marvin Boote
This Mentor has over sixty years of business experience, fourteen as an agricultural chemical salesman and fifty as the founder of his own chemical marketing company. His entire business career was built on the unique ways he solved business problems and on his reputation for personal integrity that inspired everyone who ever worked with him. Mr. Boote has always given back by being a mentor to many people wanting to start their own businesses and is doing it again by writing this article. It should be read by anyone interested in seeing how he was able start and build a successful business in the volatile agriculture commodity markets starting with limited capital. It is also a good article to learn some of the basic principals you need to know to start and build a successful business.
I born in 1925 and grew up in Southwestern Minnesota during the Great Depression. My Dad started a hatchery for turkeys, geese and ducks couple years before I was born. Once the poultry hatched, he then sold them to local farmers to raise. When the poultry was mature, he bought them back, processed them and shipped them in refrigerated rail cars all over the US. This is a business model much like Tyson and other companies that process poultry use today. His business was well established when the Great Depression hit in 1930 and like other food processors he was able to do reasonably well until the economy recovered ten years later.
My father taught me early on about business. One of the most important things he emphasized was knowing your costs, which required an understanding accounting. He also explained how you needed banks to help you finance your business and showed me how to obtain a bank loan and then maintain a good relationship with the bank. Every year while I was still in high school he stood over me and made me put together my own personal financial statements so that I understood what I needed to prepare if I ever wanted to borrow money from a bank. My dad was also a good marketer and traveled all over the US selling. He taught me the importance in any business of building strong relationships with your customers and suppliers. He also told me how important it was to perform under your contracts so that you built trust. Then you could get terms from your suppliers that reduced your need to use bank financing.
When I graduated from high school, I went to the University of Minnesota and got a duel major in Economics and Psychology. But I didn’t go into business for myself right away after I left home. I had already gotten I married and started a family. I needed to support them, didn’t want to work for my father and took a job working for the agricultural chemical division of a major oil company. But that job was difficult for someone raising a family because I was on the road a lot selling chemicals to regional distributors who in turn sold to the farmers. I was made a regional manager and a few years later was asked to develop a new market in Brazil. I didn’t want to take my family out of the country and decided to take a job that did not require much travel with a regional ammonia and nitrogen fertilizer company in Minneapolis. I worked there for four years and learned more about the agricultural chemical business that gave me the confidence to go out and start my own agricultural chemical marketing company.
The amount of capital investment needed to build a chemical plant that produces fertilizers like ammonia, urea, phosphates and potash are huge. Consequently, the role of most marketing companies like mine was to buy product in bulk from the major producers, break it down and ship smaller amounts to the distributors who sold directly to the farmers. At that time most of these major producers didn’t have regional sales representatives themselves and only wanted to concentrate on production and bulk sales, which left an opening for independent marketers like me to move product closer to the farmers.
Because we were adding value in the marketing and not the production, our margins were only around 5%. The same is true of many companies in agribusiness that only handle and market products. For example, grain elevators store and dry grains they buy from farmers and aggregate them into large volumes that can be shipped economically by train or boat. Their margins are also low because of the intense competition. Because the margins were so thin, a big risk in the business was getting caught with too much inventory at a time when prices were dropping. People who are in the grain business can hedge their inventory risk by buying future contracts on the Chicago Board of Trade. But at the time there were no such contracts for agricultural chemicals. So balancing your sales with your inventory position was critically important and required good accounting. It also required discipline not to speculate on an inventory position even if you believed prices were going up. There were several companies I knew over the years that had some great years speculating on prices successfully. But there were many who got it wrong and lost their companies with just one bad bet. When prices are falling, you will find that in almost any market it is very difficult to get out of an inventory position. The same is true of almost any market including the stock market where you will also generally see sharper moves to the downside that can wipe out gains that it took many years to achieve as happened in 2008 and 2009.
The last several years marketing agricultural chemical under my old business model became more difficult and we looked for way to diversify. I had brought my youngest son into the business by then and he came up with the idea of trying to buy specialty industrial chemicals from China. The Chinese expanded their industrial chemical production and needed to expand their markets. They did not have sales teams and strong customer relations with end users in the US. He hired a Chinese national in Beijing to help us build supplier relationships while he found markets in the US for these chemicals. It was a successful venture that is now one of the largest parts of our business. We also invested in a business that had a unique technology for water treatment and developed markets for some of the sulfur that was being generated in large quantities as refiners were required to remove more and more sulfur from refined products as emission standards rose for gasoline and diesel fuels. We also began brokering methanol and gasoline from corn processors and refiners to further diversify our business.
When I tuned the business over to my son a few years ago, he had build a good team and sold part of the company to these employees. The business is still doing well and my son and the employees continue to develop new marketing ideas and ways to grow the business.
Operating an Agricultural Chemical Marketing Company
There is an old saying that you can’t sell out of an empty wagon. Securing reliable sources of supply is a necessity. In the chemical business, this means that you are going to have to be able to buy from the larger chemical companies that own the facilities that produce most of the chemicals and fertilizers produced in the world. Since the feedstock for most of these companies is petroleum or natural gas, many of these companies are part of the large oil companies where they have access to their own feedstock. The good news is that these are produced by the manufactures at standard grades and are all basically commodities. This means that there is no brand loyalty that can be claimed by a particular producer. The farmer buys fertilizer based on the price not the packaging. When supplies are tight, to be able to get material from a supplier can be difficult unless you have built a good relationship. It is important that you take delivery on time so that the supplier’s manufacturing operation is not interrupted because of lack of space in their warehouse. It is also important that you pay them on time. This often means that you have to present your supplier a letter of credit at least for the first few years. A letter of credit is a promise to pay in a specific time frame after delivery of the product by the supplier presenting the invoice to the bank if you don’t pay. So the bank guarantees payment. Lines for letter of credit are critical if you are getting started to be able to buy from a large supplier. Normally the credit department of these large companies will not give you normal trade credit until you have an established history and a decent financial statement to present to them. This means that your banker is going to be your business partner. Treat them as such. Keep them informed of what is going on with your business, the good and the bad. Don’t try and hide any problems you are might be having and provide them with financials on time. Bankers can help you solve business problems. But they hate surprises and like being pulled in early when a problem develops. One told me that they want the role of a doctor that can help heal the business not that of an undertaker. Also understand how a bank makes money. They lend out at least 90% of the money they take in on deposit. This is called the “fractional reserve system”. They have bank examiners who will not hesitate to force the bank to put more of their reserves against your loan if the bank’s documentation is not complete, which means they have less money to lend and consequently less revenue for the bank. Give your bank everything they need and have it to them on time.
The other side of the equation is collecting what people owe you. This means that it is critical that you examine your customer’s financial statements just like a bank would. This is where the other significant risk comes it for a marketer. While the large suppliers have the leverage to require bank letters of credit from independent marketing companies wanting their materials, the independent marketing companies like mine normally sell to smaller distribution companies that won’t normally be able to provide you with a letter of credit. So terms are important. These suppliers want to get as long of terms as they can so that they have plenty of time to collect from their customers who are normally farmers. But remember just like you have to balance inventory with sales, you have to balance terms with your supplier and customers. For example, for most transactions we had thirty days to pay the supplier. We tried to sell this material quickly and extend the same terms to our customers to try and balance our cash flow. You also This have to make a judgment call each time you extend trade credit even when it is only for thirty days. Since marketing margins are thin, you don’t have room to absorb much in the way of bad debts. To make that call you have to be out in the field looking at the customer’s operation and seeing what kind of a businessperson they are if you are going to be able to judge the credit risk and not just review their credit applications. Every business owner should see it as a red flag when a customer who you have done only a little business with over the years suddenly wants to put all his or her business with you. You would like to think that all the time you spent cultivating this business relationship is just paying off. But I have seen instances where these businesses had their credit limited by my competition or by their banker. My credit managers knew we had to extend credit to make sales. But they looked at my customers’ financials as if they were our own because in effect they were. If the credit manager said not to extend credit, it didn’t mater who the customer was. Managing your accounts receivable is a big part of being able to stay profitable through the inevitable ups and downs of commodity and business cycles.
Until the last part of my business career a lot business was done over the phone and the contracts followed a few days later through regular mail. This mean that people only did business with other people they knew would honor those verbal contracts. Because commodity markets are so volatile, it was always possible that you would find you made a bad purchase or sale before the written contracts got to you. Legally you could choose not to honor those contracts. But once you did that, you would never likely do business with that supplier or customer again and the word would get around in the industry. E-mails now provide an almost immediate confirmation of a trade and eliminate most of this kind of problem. But people still do try and get out of unfavorable contracts even if there is an e-mail confirmation. It is not worth trying to get out of one unfavorable transaction and risking your reputation in the industry. Let me give you an example. At one point in the 1970s the price of ammonia went from $50 per ton to $350 per ton in only a couple years as the demand for US grain exports grew rapidly. I had to supply my customers so I bought ten rail tank cars of ammonia from a plant in Houston and brought then into the Midwest markets. Even though I sold them off as rapidly as I could, the price dropped to less than $200 per ton by the time that all were sold. There were higher than normal margins at that time brokering ammonia. So the profits from the early sales offset the losses at the end and the ones in the middle broke even. Overall we only lost a little money. A few other people tried to not take delivery and get out of their contracts when this price drop occurred. A few years later when we called the company one day to get some product in a tight market, I could hear the boss in the background say to salesman, “ Sell him whatever he wants”. So stepping up to the plate and honoring the contracts had a big payoff over time.
Transportation costs are also important in buying or selling any bulk commodity whether you move them by ship, barge, rail and truck. There is a lot of variance between the cost of these different kinds of transportation and well as variance within a class depending on where transportation equipment is positioned. For example, you get better prices on any of these if they are looking for a backhaul that fits your destination. You need to have someone keep up on these transportation markets and knows how to locate equipment where you can find carriers that need things like backhauls. Some companies with enough volume can afford to hire their own people. I built relationships with transportation brokers for my own company and found this more effective than me trying to have an employee do this. The broker was in the market every day and had more and better information about the lowest cost ways to move my product
You also need to build a company around people who share your values. If you find out that you have made a mistake, get rid of them quickly. People do make mistakes of judgment that you can help them not repeat with training and experience. But you cannot teach character.
You also need to build relationships with suppliers and customers. The chemical business had a couple of conventions each year that gave you the opportunity to do this. But attending conventions can be expensive. I made it clear that when we went we were there to work. We had lists of people we were going to each make sure to contact. I made it a rule that nobody every sat down on the main convention floors but circulated and used the time to make additional contacts. We always ended up coming back with more than enough new business to pay for the trips.
Be prepared to put in the time to make your business a success. You are going to be working at least sixty hours a week at first. Plus you are going to have to do a lot of traveling for most marketing businesses. So make sure your wife understands and that you work with her to try and balance your home life with your wife and kids. My wife was not only able to do this well but also was a good advisor when it came to making many decisions in the business. She often turned out to be a better judge of a person’s character than I was.
Summary of Basic Business Principles and How to Prepare
If you are a young person who thinks that you might want to run your own business some day, you need to learn basic accounting principles as soon as you can. You have to know what your costs are at all times and be able to know that your have good accounting controls. You also need knowledge of accounting to be able to work with your bankers. Even though you may spend most of your time selling or manufacturing a product, know how your back room works and make sure that you understand your financial controls. I have seen businesses fail simply because they didn’t have good accounting systems for them to know their costs or had poor credit controls on their accounts receivable.
You have to know how to marketing your product. I learned chemical marketing by having marketing jobs as a chemical salesman and then sales manager positions with major companies. Having some job experience in marketing and sales is important. It is easy to buy inventory. It is a lot harder to sell it. Good marketing skills are critical in running any successful business.
You have to know how to buy raw materials or any inventory you might carry at good prices. There is an old saying in our business “well bought is half sold”. This requires you or someone you hire to know these markets and have a number of relationships with suppliers where you can talk freely about pricing. Part of this pricing is being able to get low cost transportation either by building your own company’s capability to find equipment or by building a relationship with a good transportation broker.
Constantly work at building good relationships with customers and suppliers. There is always turnover. So you may need to replace one that is important some day. This is also the only way to grow a marketing business. Along with this, try not to become too dependent on one particular supplier or one large customer. It is tempting because it seems like it can make things easier. But large suppliers and customers are going to know that they are critical to your business and often gradually push hard on price so that your margins shrink over time. Try to diversify as much as you can.
Run your business with honesty and integrity. In almost any business, your reputation becomes your most important asset.
You are going to be working a lot of hours to start and run your own business. Be prepared to invest more time than you would as an employee.
Don’t start unless your wife understands the time commitment and is on board. This doesn’t mean that you have to neglect your family. It just means that you have to plan things to do with your family on a regular basis so they know they are as important to you as the business.
Mr. Boote would like to answer any questions people might have about his article. If you have a question, submit it by making a comment on this post and Mr. Boote will respond in a few days. We hope to eventually schedule a discussion board if there is enough interest.