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Dr. David M. KohlThe landscape of agricultural economics has resulted in margin flipping between the grain and livestock sectors. The grain industry, which was on an economic hot streak for the past decade is now experiencing margin compression. In contrast, the livestock industry is financially hot! Many experts are debating the duration of this portion of the cycle. Of course, those agricultural businesses that are dependent on the health of the U.S. economy are experiencing green light economic conditions with an economy in its 65th month of expansion. What is in store for 2015 as you develop your business plans and actions to position your business to be resilient and agile?

The easy money has been made in the grain industry; however, top-flight managers will still find a way to make a profit. The duration of the economic moderation will be dependent upon a number of strategic variables. Slowdown of the economies of emerging nations, i.e. the BRICS and KIMT nations including Brazil, Russia, India, China, and South Africa along with South Korea, Indonesia, Mexico, and Turkey, has moderated demand for many U.S. commodities.

Central banks, both in the U.S. and abroad in Japan and Europe, will be critical to the grain industry because up to 40 percent of corn, soybean and other commodity prices have been impacted by central bank strategies through valuation of currency and level of interest rates. For example, the strategy in the U.S. was to decrease the value of the dollar to encourage exports and keep interest rates low. The withdrawal of stimulus and possible rise of interest rates in 2015 would suggest a stronger dollar will result, decreasing producers’ ability to export.

The duration and intensity of the positive economic cycle in the livestock sector will influence grain price levels. An economically viable grain sector needs an economically viable livestock industry. Initially, the livestock industry will benefit from the high prices, but as the cycle continues, more and more of the margin will be generated through cost control as input costs decrease.

Finally, the weather is still in control of agricultural economics. Keep a close watch on growing conditions in the southern hemisphere, as well as conditions in the northern hemisphere, which will impact the economic health of both the grain and livestock industries in 2015.

[rich-callout title="30-Day vs 15-Year Farm Credit Bond" image_id=7687]This chart illustrates that 30-day Farm Credit issues remain at historically low levels through November 2014 while the gap between long-term and short-term rates remains relatively flat. Read our three part series on interest rates at www.myfcsfinancial.com under the News & Events link to learn more including what establishes the interest rate and what producers can do to manage their risk. Then talk to your FCS Financial expert about available options.[/rich-callout]What can one do to position a business for short and long run sustainability? Two terms most often used in athletics come to mind: resilient and agile. Your business needs to be resilient, but on the other hand it also needs to be agile. Let’s examine the characteristics of a resilient business. A good financial record system that “talks” to the business is important. Knowing cost of production, particularly by enterprise, will be imperative in allocating capital resources to their highest and best return. Sound record systems will be necessary when selecting government and insurance programs to mitigate risk. This winter will be a game of “chicken” concerning land rents. Being armed with cost and price data can be powerful in negotiating a positive bottom line.

Of course, being resilient but agile requires accumulating working capital (that is, current assets minus current liabilities). If you anticipate a negative margin, it is important to know your burn rate on working capital. It is calculated by dividing working capital by the projected negative cash flow margin. If the burn rate is less than one year, the business will lack resiliency; however, if the burn rate is approximately three years or more, it may have the agility to capitalize on opportunities as they appear, particularly in the down cycle.
A business that is resilient will have modest family living withdrawals. With $50,000 to $80,000 differences between the high and low third of farm family living costs, controlling the personal budget will be critical.

To be agile, your business plan needs written business, family, and personal goals that are communicated to stakeholders and partners. These goals will assist you in maintaining focus regardless of where you are in the business cycle.

Finally, use a team of advisers to maintain agility, including your lender, crop or livestock consultant, and industry professionals. This team can offer valuable insight and feedback as one navigates through these economic times with a surprise around every corner. The keys to a sustainable business are to be resilient in management and financial practices to handle adversity, but then to also be agile to capitalize on opportunities.
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