Global Economic Points to Ponder

By: Dr. David M. Kohl

The other day in a seminar, a naysayer said that global economics is a bunch of noise and that planning is too academic with all of the uncertainty in the economy. I am not sure whether he was having a bad day or was attempting to get my attention. My response was that you may not be interested in global macroeconomics, but it is having a big impact on your business, your family, and your personal life. In this type of environment, business planning is not an option, but a requirement.

Despite the participant’s remarks, global economics certainly has a bearing on decision-making in farm businesses. As the hot, dry summer transitions into autumn, there appear to be three major economic fronts that are converging to create a synchronized global slowdown. The dry weather occurring here in the U.S., Russia and India has trumped this slowdown. Three or four dollar corn prices and beans at single-digit prices were in the making if the weather had not shown its wrath in the forms of drought and heat in major production areas of the world.

[rich-callout title="30-Day vs. 15-Year Farm Credit Bond" image_id="4583"] The chart below illustrates that 30 day issues continue to stay at historically low levels through July 31, 2012. Movement in the gap between long-term and short-term rates decreases slightly. You may want to talk with your FCS Financial expert about locking in historically low, fixed rates on real estate loan or other term loans. Be sure to ask about loan conversion options on those loans that do not include prepayment penalties. This benefit is available to existing loan customers and is generally less costly and simpler than refinancing your loan.[/rich-callout] The synchronized slowdown first emerged in the European economy, which represents 26 percent of the world’s GDP. It will continue like a slow moving soap opera, possibly for a number of years. Currently, 12 of the 17 euro nations are in recession, with France and Germany eking out positive growth. Next year’s national elections in Germany will be a pivotal event because the incumbent, Angela Merkel, has had a main priority of keeping the Eurozone together. If she is not reelected, then the probability of a breakup of the euro currency increases dramatically.

How does this impact agriculture in the Heartland? China, one of the biggest importers of U.S. agriculture production, finds Europe as their biggest customer, particularly for consumer goods. If Europe goes into a full recession, then China’s economy will slow, possibly decreasing demand for U.S. agricultural commodities. This in turn could cause other emerging nations’ economies such as Brazil, India, Russia, and South Africa to slow, resulting in a “double whammy” in the demand for commodities. Will this scenario set up for record high corn and bean prices, only to be followed by a steep decline? Weather conditions in the southern hemisphere in the next six months and in the northern hemisphere next year will have much to say about this outcome.

The final part of the synchronized slowdown is here at home in the U.S. The fiscal cliff, i.e. uncertainty over taxes, health care, and general regulation, has resulted in not only record low approval ratings for our representatives, but it has also has placed American businesses and households in slow motion regarding capital expenditures and consumer spending. The ensuing increases in government debt and budget deficits with no plan to correct budget imbalances places caution as the main mode of operation.

To the participant’s point about not being able to plan for this uncertain economic environment, one could empathize with his feelings. However, a good solid business plan with cash flow projections that are monitored by comparing them to actual results would be a good first step. Recently I facilitated such an exercise with ten of an ag lender’s customers. Surprisingly, after six months of operation in 2012, only one customer missed revenue and cost projections by ten percent.

Next, analyze and benchmark your business financials and ratios with a close eye on working capital trends. Working capital is a business’ backstop should worst case scenarios play out this fall and winter, or into next year.

Finally, it is a good time to work side-by-side with your lender through these uncertain times. Sometimes two heads are better than one for finding the blind spots and establishing potential correction strategies and actions, which can be a proactive practice in navigating the global economic whitewater.

Global economics are here in every producer’s backyard. Denial is a recipe for disaster, while reading the leading economic indicators and developing proactive plans can create opportunity even in the worst of times.