The current economic environment is very similar to the late 1970s. High oil and energy prices were prevalent during that period of time. Geopolitical and military uncertainty were daily headlines impacting businesses and households. International agriculture markets, sanctions and tariffs, and uncertainty in trade deals wreaked havoc in the decision-making process. Stagflation, that is high inflation and declining real buying power, was present in the 1970s and is very similar to the current environment five decades later.
What is different today is that the agriculture industry has supply chain issues, a lot more industry consolidation, and rapid changes in consumer and societal trends. On the bright side of the ledger is the consumer’s increased awareness of the importance of a diversified and dependable source of food, fiber, and fuel for the basics of life. Also, the reassurance and transparency of where food is produced, processed, and distributed is becoming more “en vogue’’ in consumer discussions. Another positive in the agriculture industry is the accelerated transition of the young and beginning farmers ready to take on the challenges of operating in an economic environment that is both financially and mentally uncomfortable.
Getting comfortable with the uncomfortable
Recently, I was challenged by a farm group to share my decades of experience being a business owner, educator, and speaker on how to become more comfortable managing in this uncomfortable environment. While in no particular order, the following is some of the wisdoms learned from the school of hard knocks with an academic tweak called the “ABCs of management.”
A. Ownership of financials
One observation over the years is that good accurate records with an understanding of the financials including production costs and margin management is critical in managing economic shockwaves. If knowing the breakeven cost of production is good enough for the TV show Shark Tank, then why not for an agriculture business? In the 1980s farm crisis era, many spouses were the anchor for successful business turnarounds with close monitoring of business financials on a monthly or quarterly basis. Today, with larger farm businesses the accountant or chief financial officer (CFO) is becoming a more common source of information in the decision-making process. The importance of getting future business owners comfortable and familiar with managing business finances early in their careers cannot be overstated in an environment where inflation and interest rate changes can quickly alter bottom-line margins.
B. Financial liquidity
Another variable to get comfortable with is knowing the importance of financial liquidity. Whether it is a nation such as Russia and their bond commitments, a business, or a household, financial liquidity is often the chokepoint of financial sustainability.
Working capital or quickness to cash is the financial bridge to long-term success in uncertain times. While the financial networks and Wall Street have recently stated that “cash is trash” because buying power is reduced during periods of high inflation, I have a much different view of cash and liquidity. Liquidity can be used to preserve accumulated wealth by preventing the sale of assets at discounted prices during a down cycle.
On the other hand, working capital is a cash bridge that can be utilized to capitalize on opportunities such as purchasing discounted assets or inputs that provide a favorable cost of production structure. Working capital and cash can also be used as a mental health balance to provide resiliency, agility, and flexibility.
C. Support network
In the uncomfortable times, a support network is critical. This could be an informal peer group or a formal advisory team. A crop or livestock consultant or a financial advisor can provide insight and balance to the decision-making process. An agriculture lender, now as well as in the 1980s, can be very instrumental in providing alternatives to navigate unsettled times. Taking time to shut off technology to stop the bombarding messages and hear the silence can be a very powerful medicine and action in finding mental balance.
Though these times feel very uncomfortable, the reality is that the economic environment is laced with opportunities if one follows objective processes and periodic adjustments.
Dr. David Kohl energizes agricultural lenders, producers and business professionals with his keen insight into the agricultural industry through extensive travel, research, and networking around the globe. He is a Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech, Blacksburg, VA. Dr. Kohl has traveled over 8 million miles in his career and conducted over 6,000 workshops and seminars for a variety of agricultural audiences. Additionally, Dr. Kohl’s personal involvement with agriculture provides a unique perspective into the future trends of the agricultural industry and economy.
