By Dr. David Kohl
Imagine being on a tightrope journeying over a deep canyon with extreme windy conditions. This is analogous to the economic environment ahead, very similar to the post-commodity super cycle era of a decade ago. Whether you are walking an actual tightrope or managing an agricultural business, the way forward will require your “A” game with focus and attention to detail to navigate for positive outcomes.
The agriculture economic environment at the quarter-century mark will be full of disruptors that can change economic fortunes very quickly. For example, one-half of the global population will face a major election this year. This puts a high priority on monitoring geopolitics and possible changes in outcomes when developing and executing a game plan. Expect the unexpected when it comes to agriculture trade, tariffs, and sanctions with major trading partners both on the output and the input side.
U.S. agriculture is now becoming a secondary supplier in a competitive world marketplace for many commodities. If China and the Asian basin have sufficient supply from the Southern Hemisphere with favorable currency dynamics, the challenge of supply exceeding demand manifests itself in the equation. Of course, monitoring weather dynamics is now becoming a year-long process in both hemispheres. This, along with improved seed technology and livestock technology dynamics, can change prices and competitive advantages very quickly. While these macroeconomic conditions appear to be negative, one can manage for positive outcomes.
The economic environment in agriculture is building towards a period similar to the pre-pandemic period from 2013 to 2020. Falling prices, with the exception of beef and livestock, along with stubbornly inflated costs and resilient, high interest rates are squeezing margins for some producers, which could become losses. A focus on the basics and fundamentals of business and financials can be a first step in managing through the noisy, emotional marketplace.
Basic cash flow
A cash flow budget prepared at least on a quarterly basis can be a good start. Financial sensitivity shocks with various production, price, input costs, and interest rate levels can provide the guardrails for financial outcomes and decision-making. Even if one has annual income, it is still very important to monitor costs and expenses to determine if you are on track on a quarterly basis. Monitoring your financial spreadsheets or your homemade budgets can be imperative in marketing and risk management decisions.
During the COVID-19 pandemic our creamery business was nearly derailed financially. Preparing and intensely monitoring the weekly cash flow was a powerful tool to direct the business to a positive outcome.
Balance of efficiency and effectiveness
Be careful of over emphasizing cost and expense cutting and its impact on the long-term continuity of your business. One has to be efficient, but still be effective. In some cases, this can result in increasing expenses or selected capital purchases. A real-life example of this situation is Boeing aircraft company. The company cut costs and corners to show financial performance, only to have issues and flaws in aircraft, which is costing them dearly in the long-term.
Working capital timing
Monitoring working capital will be critical in the agriculture economic environment ahead. Timing to meet adverse shortfalls in cash flows, profits, or taking advantage of opportunities will be a balancing act to keep one out of the “financial loss canyon.” Examine your current assets, which have a life of less than one year, and include inventories, accounts receivable, prepaid expenses, and cash. Match your current assets to current obligations such as operating loan obligations, accounts payable, and principal and interest payments. This can impact the timing of marketing decisions and the level of risk management coverage. If the business generates a profit, allocation of these positive outcomes is a three-legged stool. How much should be used to build working capital reserves, make capital expenditures, or pay income taxes?
A producer from the Midwest recently commented after a seminar that he had built up $1 million in working capital over the last three years. However, a $300,000 loss last year resulted in nearly one-third of his buffer gone within a year. This year he has to make some tough decisions such as simplifying his strategy by dropping some rental farm ground that lacks production with high maintenance landlords. He also said he may have to cut family living costs. This strategy can reduce potential losses and he indicated that he is glad that he did not wait too long. He joked that paper wealth and equity does not make the payments unless you sell assets. He is focusing on moving the budget results into the black. Preserving working capital is a lesson he is teaching his children, who have yet to experience a downturn. Sometimes, tough economic times build the best business models and can be carried on to the next generation.
The road ahead
As an educator and business owner who has experienced numerous down economic cycles, the widening gap of profitability will occur. Analogous to sports, the easy part of the schedule is over for the agriculture industry and we are moving into what we would call the playoffs. One has to perform well and execute the basic fundamentals of production, business, finance, and marketing with a good set of assistant coaches or advisors. Remember, there will be more opportunities in agriculture over the next five years than there were in the first 25 years of the century. However, these opportunities will require a strong management mindset!
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 10 million miles in his career and conducted over 7,000 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.
