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Dr. David M. KohlIn a recent seminar on the West Coast, a producer participant indicated that my economic outlook was “sugar-coated.” Later discussion revealed that this individual brought two of his business partners to the seminar, who were both aggressively growth-oriented. He was hoping a stiff dose of reality would curb their appetite. Well, his efforts are commendable and for some in agriculture, straight talk may be the very best approach. Let’s talk frankly about agricultural economics and some positive, proactive actions needed before the 2017 season begins.

Like the business partner above, many producers ask for an economic status report on agriculture. Well, analogous to a baseball game, we are in the mid-innings. In the early part of an economic reset, profit and cash flow margins become negative or marginal at best. Now, as the mid-innings continue, working capital is being depleted. The next step will occur over the next two years as assets and equity will come into play. Core assets like land will be used for refinancing, to generate working capital, in equity restructuring, or placed on the market. So, how much longer will this cycle remain?

Four major factors will greatly impact the extent and depth of this economic reset. First, the economics of the emerging nations (Brazil, Russia, India, China, South Africa, South Korea, Indonesia, Mexico and Turkey) will be critical in the fortunes of agriculture. When their economies were booming, the emerging nations experienced growth rates from 6 to 10 percent. Their insatiable demand for food, fiber and fuel lit up the agricultural economy. Consider that today, Brazil and Russia’s economies are in recession and China’s economic growth has subsided.

This chart illustrates that 30-day Farm Credit issues remain at historically low levels through November 15, 2016 - relatively unchanged over the past year. However, the gap between long-term and short-term rates is increasing. Now is a good time to call your FCS Financial expert to discuss your interest rate risk and options available including fixed rates.[/rich-callout]Another factor of reality is the ethanol industry. As one of the drivers of the economic super cycle, the ethanol industry is today in its maturation phase. Add this plateau in demand to a global oversupply of grain and you have commodity prices reminiscent of a decade ago.

Next, the continued strength of the U.S. dollar is a significant inhibitor of agricultural exports. The key element here is to monitor actions of the U.S. Federal Reserve along with European and Asian central banks. If global central banks continue to add stimulus, the U.S. Federal Reserve may raise interest rates. In straight talk, the duration of the U.S. dollar could extend this economic reset into extra innings.

Of course, Mother Nature always has surprises. Economic fortunes can change rapidly with adverse weather in any major production area. However, even Mother Nature cannot completely erase the aforementioned variables. Any weather-related relief in prices would be temporary as other global factors will continue to weigh heavily on the long-term trend of agricultural economics.

So, what are the straight talk action items needed for the upcoming renewal and business planning season? First, producers with negative margins that plan to request re-financing, need to develop a one-page, written plan with strategies and actions to correct the negative profits and cash flows. The plan should follow the S.M.A.R.T. principle; specific, measurable, attainable, realistic and timely.

Next, outline in writing short and long-term goals. Short-term goals are usually one year while long-term are normally three to five years. In the goal process, solicit participation from your spouse, partners and family members involved in the business. Articulated goals help maintain balance between business, personal and family objectives.

Third, provide an updated and current balance sheet. If possible, accrual income statements are best. More scrutiny will occur of financial information, including quality and timing of both the balance sheet and income statement. Don’t forget to include accounts payable, capital leases and loans with relatives or friends, as any of these can impact repayment ability and cash flow.

Finally, develop a projected cash flow for the business. Yes, it can be difficult to predict prices and cost. Therefore, conduct scenario analysis including factors such as changes in price, cost and production levels. In actuality, 80 percent of a business plan is the cash flow document because it requires one to think through production, expenses, prices and operational timing.

Well, this is my straight talk. Some may call it “sugar-coated,” but I contend that it is simply the “cup half-full” approach. After all, a positive, proactive approach is needed to position the business for success in this, or any economic environment.

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