The Pulse of the Economy & Business

A new year is fast approaching, with its share of challenges and uncertainty. If one takes a cup half-full approach, there will be more opportunities for proactive managers to succeed in a global and domestic economic environment that presents volatility in the extremes.

The pulse of the agricultural economy finds two extremes. The supersized super cycle that has lasted for a decade is partially the result of global economic growth generated by emerging nations, with China being the fulcrum. Domestic factors such as the shift to ethanol and biofuels, the emergence of oil, gas and mineral incomes fueled by the low value of the dollar, and low real interest rates, have presented profits and wealth accumulation to many of the 60 million people who reside in rural America.

Specifically, grain, oil seed, and fiber enterprises have experienced long profit windows with minimal and shallow downturns. Specialization and consolidation are being economically rewarded. On the downside, margin compression is being experienced as a result of higher input costs and increased fixed costs for land through cash rents and appreciating land values. High prices for marginal land and outside investors seeking farmland investments are signals that land appreciation is long in the cycle.

[rich-callout title="30-Day vs 15-Year Farm Credit Bond" image_id="4895"] This chart illustrates that 30 day issues continue to stay at historically low levels through November 30, 2012. Movement in the gap between long-term and short-term rates remains steady. Ask your FCS Financial expert about conversion options and locking in historically low, fixed rates on real estate loan or other term loans.[/rich-callout] Contrasting this to the livestock industry through the super cycle finds short profit windows with extended downturns. There has been a shift of agricultural resources from livestock to grain as producers seek more profitable enterprises that are less labor-intensive as a lifestyle choice. Specialization in the livestock industry has resulted in increased financial risk. Increased regulation on consumer and food issues, as well as environmental and animal welfare issues, has taken the economic glow off this industry. Many in the grain industry are concerned because an economically sustainable livestock industry is an important component that contributes to a viable grain industry.

While weather is not my expertise, moisture and growing degree days in the southern hemisphere in the next four months must be watched. Moisture this winter and next spring in drought-stricken production belts in North America, Europe, and parts of Asia will be dominant factors in the economic outcomes of both the crop and livestock sectors next year and beyond.

The pulse of the developed countries now finds Europe locked into a major recession. China has changed leaders and is providing stimulus to maintain economic stability. Domestically, the United States is in the final countdown toward the fiscal cliff or fiscal slope. If the U.S. economy goes over the cliff or slope, it will reduce gross domestic product (GDP) by 2.6 percent to 3.6 percent, placing the U.S. into a recession. The most likely compromise will be similar in nature to the plan proposed by Bowles and Simpson that includes tax increases and budget cuts. However, the economy and businesses are currently being held hostage by politics, suppressing normal investment behavior. Remember, 80% of economics is behavioral. Businesses and the public want clarity in the rules for decision-making.

Speaking of decision-making, the following are a few simple proactive practices to jump start next year for your business.

First, it is important for each business partner to establish written goals, including business, family and personal goals, as well as mental, physical and spiritual goals.

Second, make an appointment with your lender to review your financials. Being conservative on debt with a debt to asset ratio below 50 percent, and having strong liquidity, with working capital of at least 33% of revenue, are proactive practices of the times. Check all partners’ credit scores, also; ideally, they should be above 700.

Finally, develop financial budgets based on the past three years, and shock test up to a 25 percent increase in costs and decrease in prices.

Opportunities in agriculture abound, but failure can result despite the great super cycle if one does not focus on the basics of goal setting and financial management with a trusted advisor.