Written by: Dr. David Kohl, Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech
The K-shaped economy tells a familiar story. A few individuals at the top control much of the wealth and are free spenders. At the bottom, a larger share of consumers are struggling to make ends meet. According to recent data, the top 1 percent of Americans control 32 percent of the net worth, while the bottom 40 percent hold only 2.5 percent of the equity in businesses and households across the United States.
Moving to the agriculture sector, the margin squeeze driven by volatile prices, rising input costs, and capital expenditures has created cash flow problems. These pressures are expanding into financial liquidity and working capital challenges that are requiring refinancing into longer-term debt secured by land or other equity. Speaking of land, those that hold farm real estate are still enjoying appreciation in many areas of the country asthe baby boomer producers position themselves for generational transfers and attract the ever-present off-farm baby boomer-era of investors.
Low-Gear: Grain, Row Crops, and the Structural Squeeze
The grain, row crop, and some specialty enterprises are caught in a global competitive correction. While some feel that this is cyclical, others argue
it has been building over the past 15 years because of global southern hemisphere competition, which pushes it more toward structural than temporary. Of course, Covid stimulus checks resulted in positive cash flows for a few years, and near-zero bond interest rates helped inflate land and asset values, too. Those that rent and lease farm ground, which has grown from 17 percent after World War II to over 60 percent today, face the added challenge of high rent expectations from landlords.
Survival Tactics in the Low-Gear Economy
Managing in the low-gear sector requires focus and attention to a marketing and risk management program. Geopolitics and continuous wars, compounded by weather disruptions in production belts around the globe, often present small windows of profit opportunities. Knowing your cost of production across your various enterprises, and down to the field level in some cases, can place the odds in your favor. One producer who attended a recent seminar of mine was operating in ground zero of the low-gear economy: rice, cotton, and soybeans. He generated a small profit by shifting enterprises and scaling back on the rented ground that was not logistically efficient or productive when put through a benefit-cost analysis. A few difficult landlords made those decisions even easier. For those operating in a low-gear economy, position your business for cyclical events such as weather or other factors that create supply and demand shocks. Remember, you build your business resiliency, nimbleness, and agility during the downturn, where focus on the basics matters most: production efficiency, cost management, marketing, risk management, and capital efficiency.
High Gear: Beef, Livestock, and the Temptation of Good Times
Those in the high-gear segment of the economy, such as beef, livestock, or more diversified businesses: beware. Mistakes are often made at this part of the
cycle through complacency, chasing the next big thing, or swinging for home runs when base hits are what build the business.
While strong equity markets and spending by top-end consumers can drive demand, this can change quickly. The ongoing movement from carbs to protein is a powerful and positive force driving long-term demand among domestic and global consumers.
A three-pronged strategy makes sense in a high-speed profit cycle. First, focus on efficiency before growth, or put another way, better before bigger. It is a time-tested principle. Next, build working capital reserves from profits. This requires balancing three competing pulls: paying taxes, funding business growth, and building working capital. Avoid the trap of spending a dollar to save twenty cents in taxes. This kind of thinking can strain debt service levels on capital farm expenditures or quietly drain working capital you will wish you had later.
Finally, be careful of non-productive capital expenditures, or what I call killer toys, outside of the business. By all means, one must enjoy the fruits of success, but do it within reason.
Cycles and structural adjustments are a fact of life. It is how one plans, executes, and monitors, both in the short and long run, that determines profitability and prosperity in business and in life.
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.
