The economic journey that lies ahead is going to be a three-dimensional pathway full of challenges, but also opportunities for the proactive manager. Along this journey, disrupters can occur to bottom-line profits in the form of the three-headed, fire-breathing dragon. If not properly managed, it can lead to burning through profits and cash flow, then financial liquidity. Without proper action, these elements could result in the loss of equity and wealth.
Extreme volatility concerning prices received will be the name of the game in the future. Geopolitical and military agendas, coupled with uncertainty in trade agreements, can quickly flip the switch in the profit picture. The value of the dollar relative to other trading partners’ currencies, the U.S. and global economic health, and a possible recession can quickly alter demand. Coupling this with extreme weather, monitoring pricing windows for opportunities will be a tall order over the next couple of years.
The second head of the fire-breathing dragon along the economic journey will be the input side due to inflated costs. One has to be very careful of the economic flip, which happens when prices decline but costs remain elevated, creating limited profit or negative profit margins. Historically, prices will correct at an accelerated rate, while input cost adjustments may take two to four years. However, the correction for some costs such as labor and machinery repairs very seldom adjust back completely.
The third head of the fire-breathing dragon at the economic pass on our business journey is interest rates. Government stimulus and loose monetary policy have been a double-barreled approach that have been large contributors to U.S. and global inflation. Supply chain disruptions, the Russo-Ukrainian War, deglobalization, and imbalances in the movement from fossil fuels to green energy have converged, resulting in inflation rates similar to the 1970s. Central banks in the U.S. and globally are making every attempt to curtail inflation with the risk of creating deep, and possibly extended, U.S. and global recessions. Businesses with borrowed monies on variable interest rates or short-term fixed rate resets could see their interest costs doubling, or more.
Managing the challenging pathway
While the three-headed, fire-breathing dragon can create profit, cash flow and equity challenges, there are strategies and actions to improve the odds for favorable outcomes. This requires getting down to the basics of planning, strategizing, executing and monitoring.
Planning to navigate this journey requires a multidimensional approach. A good set of cash and operating profit budgets linked to a monthly or quarterly cash flow will be critical. When developing these budgets, determine the cost of production for your business by enterprise, if multiple enterprises exist. A break-even analysis with different production, price, cost and interest rate scenarios needs to be mapped out in your financial spreadsheets.
Once this is accomplished, detail your marketing and risk management program and determine what level will allow you to capture profit windows. This shifts emotional decision-making to more of an objective process. For some managers, this requires the assistance of an advisory team to provide input and objectivity.
Moving forward with production, understanding one’s needs through soil testing with yield and quality goals will be a priority. One must plan for proactive practices to optimize risk such as the timing and application of inputs and using cover crops and other soil and water practices for both short-run and long-run sustainability.
Develop a communication plan with your suppliers to know whether supplies are available and at what level costs need to be budgeted. Managing risk requires one to consider locking in input prices in conjunction with your marketing plan and output prices.
Along the economic journey, it is important to periodically monitor business performance more than once a year during tax season to minimize income taxes. Careful attention needs to be placed on the balance sheet. Examine your working capital position, which can enable the business to block adversity and take advantage of opportunities. Being financially liquid allows a proactive manager to be in the position to optimize market timing and flexibility. A strong liquidity position allows one to benefit from the timely purchase of inputs, avert possible shortages, or take advantage of input cost deals. Financial liquidity backed by reserves and equity provides both resiliency and agility in the business journey.
The days of passive business management are in the rearview mirror and possibly are taking a direct hit by the three-headed, fire-breathing dragon. A proactive manager that remains focused on the journey through planning and managing the controllable variables and then managing around the uncontrollable variables places the business odds in one’s favor.
Dr. David Kohl is an academic hall-of-famer in the College of Agriculture and Life Sciences at Virginia Tech in Blacksburg, Va. Dr. Kohl is a sought-after educator of lenders, producers and stakeholders with his keen insight into the agriculture industry gained through extensive travel, research and involvement in ag businesses. This content provided by Northwest Farm Credit Services.