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Export markets and borrower risk

Know your cost of production and breakeven points.

David Kohl, Contributing Writer, Corn+Soybean Digest

October 13, 2021

2 Min Read
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Export markets are a critical element for many producers' profitability. Currently, with very little emphasis on trade and China's movement toward decoupling with Western economies, risk intensifies, particularly if a producer is export driven and borrows money. A lender recently asked, “How should underwriting standards be adjusted for producers who are heavily dependent on export markets?”

If challenges caused by export markets result in profitability and cash flow issues, the first line of defense is working capital. Working capital reserves of at least 25 percent of expenses would provide a fallback position to weather a market storm in the short run.

Fixed overhead costs

Principal and interest payments and interest on operating capital are fixed overhead costs. A new metric that can guide business decisions when carrying debt in volatile markets is working capital divided by total principal and interest payments. A ratio between 3:1 and 5:1 would provide resiliency. A ratio of 2:1 would provide some protection. However, if this ratio is less than 2:1 and abrupt, negative changes occur in the export markets, this particular operation would be vulnerable.

Make a plan

Another sound practice is to develop a marketing and risk management plan, execute the plan, and then monitor the results. This requires one to know the cost of production and break-even points. This will be critical for the year 2022 where many producers will be operating in an environment of inflated costs and uncertain market prices. The years 2020 and 2021 could be described as an era of high prices before inflated costs. The icing on the cake were government stimulus checks combined with strong profits. 2022 and beyond could be part of the cycle where instead of profits being measured in dollars, they may at best be measured in quarters, dimes, and nickels. Ownership of the numbers and getting into the details of the analytics may be necessary to position for the positive side of the ledger.

Related:How to move your farm business forward

Margin compression, along with uncertainty in export markets, will be a given for the agriculture industry in the coming years. Having a backup of working capital, knowing one's financials, and adhering to the plan can provide a three-dimensional approach for possible export adversity.

Source: Dr. David Kohlwhich is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. 

Related:Learn crisis management for your farm business

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About the Author(s)

David Kohl

Contributing Writer, Corn+Soybean Digest

Dr. Dave Kohl is an academic Hall of Famer in the College of Agriculture at Virginia Tech, Blacksburg, Va. Dr. Kohl has keen insight into the agriculture industry gained through extensive travel, research, and involvement in ag businesses. He has traveled over 10 million miles; conducted more than 7,000 presentations; and published more than 2,500 articles in his career. Dr. Kohl’s wisdom and engagement with all levels of the industry provide a unique perspective into future trends.

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