In the last column, we discussed economic cycles as analogous to the seasons of the year. We looked at the summer season of the great commodity supercycle that brought record profits and wealth accumulation through appreciated and earned net worth. The change from summer into fall chilled cash flows and profits; and more recently, some producers experienced an economic frost. Especially those with marginal land or inefficiencies have used the refinancing of debt to bridge working capital and profit losses. Of course, the late fall season also brought a decline in the value of assets such as equipment, livestock, and marginal land.
Now through early next decade, the agriculture industry will brave the winter season of the economic cycle. The first cold snap will set in when producers are denied for restructuring and left without the operating monies upon which they had depended. Those particularly vulnerable will be low-equity, larger producers that enjoyed growth during the supercycle. Some will liquidate assets to generate cash flow and continue to downsize their operations. Others may opt to liquidate totally. The winter season also calls for the monitoring of macroeconomic factors like international trade negotiation, disrupted export markets, or a rise in interest rates that may tighten already squeezed or negative margins. Yet, there are still those producers with working capital and management savvy that will selectively grow the business in a disciplined and methodical manner over the winter season.
Of course, no matter how hard the winter winds blow, springtime will eventually come. At some point in the early to mid-part of next decade, spring will arrive with renewed strength and the promise of warmer days. Winter serves the vital purpose of naturally weeding the landscape of that which is not adaptable in order to make room for new growth. In agriculture, this could be those ready to retire, those with financial challenges, or perhaps those with the desire to pursue another chapter in life.
This time for regeneration and creativity will also bring stout competition between those with experience and equity, and those with youth and vigor in market driven pursuits. The most astute managers will recognize that a combination of both youth and experience will take the business to new levels. For some, this may be a consolidation of operations or the inclusion of non-family members into the business. In the spring, market-oriented managers will align with niche markets, both domestically and abroad. Many managers will build multi-dimensional businesses with different entities all driving towards efficiency. The “asset-lite” and interdependent approaches will be more commonplace in the middle of the next decade and in this part of the economic cycle.
As “the weather man,” Eric Snodgrass, and I discussed weather and economics, we noted their reflective relationship and were encouraged. Just as it did for us, I hope this view of the seasons provides some food for thought, as well as hope for what is yet to come.