August 10, 2022
An agriculture producer, whose business was deep into strategic planning, wanted to know what some of the proverbial trapdoors are to avoid over the next few years. Unfortunately, we do not have a crystal ball to tell us when the bottom will drop out, leaving one's fortunes to the abyss. Over the next two articles, we will examine some of the variables to keep a close eye on to avoid trapdoors in your business.
With turmoil and transition, geopolitical risk will be a tall order in every agribusiness strategic plan. With the U.S. agriculture industry being export dependent for many commodities, changes in the political landscape and possible long-term military conflicts will lead to extreme volatility for input costs, prices received, and interest rates.
Conducting financial sensitivity analysis and understanding its impact on bottom line margins with various scenarios is essential to avoid trapdoors and emotional business strategy. The key is to establish outcome guardrails to avoid the herd mentality, which means to mindlessly follow the group when headlines and panic are difficult to resist. Passions and emotions are the most important aspects of investing, financing, and, sometimes, marketing. According to author Scott Nations, losing money is about twice as psychologically painful as making money is pleasant.
The geopolitical military risk may be around for the long haul as authoritarian and emerging economies attempt to wear down the Western rich nations. A proactive businessperson must formulate a strategy to take advantage of the opportunities that volatility creates. A marketing and risk management strategy with possible trapdoor scenarios must be systematically evaluated.
“The government will take care of us”
The other day, a lender indicated that one of his producers was very complacent about the future. The producer’s side remark was that he was not worried because the government generally comes to the rescue. The government assistance received during the pandemic has reinforced this behavior, but this may not be sustainable. The trapdoor here is that the government can give, but the government can also take it away. Making both short and long run decisions based on net income from the government can be a very risky strategy.
One can observe an example of institutional panic when the Federal Reserve was behind the curve on curbing inflation. For those that have credit on variable interest rates, sticker shock is in the future.
To avoid the trapdoors, carefully examine your loan terms. Are there interest rate resets after a certain number of years? Can the business absorb the interest rate increases and how does it influence margin? If the agriculture industry goes into a downturn, be aware that federal and state regulators can send directives to tighten credit at lending institutions. This can put businesses into a financial liquidity crunch.
Stay tuned for the next article where we will continue our trapdoor discussion.
Source: David Kohl, who 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.
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