Volatility has always been an element to manage in agriculture. Your parents and grandparents managed the roller coaster of farm economics by being conservative concerning financials, overall management, and growth expectations. The current and future generations will experience economic volatility in extremes. Surviving through volatility will require proactive management with an emphasis on high business IQ.
Present-day volatility, profits, and cash flow center around market perceptions on trade negotiations, tariffs, and overall expectations from the global markets. However, layered on these elements are extremes in weather in the U.S. and in other major production or transportation areas which can impede the flow of goods and purchased inputs. The political uncertainty in the U.S. and abroad in a 24/7 news cycle creates extremes in emotions.
Black swan events, such as the African swine flu which has changed the marketplace and prices for pork and other livestock industries, can also spur volatility. Consumer demand shifts in all sectors are quickly creating competition and demand that supply cannot meet. The consolidation and structural changes of the agriculture industry is placing more power in the hands of fewer players. This shift is creating concentration risk in many industries, which can change fortunes overnight if an incident or an adverse event occurs.
So far in this economic cycle, volatility has remained on the profit and cash flow side of the business. Significant drops in asset values, particularly land, is the individual producer and industry’s biggest concern. Volatility in asset values has been most prominent in livestock and equipment. However, real estate, which comprises up to 80 percent of the U.S. farm balance sheet, has yet to experience much volatility. There are several factors that influence the volatility of real estate values that need close observation.
The lenders’ appetite for refinancing and restructuring losses using land equity.
The producers’ appetite to use land equity to restructure losses.
The regulators’ appetite for continuing to allow these refinance strategies.
The suppliers or unregulated lenders’ appetite for extending operating funds.
The investors, hedge fund managers, or newly minted wealthy individuals’ appetite to invest in farmland.
The supply and demand for real estate, equipment, and livestock in certain areas and regions of the U.S.
If supply exceeds demand, then the appetite of the players quickly changes, and volatility increases in extremes.
Source: Dr. David Kohl
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