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.
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 Kohl, which 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.