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Passing the Test

In real life the test comes first and then the lesson.

One of the great privileges in the world of “cyberville” is conducting webinars with other prominent individuals involved in agriculture. Doug Johnson, an Ag Strategist with Moody's Analytics, is one such individual. We have shared educational endeavors from banking schools to conferences for over three decades. Doug has a great quote that is very applicable to today's economic environment, “In school you get the lesson first, then the test. In real life the test comes first and then the lesson.” His comments are very applicable in today's world where changes are occurring almost every second. In this column, we will examine the test for economic volatility. However, before the test, what are some of the lessons?

The first lesson is that weather, both locally and globally, is extreme in terms of rainfall, temperature, wind, etc. This has resulted in financial and economic extremes for expenses, such as replanting costs, and marketing strategies.

Another lesson learned is that supply and marketing chains can be disrupted. A recent drive by the local John Deere dealership found that the COVID-19 supply disruptor has left very little inventory on the lot. Some grain and hog producers discovered that many ethanol and processing plants were shut down because of COVID-19 and subsequently disrupted marketing prices. Of course, this is only the beginning of trade volatility. The sanctions and tariffs were chapter number one. The movement from globalization to regionalization will follow. China’s strategy of “dual circulation” seeks to decouple their economy from the U.S. over the next few years and could create extreme economic volatility.

The government support payments of $2 billion per day to agriculture globally is a lesson yet to be learned. How payments will be reduced, both in the U.S. and globally, will impact the capability and the competitiveness of the balance of agriculture trade within countries and also the competitive balance of agriculture trade to individual producer’s pocketbooks. This, along with the loss or reduction of nonfarm income as a result of high unemployment rates and changes in the workforce will impact approximately 50 percent of producers who are dependent on nonfarm income to supplement their operations over the next couple of years.

What is the test question? Develop a projected cash flow for your business. However, your financial sensitivity parameters need to be expanded and explainable. What happens if revenue is down 10 to 20 percent and costs are up 10 percent? How does this situation impact your debt coverage ratios? What happens if government support payments to agriculture are reduced by 25, 50, or 75 percent? What is the impact on net farm income and what is the plan post-pandemic payments?

This is only the first of future columns that will explore other facets needed to test a business’ financial depth chart. Stay tuned for more!

The opinions of Dr. David Kohl are not necessarily those of Farm Progress.

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