October 19, 2022
One of my most enjoyable summer treks is the annual AgViews Live conference sponsored by Bell Bank in Fargo, North Dakota. Producers, lenders, agribusinesses, and others involved in agriculture participated in this three-day engaging, educational, and interactive event. I shared the podium with Lynn Paulson, Director of Agribusiness Development at Bell Bank, as well as other featured speakers. Let’s discuss some of the nuggets from this year's AgViews Live conference.
Lynn advised that minimizing the economic shock waves requires one to be prepared, vigilant, and focused. Today's world headlines, instant technology, and other factors are designed to distract, so maintaining focus is very important.
We both stressed the importance of working capital as a form of resiliency. For many producers, the past two years were some of the best ever. However, much of the free cash flow and profits were a result of government payments before input costs increased. Determine working capital needs and whether existing working capital was a result of earnings or a debt restructure to replenish working capital using equity from the balance sheet.
Lynn, whose activities cover many states, indicated what strong producers are doing. He went on to say many producers can quickly quote a production yield. However, not many can recite what their coverage ratio was, for example, "My coverage ratio was 163 percent for the last two years." The point is that producers work hard on production management, but cost management and marketing plans linked to production have a direct impact on the coverage ratio. It is very important to see this linkage.
Another quote invoked some humor. Lynn said, “If your business is swimming in cash, keep swimming!” While cash seems to be eaten alive with inflation, cash gives you the ability to block adversity and allows you to take advantage of opportunities. The term “dry powder” has never been more appropriate for cash.
The interest rate shock waves are alive and well. Take time to assess one’s debt structure to determine your interest rate risk. Do you have fixed or variable interest rates? Do your mortgage loans have interest rate resets after a fixed period? A five-year or seven-year interest rate reset needs to be analyzed because it can present a clear and present danger for highly leveraged operations. When this conference took place in late July, variable interest rates had already increased by 350 basis points. This is an increase of 42 percent year-over-year and interest rates will most likely increase by 100 percent this year! For example, an operating loan with a balance of $100,000 will incur an additional $3,500 of interest expense annually.
2022 is shaping up to be one of the most expensive crop years ever. The key will be what price window opportunities will be available to capitalize on a positive margin, given the recent changes in prices and costs. Again, being properly prepared, vigilant, and focused will be critical to position for profits, particularly in 2023.
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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