“Better is better before bigger is better. Get efficient before you get bigger.”
There will be more business opportunities in agriculture the next 10 years than there’s been in the last 30, according to agricultural economist David Kohl.
But there will also be more ways to go broke, he cautioned. Farmers can protect themselves through good management, knowing their production cost by enterprise and keeping moderate amounts of cash around.
“Not only does it (cash) get you through the downturns, but it positions you to proactively and intuitively capitalize on opportunities,” said Kohl, professor emeritus at Virginia Tech. “Cash will be king.
“Cash flow, profitability and liquidity and working capital are going to be real critical,” he told the Manitoba Special Crops Symposium last month.
Working capital to revenue should be at least 20 per cent.
“Better is better before bigger is better,” he said. “Get efficient before you get bigger.”
“Growth is the number one reason businesses fail,” said Kohl, whose presentation was sponsored by RBC Royal Bank. “Sometimes you outgrow your finances, but sometime you outgrow your business acumen.”
Expect price volatility to continue for production and inputs. Eighty per cent of farm spending is connected to oil and 70 per cent of oil comes from politically and militarily unstable regions, Kohl said.
He recommended a three-pronged approach to managing risk. Protect revenues through hedging and crop insurance. Be a disciplined marketer and be prepared to leave money on the table. People who sell at the top of the market are destined to sell at the bottom too.
And don’t buy all your inputs at the same time.
The second strategy is learning “people skills.” A farmer might not have employees, but needs to work with lenders, suppliers and buyers.
The third prong is not to be suckered in by low interest rates.
“Low interest rates are not going to last forever,” Kohl said.
A one to two per cent rise in rates would cut margins in Kohl’s business by 36 per cent, he said.
Interest rates usually rise in tandem with inflation. Inflation is expected to hit the North American economy in the wake of trillions of dollars of government spending to stimulate the economy and mitigate the recession.
The economy has improved, but it’s because of the government spending, which Kohl referred to as “sugar candy.”
“What’s going to happen when we take these training wheels off these economies? Are they going to be able to stand on their own?”
Much depends on the so-called BRIC economies – Brazil, Russia, India and China. If those economies, especially China’s, grows by nine to 12 per cent that will drive up oil and commodity prices. If growth is six per cent or less, prices will fall. Growth of three per cent or less will trigger a major recession in the G20 countries.
LAND EQUALS WEALTH, NOT CASH
Over time, owning farmland has been a good investment. Land has gone up in value 80 of the last 100 years, Kohl said. Since the end of the Second World War land prices have increased 63 years and declined eight.
“Land tends to be a wealth accumulator but not always a cash flow generator.”
When farmers earn a lot of money, they tend to buy land. They should hold back some cash to get them through tough times. If they don’t, they might be forced to sell land and at a lower price than they paid for it, Kohl said.
Don’t overpay for land just because it’s the piece next door. Money is cheap to borrow right now, but if you can’t pay it back it’s very expensive, Kohl said.
Land prices rise after what Kohl described as a “super cycle” – a period when commodity prices rise dramatically.
There have been four since the late 1900s. The first was 1915-17. It was triggered by the First World War. The next, 1950 to 1957, followed the Second World War and the Korean War. The third was 1973 to 1974 and triggered by the United States secretary of agriculture predicting unprecedented demand for food as the world’s population grew. And the most recent ran from 2003 to 2009.
“If you haven’t made money in grain agriculture in the past six years, Houston you’ve got a problem,” Kohl said. “You know why? Because you’ve come off one of the four super cycles that occurred over the past hundred years.” [email protected]