Northwest FCS News
I recently conducted a webcast focused on the dairy industry. Out of all of the agricultural sectors, dairy is undoubtedly one of the hardest hit by the economic down cycle. In 2009, the dairy industry began a three-year cycle that was abrupt and deep, and then finished with a quick bounce back. Today’s downturn seems to be elongated with no end yet in sight. Indeed, this economic reset continues to challenge even the best of managers.
As is usually the case, the combination of several factors put financial pressure on the dairy industry. In particular, Europe dropped dairy production quotas, Chinese import demand decreased, Russia banned European dairy and other food imports, production was good in Australia and New Zealand, and the strong U.S. dollar continues to hinder export potential and make imports into the U.S. more competitive. (Of course, the dairy industry is not alone as there is considerable financial stress in many agricultural sectors.)
Looking back at the farm crisis of the 1980s, we may draw some lessons regarding a down cycle.
First, it is important to remember that profitable times do not last forever, and neither do challenging times. High prices tend to cure high prices. However, the reverse is also true, which is low prices will cure low prices. Agriculture is a cyclical industry; the key is to manage for the cycle. Specifically, in positive economic cycles, build up reserves and liquid assets. In tougher times, work to enhance liquidity and reduce cash flow commitments through equity restructuring.
In the past, many have attempted to find one magical silver bullet to relieve the financial pressure of an economic downturn. Well, agriculture is full of amazing individuals, but there is no magic involved. Good managers analyze their businesses to make small, incremental changes that most often compound over time. In other words, they “sweat the small stuff.” They conduct soil and nutritional crop testing, cut living costs and find input substitutions without compromising output. Good managers know their cost of production and market their products for incremental profits instead of waiting for a bigger and better return. These types of changes can be rather mundane, but extremely important in sustaining the business.
A good tool to use in monitoring performance is variance analysis. Develop a cash flow budget with projections. Then, compare those numbers to actual results. This will help identify and focus the small incremental adjustments that can be made.
Develop a team of advisors with which you can discuss strategies and tactics. Use this group of varied individuals as your sounding board. In problem solving, sometimes an outside perspective can deliver new solutions to old problems. The process then becomes to strategize, execute and monitor. Accountability in this process is another benefit of an advisory group.
In the 1980s, several events unfolded that eventually reversed the cycle and changed the fortunes of agriculture. This economic cycle is no exception. Using practices from the1980s, be proactive and analyze your business for potential improvements. While it is not magic, the combination of small, strategic changes can seem magical in enduring the down cycle.