The Ag Globe TrotterDr. Dave M. Kohl
Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.
The start of another year is one of hope and opportunity coupled with a world of challenges. Let's discuss some of the hot topics that will need to be addressed at both ends of the outlook spectrum. Here are some business management strategies and tactics for both a challenging and an opportunistic environment.
Inflation will be a key word in the vocabulary of businesses and consumers in 2022. And inflation will be part of the mindset, as long as there’s uncertainty in the movement from fossil fuels to green energy, and supply and marketing chain changes as a result of consolidation among large firms. Closely watch consumer confidence and the direction of central bank strategy worldwide concerning the level and duration of inflation. Globally, central banks will be walking a delicate tightrope of economic growth and price stability along with full employment. Any disruption in this balance could create extremes in economic and financial fortunes.
As managers of businesses and households, cash flow budgeting with a close watch on working capital reserves will be an important priority for business in 2022. When developing cash flows, conducting a financial sensitivity analysis of price, costs and interest rate increases will be a requirement. This provides financial monitoring guardrails to keep your business financials out of the ditch. A tough financial pill to swallow will be the burning of working capital that the business generated in the recent good economic years to accommodate higher cost structures caused by inflation.
Ideally, producers should develop and monitor their own financials. Producers who are dependent on lenders or accountants to develop financials had better take stock and monitor financials monthly or quarterly. Once per year financial reviews are analogous to driving at excessive speeds on the interstate in icy and snowy conditions, which often leads to an accident or getting stuck in the ditch. Remember, financials in an inflationary environment move quickly, and both positive and negative outcomes can spiral out of control.
If you want to learn more or need a refresher on your financial management skills, Northwest FCS is offering a free Financial Statement Basics Webinar Series beginning in late January. To learn more visit northwestfcs.com/register.
2022 will be a transitional period of business choices and assessing possible changes in strategy. Test your thoughts for compatibility with your core values, vision, and both short- and long-term goals. For example, many opportunities for growth, elimination or a reduction of certain businesses may exist. Balance these options with your business, family and personal goals. This will require communication with your partners, family members, stakeholders and advisory team. Filling out the business IQ assessment and writing down your goals can be a valuable exercise in the first 20 days of the New Year.
Trade and export markets, along with geopolitics and consumer trends, will be very important in 2022 and beyond. Is your business in the position to capitalize or is it hindered by the possibility of economic landscape shifts? Of course, my good friend Eric Snodgrass of Nutrien Ag Solutions, otherwise known as “Eric the Weather Guy,” is a must-follow in 2022 because weather in the first six months in the Southern Hemisphere and in Eastern Europe will play a large role in prices and financial outcomes here in the United States.
For many, the past two years have been analogous to an athletic team’s “soft” schedule. It is time to step up your business game plan. With the reduction of government payments and higher input costs along with variability in prices, a balance in production, marketing, risk management, finance and operational efficiency will be crucial in the tough part of the economic schedule ahead. There will be wins and losses, but following some of the aforementioned business processes will put the odds of success on your side.
Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension and other popular publications.
© Northwest Farm Credit Services 2022
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