Dr. Kohl’s Corner: Managing

Managing the Economic SHOCKWAVES

By Dr. David M. Kohl

Who remembers that a little over two years ago oil prices were negative?

Fast-forward to today, and we are seeing triple-digit prices with daily fluctuations in double digits that send chills through businesses and consumers. The ripple of energy prices can be felt through the agriculture industry with increased prices for fertilizer, sprays, transportation and any input that is directly or indirectly tied to the energy industry.

Next, global markets are being impacted by sanctions, weather and possible supply chain disruptions resulting from global conflicts and political ideology. Some demographics, such as the baby boomer and veteran generations, indicate that these times are very reminiscent of the late 1970s. During that period, inflation was in double digits with stagnant economic growth, otherwise known as stagflation. Land was the investment of choice in the agriculture industry. Markets were uncertain as world leaders used agriculture trade in negotiations between government and military strategy. In terms of managing businesses then and now, let’s dust off some of the strategies that have stood the test of time as the economic shockwaves come fast and furious. As global threats intensify, taking ownership of your business finances is priority number one. Whether operating a business or personal household, financial liquidity is often the chokepoint. The ability to generate working capital and turn it into cash that meets short-term obligations is essential. Does your balance sheet have a current ratio above 2:1? Is your working capital 25% or more of business expenses? Is your working capital above 200% or 2:1 of your total principal and interest payments on term debt? While cash in the bank earns very little interest in the current marketplace, it brings peace of mind, the ability to pivot and block adversity, and the power to take advantage of opportunities that may have immeasurable value. Modesty concerning debt level is another priority. Financial leverage without the backup of the aforementioned working capital can be very punishing to a business when sharp, adverse economic cycles occur. Young farmers and ranchers as well as growing businesses often have larger amounts of debt, which requires other factors to offset the risk of debt. If your debt to asset ratio is above 50%, strong operating efficiencies, production cost control, and a marketing and risk management program are critical. Modest family living withdrawals and occasionally cutting back on some costs during adverse economic cycles will be a priority, despite inflating personal expenses. Similar to the economic cycle marked by high inflation in the late 1970s, the ability to adapt, innovate and plan will be a premium strategy. Assessing alternatives for inputs or diversification of

Similar to the economic cycle marked by high inflation in the late 1970s, the ability to adapt, innovate and plan will be a premium strategy.

enterprises in a changing domestic and global marketplace must be considered. A plan, with backups, is critical in a very fluid economic environment where a decade worth of change occurs in a matter of weeks. Farm and ranch businesses that managed through the inflationary years of the 1970s, followed by the farm crisis era of the 1980s, were very resilient. They were focused, agile, and sought new ways to navigate the economic shockwaves. These managers were open to education and help from support networks such as lenders, advisory groups, and mentorship for financial and emotional balance. Similar attributes will be important when navigating the shockwaves in today’s volatile economic environment. ■

Dr. David Kohl energizes agricultural lenders, producers and business professionals with his keen insight into the agricultural industry through extensive travel, research and networking around the globe. He is a Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech, Blacksburg, VA.

Dr. Kohl has traveled nearly 10 million miles in his career and conducted over 7,000 workshops and seminars for a variety of agricultural audiences. Dr. Kohl’s personal involvement with agriculture provides a unique perspective into the future trends of the agricultural industry and economy.