Let’s start my second 500 columns with an outlook for 2011 for agriculture and the general economy.
- First out of the gate, develop your cash flows and financing plans for the upcoming year and beyond. At least three to five scenarios are needed with the volatile prices in inputs such as fertilizer, fuel, cash rents and land cost. Know your breakeven points, but remember to build in a profit margin or return when developing your risk management and marketing programs.
- If you are seeking financing, do not get caught in the lowest interest rate trap. Seek a lender who is relationship-oriented. That is, they know your business and industry and provide terms that are reasonable to your short-run and long-run business sustainability. Expect to see more mergers in the agricultural banking and lending environment. Seek a lender with a management team that understands the industry. It is critical to develop a relationship with another backup or shadow lender at the institution, especially if your lender is close to retirement age. Remember, transition planning is just not for businesses but lenders, as well.
- Keep a close eye on Prime and LIBOR interest rates. Any concern about the U.S. federal debt or monetary and fiscal policy strategy and execution by the Federal Reserve and government will be closely watched by global investors. This, in turn, could sway interest rates very quickly.
- Watch for possible large swings in oil and fertilizer prices on your radar screen. As a business strategy, the best bet is not to put all your eggs in one basket.
- Flipping (quick real estate sales) is now starting to emerge in the agricultural industry. Do not get caught up in the euphoric emotion. Just take a trip to Florida or Arizona to see how things can change in the real estate market.
Tips for 2011
- Start by developing a business plan that brings discipline to strategic business decisions.
- Conduct a trend analysis on your financials with key ratios and benchmarks.
- Schedule a review or checkup with your lender or financial advisor.
- Be an advocate for the agricultural industry. With an increasing amount of non-farm consumers and decision makers who are distant from the actual agricultural front lines, we need all the assistance we can get.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]