Recently, a Kansas producer of the Baby Boomer generation asked me, “Hey Doc! When will economics stabilize?” Well, it is certainly understandable for producers to seek some sense of economic normalcy in these days of economic reset. My response, however, may not deliver the comfort for which this producer was hoping, but it is definitely not all bad news.
Volatility in economics is here to stay for a number of reasons. Historically, parents and grandparents dealt with volatility within one standard deviation range. However, now and into the future, two standard deviations and more extended durations can be expected.
In days past, government support programs, emergency funds, and buyouts often reduced the volatility in revenues, costs and net income swings. Today and for the foreseeable future, neither state nor federal governments are able to fully fund past programs, which historically reduced volatility. With fewer representatives from agricultural and rural areas, the poor financial position of government, and the perception that agriculture has been prosperous, government support seems unlikely. At best, minimal government assistance may be available but there are certainly, no guarantees.
In fact, expect greater volatility because of global market shifts, changes in trade and consumer trends, and finally, unexpected geopolitical events where agriculture is quickly used for political negotiations. These trends, along with aberrations in weather and its impact on natural resources, will result in volatility being the new normal standard.
Mindful of increased volatility, what can one do as a business manager to protect and maintain sustainability? Simply put, conduct scenario planning on cash flows and examine the different outcomes.
Self-insure your business financially through working capital, the financial shock absorber. This liquidity will also allow you to meet expenses and service debt commitments, no matter the direction of the current cycle.
Next, a good marketing and risk management plan must to a top priority. In volatile environments, executing a well-developed plan allows you take profit opportunities when they arise. This flexibility will be critical to a sustainable business.
Yes, my answer may have disappointed the baby boomer producer, but the good news is economic volatility will create more opportunities in next decade than it has in the previous three. However, it is important to realize that economic volatility will also present plenty of room for failure if not managed well. Current economic realities can be viewed as exciting or disappointing, but either way, this is the fortunes of business in the 21st century.