“Agriculture’s long-term future is very positive, but there will be bumps in the road,” Michael Boehlje, Purdue distinguished professor of agricultural economics, tells farmers this summer. “Make sure you aren’t road kill.
“You can make money with today’s $6+ prices,” he says, citing weather’s role in creating tight commodity stocks. “But economic uncertainties could cool both domestic and export demand.”
“Current land prices and rents are really high,” he says, “and fertilizer, seed and chemical prices are expected to continue going up, even as commodity prices drop longer term.”
Here are eight keys for success under the highly volatile conditions he foresees in the next three to five years:
- Today’s budgeted profit and loss margin is the highest in 20 years; lock in these high margins.
- Buy crop insurance to protect significant amounts of revenue. Meanwhile, explore alternatives such as enterprise coverage to reduce its cost.
- Assess your borrowing needs to gauge the risk you would face from higher interest rates, and consider fixing some interest rates.
- Current levels of volatility mean businesses cannot safely use as much debt as in recent years. De-leverage by paying down debt while you have the earnings and cash flow to make it easier.
- Hold financial reserves. Increasing working capital and reserves puts you in a stronger position in volatile times.
- Be conservative when bidding or buying, especially when making long-term commitments based on short-term margins.
- Fund growth with equity, not borrowing, and be prepared to grow less rapidly.
- Don’t lose cost discipline in today’s high-profit environment. Invest in operational excellence to push costs down, increase efficiency and improve yield management. Avoid bad capital decisions based on tax management.
The Resurgence of Risk
Increases in interest rates and inflation are a one-two punch, says Michael Boehlje, Purdue distinguished professor of agricultural economics, who believes inflation could be 4-5% by mid-decade.
“Interest rates could be 3-5% higher by 2015,” he says.
“Access to funds could become more problematic, especially for growers who borrow from commercial banks. A major adjustment in the commercial real-estate market (where the delinquency rate has increased from below 2% to more than 8%) could leave many local banks short of the capital to make any loans, forcing them to tighten requirements,” Boehlje says.