Cycles Of Extremes
The other day I presented a webinar sponsored by the Canadian Farm Business Management Council. This event was broadcast live across Canada and was very interactive with many excellent questions from participants. It was the 10th webinar that I presented this year via our computer and web camera in my office in Blacksburg, VA. This method of presentation sure beats the cramped, always late, non-reliable airlines.
Leo, one of the participants, asked why we should anticipate cycles of extremes in business planning and execution in agriculture.
First, extremes are occurring in our economy because of a practice called just-in-time inventory management. For example, energy prices will bounce at the slightest sign of disruption due to weather, terrorist activities or demand shift. This is the result of low supplies and inventory, one half of what it was 30 years ago. Yes, a small blip in supply and demand has a large effect because major developed countries have no energy plan.
Second, the agricultural industry in North America has few players generating the bulk of production. Seven percent of farm and ranch businesses produce 80% of the revenues, thus a slight shift in production or consumer demand can create sharp deviations in income or expenses. As producers become larger, five-digit swings in net income and losses are turning to six- and seven-digit variations. This frequently sends chills into the industry that finances agriculture.
Yes, a stable industry is healthier; however, the producer that positions their business to capture the profits in the high cycle and mitigate the risk on the down side can really benefit.
Finally, the wild cards in this situation are growing and developing economies like those of China and the Asian region. China’s demand for raw materials has doubled in the past decade, which has influenced the business models of agriculture.
Thanks Leo for the great question, and I look forward to the next webinar.
Editor’s note: Dave Kohl, The Corn And 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].