The most common stockholder question we have fielded over the past couple of years is “How do I position my operation for the future?” Recently, I’ve started getting another question: “Is this a good time to expand my operation?” Depressed commodity prices and lower land values have kept most producers focused on remaining profitable rather than expansion. As always, everybody’s operation is different, so one answer doesn’t work for all, but here are a few things I consider when asked those questions.
First, the health of the General Economy. The reason I always consider the general economy’s health is to assess the strength of the U.S. dollar. In a recession, the U.S. dollar weakens which generally creates opportunities for agriculture because our goods are cheaper to buy relative to other countries’ goods. The current U.S. economic expansion is the longest in history (10 years in June). This expansion has also been the weakest in history when you compare the cumulative real GDP growth to other expansions in our history. I also consider the slope of the yield curve. A flat or inverted yield curve (short-term rates are virtually the same or greater than long-term rates) is a good sign that credit may be tightening. Since 1960, an inverted yield curve has preceded each of the past eight recessions. We have experienced two inverted yield curves this year, so…should we prepare for the next recession? While the current cycle has been long in duration, it has been weak in magnitude which implies the current cycle will be extended. A recession and weaker dollar is inevitable, but I think we are a good 12-24 months away.
Second, the health of the Ag Economy. Let’s face it, the past six years have been tough. Land values have dropped 20-40% from the peak, commodity prices have averaged below break-even points and interest rates, while historically low, have increased. Cattle markets have been good most of the time and precipitation has helped some “out produce the price.” The Ag Economy has suffered while the trade war tries to address the U.S. cost to access Chinese markets, which is four times the cost for China to access ours. A favorable trade deal with China will significantly improve the Ag Economy outlook, but it will take nearly a year for the full effects of this trade war to back out of our market prices. Until then, we will have to rely on market facilitation payments to make up some of the trade war difference. Wet weather conditions in the Midwest hindered planting progress for corn, milo and soybeans and we will probably see record preventative planting acres. The wet conditions are also going to limit production on the late planted acres. These reports have created tremendous commodity price increases in May and I hope many of you have taken the opportunity to market this year’s crop and next year’s too. As I mentioned in our December newsletter, there are windows of market opportunity and our website’s Industry Insights is a great tool to help you seize those opportunities. Assuming we don’t suffer a significant weather event and are able to come to terms with China, we will continue to bounce on the bottom of this Ag cycle (with short-term price opportunities) and will see a prolonged agricultural recovery begin in the next 18-24 months.
Third, the financial health of your operation. Our stockholders’ financial results are as diverse as our territory. Some have endured losses for consecutive years, some have continued to see profitable operations and the majority have bounced around break-even during this current ag cycle. The first line of defense in dealing with potential issues is always the profitability of your operation. This isn’t necessarily your Schedule F income/losses, but your earned net worth gains/losses. Developing a projected income statement and/or cash flow helps you assess scenarios and whether they align with your goals. If those aren’t aligned, are you willing to change (reassess how you operate, supplement with off-farm income or custom farming, reduce family living expenses, or sell something)? Another thing to consider is a strong working capital position. Working capital (current assets less current liabilities) is cash and assets that can be turned into cash (grain, cattle, etc.) available within 12 months, less your current financial obligations (payables, loan payments, etc.) due within 12 months. Working capital allows you to self-finance short-term operating strategies rather than depend on your operating note and provides you flexibility to market crops, negotiate discounts and weather the current ag cycle. Having 30% of expenses in working capital will help you cover unexpected changes in your plan.
Finally, for those planning on expansion, please don’t underestimate the management factor. Additional acres and/or cattle shifts your focus from being an “operator” to a “manager” which requires working with more people to get the job done. Setting expectations, giving feedback and holding people accountable without jumping in to do the work yourself is a difficult transition, especially when you have more acres and cattle to manage.
I’ve shared my opinions in this article to help our stockholders that have asked, and those that haven’t asked, the tough questions posed to me. As we bounce along on the bottom of this ag cycle, cautiously prepare yourself to seize opportunities and/or pass on those that don’t fit your plan. There is one thing you can always count on: High Plains Farm Credit stands ready to help you assess your financial health and has the products to help you achieve your plans for success. We are all in this together, so please don’t hesitate to contact your local branch office today.