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February 10, 2023
Are you ready to kick off another year? One thing you can count on is that father time is undefeated, and life will continue its journey whether we are ready or not. With that in mind, let’s take a look at the outlook for 2023 and beyond.
The European economy, which is approximately 20% of the world economy, is continuing into a recession. The days of cheap energy from Russia and robust export markets in China and the rest of Asia are being curtailed for the time being. Expect closer ties between North America and Europe as the war in Europe pits western nations against authoritarian regimes. There appears to be no endgame in the European war which will continue to impact prices and input costs for agriculture producers.
Core, headline and producer price inflation rates should level off and slightly decline in 2023. The financial reserves that many agriculture producers have built in recent years should provide a fallback or buffer if inverted margins occur, that is if prices decline below input costs. If this was to occur, the question becomes how much and for how long? Remember, managing in the short-term is about cash flows and working capital, not necessarily equity. Whether you are managing a business or household, get as financially liquid as possible. Try to maintain working capital of at least 25% of annual expenses. Also keep enough cash (or near cash equivalents) on hand to satisfy 90 days of operating expenses. For households, maintain a cash reserve of four to six months of family living expenses.
The year 2023 will require juggling three balls of economics. First, you must have a disciplined, objective marketing and risk management plan on the revenue side. Second, develop plans A, B, C and D for inputs. Inflation higher than pre-pandemic levels will be a given. Know your cost of production and breakeven points and how various alternatives and outcomes could impact the bottom line. Third, conduct a deep dive analysis of your loan structure and terms. What are the variable and fixed rates? How will interest rate increases and possible decreases impact your bottom line? Keeping each of these “economic balls” in the air will require a good set of cash flows with a wide range of assumptions to test changes in the aforementioned three variables.
The following are a few quick points to keep in mind as the new year progresses.
Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 10 million miles throughout his professional career and has conducted more than 7,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published five books and over 2,500 articles on financial and business-related topics in journals, extension and other popular publications.