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March 10, 2023
The triple whammy of sticky cost inflation compounded by volatility and rising interest rates challenges even the best managers. Many have indicated that while they are flush with cash and working capital on the balance sheet, they have anxiety concerning the “trapdoor of adversity.” With that being said, the top producers' responses to these economic conditions have been multi-faceted.
One trend being observed on the lecture circuit is that top performers are paying income taxes. Yes, this may have been the result of supply chain issues with machinery, equipment and inputs making producers unable to take advantage of accelerated depreciation and prepaid expenses to reduce income tax obligations. However, many have a formal tax management plan.
Next, financial analysis and budgeting using spreadsheets are diligently being used as prudent cost and expense management strategies. Producers are developing these budgets, monitoring them and making any necessary adjustments.
The top producers are making informed and objective grain and livestock marketing decisions. They also utilize a risk management plan with various insurances that are customized to their businesses. In some cases, outside sources or services provide the coaching needed to navigate the highs and lows of the marketplace.
More producers are developing and utilizing peer advisory groups. For example, some individuals within the first year of The Executive Program for Agricultural Producers (TEPAP) class are meeting via zoom for short periods of time with specific agendas to energize their management strategies. Some producers are making a concerted effort to visit other operations to provide and sometimes receive counsel. This provides perspective to their own business operations.
A very favorable trend among top performers is that they embrace education. This is a deliberate plan of face-to-face meetings and conferences intertwined with podcasts and reading lists. These often become topics of conversation in their peer group meetings.
Finally, volatility requires a working capital strategy. This includes levels of 25% to 50% of working capital to expenses, depending on the type of operation. In the working capital plan, one must have a one, three and five-year plan for capital expenditures. More producers are keeping cash reserves as dry powder to block adversity and take advantage of opportunities.
Increased interest rates and the incidence of inflation and volatility are likely here to stay for a while. Embrace it and take advantage of opportunities that are often centered in proactive management.
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.