Today both in the U.S. and Canada it is the tale of two agricultural economies. The protein industries – including swine, dairy, beef, poultry and others – are facing severe financial stress. Some say that the dairy industry may follow the swine industry, which has had difficulty for the past 18 months. The grain industry is still benefitting from the worldwide commodity super cycle that is in its sixth year. While discussing this topic with a dairyman recently, he suggested some advice and lessons learned that may assist the grain industry in weathering the storm when economic adversity comes their way.
First, a year ago when milk prices were extremely high, many producers were catching up from a negative economic environment two years prior by upgrading equipment or machinery. Others borrowed and expanded their businesses, with the assumption that milk prices were going to maintain their high level. This dairy producer who is weathering the storm took the opportunity to build some business liquidity while times were good and increased his level of working capital from 15% to 45% of revenue. He also made double payments on loans to get his balance sheet in order to make it more attractive to the lender. Yes, he did pay some income taxes, but his comment was that few people go broke paying taxes.
He also made improvements in building efficiency and refined his skills in risk management, i.e. marketing, hedging and options to establish baselines on prices. While his profit picture is not robust, he is still meeting payments and expenses.
This can be a lesson for grain producers. Act while you have an opportunity to build your financial fortress. As people in the protein industries will tell you, when financial adversity strikes, it occurs abruptly.
Editor’s note: Dave Kohl, Corn & 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 sullylab@vt.edu.