At a recent agrilender conference I was asked where some of the biggest financial mistakes will be made in agriculture. To the dismay of many, I quickly stated that the grains industry is ripe for these mistakes. Let’s drill down and discuss my thesis.
First, as with any business model, some of the biggest mistakes are made in favorable economic times. Financial budgeting is often ignored, marketing plans are shelved, and basic business fundamentals have a second priority.
Second, good economic times breed a new cost structure, with both variable and fixed cost. For example, recent run-ups in cash rents and land values have moved agriculture to new breakeven cost levels. Some have signed long term rental contracts that leave them vulnerable should grain markets collapse. Others have purchased equipment and structures for tax reduction rather than for economic logic, which has moved the economics to a new plateau. In a world that is globally flat economically, corn will seek its price level between $2.00 and $2.50 per bushel. Only time will tell whether this will be a rapid or gradual decline. Those who fail to plan and fail to build in financial contingencies may suffer the consequences.
Particularly in the last year, there appears to be froth and exuberance built into certain agricultural areas and regions. As with the Dot Com boom and the housing industry boom, what goes up will come down!
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 sullylab@vt.edu.