Economic and Management Radar Screen: 2021 and Beyond

Economic and Management Radar Screen: 2021 and Beyond

As the calendar moves to February and the days become longer, spring is right around the corner. As one surveys the economic landscape, what are some of the challenges and opportunities in the early part of the 2020s?

From a domestic economic standpoint, legislative changes out of Washington D.C. may require a shift in business strategy. Raising the minimum wage to $15 per hour by 2025 would be a challenge to small businesses, including many in agriculture. This will most likely result in some businesses adopting more automation, when possible. Others may shift from labor-intensive business enterprises to a simplification strategy. One impact of a minimum wage increase could be business consolidation or concentration cannibalization as larger businesses have more ability to absorb labor cost increases.

The energy complex, which is critical to the agriculture industry both from a cost and revenue aspect, needs close attention. Currently, the United States is a leading energy producer globally followed by Canada and Mexico as the fourth and eighth largest energy producers, respectively. The new administration’s stance on energy initiatives could result in a shift of power back to Russia and OPEC. If this occurs, more volatility in prices at the pump could ensue. This could impact agriculture profit margins and consumer confidence.

A careful assessment of electric vehicle initiatives needs to be considered. Nearly 75 percent of the electrical components for these vehicles are made in China. Thus, supply chain challenges could become prominent. Possible grid shutdowns and attacks on electrical systems are another potential unintended consequence.

With checks being written by the government for stimulus and generous unemployment benefits, tax strategy will play a prominent role in management of all businesses. Taxes at the local, state, and federal levels and possible estate tax changes will require farm and ranch businesses to retain accountants who understand the complexities of agriculture.

Expect more swagger from regulators, whether it is the food system, environment, labor, general business, or banking. More green financial incentives for the environment, soil, and water health will accelerate towards the middle of the decade. One positive outcome is that the non-farming public’s perception of the agriculture industry as an environmental problem could be changed to the solution.

The agriculture and rural landscape will see more neighbors that are “not from around here.” The trend of de-urbanization will continue to accelerate as remote work opportunities become more widespread and people seek areas with a lower cost of living and a safer environment to live and raise children. High speed internet access in rural areas will be a magnet attracting these new neighbors. One challenge of this trend is that new neighbors often bring new and different views.

Globally, watch for the new administration’s stance on agriculture trade. China is taking advantage of internal discourse and geopolitics in North America and Europe. China was the central force behind the Regional Comprehensive Economic Partnership (RCEP) signed recently. This trade agreement represents 2.7 billion people, over onequarter of the world economy, and over $12 trillion in global trade value. Will Tom Vilsack, the incoming Secretary of Agriculture, continue to back and gain support for entering the Trans-Pacific Partnership (TPP) as a blocking strategy to China's Belt and Road Initiative? Expect trade negotiations to be volatile with the agriculture industry possibly experiencing adverse fallout.

Moving towards business management, farmers and ranchers need to be cognizant of extraordinary net income as a result of government stimulus checks. It is important to realize that the quick ascension of grain prices was a convergence of events: rebuilding the hog sector in China, the devaluation of the dollar as a result of stimulus checks, and weather adversity in the southern hemisphere. Higher commodity prices, along with the stimulus checks, will be fleeting. Be careful of making long-term decisions based on temporary revenue. While these higher prices may make growth possible, use the opportunity to build working capital, increase efficiency, and shape up your balance sheet by reducing debt.

Finally, I would like to share a wish list developed by polling over 400 agricultural lenders on a recent webcast. This wish list identified traits and habits that the lenders would like producers to consider so that they would be in a better credit risk position and be more effective managers.

1. Develop a projected cash flow with financial sensitivity analysis of price, cost, and best, average, and worst-case scenarios. The best-case scenario should meet your aspiring goals. The worst-case scenario is in case Murphy's Law shows up with its ugly economic fury.

2. Create an accrual adjusted income statement with adjustments for inventory, payables, receivables, prepaid expenses, and accrued expenses. Management of your business using a Schedule F is one of the 10 worst management practices of the century.

3. Build a personal family living budget, which is just as important as a farm budget.

4. Develop and follow a marketing and risk management program. Commodity price increases in 2020 brought an element of undisciplined marketing, which yielded unusually high profits. However, in the long run, following a process, knowing your costs, and identifying your breakeven point will be critical for sustainability, profitability, and success.

5. Develop your goals and vision in writing. This allows for increased focus on the business strategy and enhances communication with internal and external partners.