Views from the Road: 2024 - By Dr. David Kohl

The quarter century mark is just around the corner and the year 2024 will be full of future shocks that could impact business plans and strategy. Let’s take a look back to examine what got us here. To kick off the century, Y2K and the anticipated technological glitches did not bring the globe to a sudden halt. Of course, the 9/11 terrorist attacks were a game changer. The Great Recession did not impact much of the agriculture sector because the great commodity super cycle was in full force, which was ignited by China's economic growth and brought record profits and asset appreciation to the agriculture industry. The COVID-19 pandemic was a boom period for agriculture as commodity prices improved before costs and interest rates increased. Of course, the lush government payments during the two- to three-year period were beneficial to many producers.

The economic period ahead of us could be coined as one with tighter margins and extreme economic volatility. In 2024, there will be a number of super trend disruptors that will impact margins and volatility. First, one-half of the global population will experience a major election in 2024. The results are already in for Taiwan. Elections in the United States, India, and Mexico will be closely watched for trade implications and possible geopolitical and military actions.

Starting in 2024, $68 trillion of wealth in the U.S. economy will begin to transfer from one generation to the next. The agriculture industry will lead the way because of the aging demographic cycles impacting this industry first. Of the $68 trillion in wealth, women currently own one-third and by 2040 women will own two-thirds of this wealth. The reason for this is that women outlive men and more own their own businesses, including agricultural businesses, and have vested retirement plans. The bottom line is that women will play a critical role in the transition of agriculture and the general economy.

Another super disruptor will be the movement from globalization to de-globalization. After a 70-year period post-World War II where globalization of trade and outsourcing of business, industry, and technology to low-cost suppliers was the norm, the movement will reverse. On-shoring as a result of supply chain, transportation, and distribution challenges and political and military agendas will create even more volatility in the agricultural sector, which is very export dependent. Global economic blocs will form such as North America, Europe, Asia, and the Southern Hemisphere to develop competition zones. Managing volatility will be a high priority strategy for producers, agribusinesses, lenders, and stakeholders of the agriculture industry as a result of the convergence of these events.

In 2024, the BRICS nations (Brazil, Russia, India, China, and South Africa) along with other economic powers such as Egypt, Saudi Arabia, and Iran will continue to try to formalize a process for an alternative digital currency to the U.S. dollar. Dollar dominance will continue to be challenged as these countries examine methods to circumvent sanctions and trade blockages. While there is a low probability of coming to fruition in the short-term, the opportunity increases as a result of monetary and fiscal policy, unsustainable debt levels, and deficits in the United States and other Western nations. The U.S. debt is a classic example of a gray rhino, which is a variable that has serious negative consequences in the future, but is ignored until factors come together to create a major disruption.

The year 2024 will be one of transition and pushback regarding the green energy movement, artificial intelligence (AI), and environmental, social, and governance (ESG) trends in businesses and institutions. The diffusion of innovation often goes through three stages. The aforementioned movements have recently gone through the infatuation stage. This was accelerated by mainstream and social media, the pandemic, and other political and societal trends. This year, these moments will enter the disillusionment phase where unintended consequences will be examined. Time will allow business, industry, and society to think through the unintended consequences and the impact on the economy, quality of life, and security. The length and degree of this examination will be very uncertain, as well as the outcomes. This third stage is the re-enchantment or the reorientation phase. This is often when compromise, collaboration, and adjustments are made in the adoption. Consumers, society, and demographics in the U.S. and globally will emerge to play a role in the impact of new innovations in the short and long run.

Managing extreme volatility and tight margins

The scenarios and factors impacting business decisions will create extreme economic volatility. The management of this volatility while walking the “squeezed margin tightrope” can cause fear for some producers. During periods of tight margins and extreme volatility, this fear can result in managers becoming very passive in management and executing business decisions. The key is to position the business and financial strategies to capitalize on windows of opportunity while minimizing the possibility of negative outcomes that could impact profitability and the financial position.

A basic cash flow statement on a quarterly or monthly basis is a good start to managing volatility and tight margins. The key is to develop the best, average, and worst-case scenarios with various price, cost, interest rate, and production levels to develop the guardrails for possible outcomes. A cash flow statement is valuable for the execution of marketing and risk management decisions throughout the year or when monitoring outcomes versus projections. This data allows for more objective decision-making rather than emotional decision-making.

“Base hits” as opposed to holding on for the highest price, or a “home run,” is a good strategy for marketing decisions. Granted, in two out of every ten years, the home run hitters may have bragging rights in the community over the base hitters. But, the base hitters, or the producers that hit small profit windows or minimize losses, are usually the winners in the long run. Of course, with strong liquidity one can manage around supply chain issues and have the flexibility in marketing plans to meet margin calls and sell output on your terms rather than to meet payment obligations and cover expenses.

How much working capital is desirable? Having working capital of over 25 percent of expenses would be considered strong, or a green light. The top 20 percent of profitable farms in the FINBIN database have an average working capital to expense ratio of 44 percent. Contrast this to the bottom 20 percent of producers that have only 11 percent of total expenses in working capital.

Finally, focus on the extremes in production, costs, marketing, and risks. Having a risk management and financial plan will be critical. Will you be ready to manage the extreme volatility and tight margins in 2024?