The decade of 2020 has already been a financial and emotional roller coaster. David Kohl, professor emeritus, Virginia Tech University, suggests the next decade will be a turbulent ride of extreme economic volatility.
He offered suggestions on business practices to help guide dairies toward success during the annual Great Lakes Regional Dairy Conference held in Frankenmuth, Michigan in February.
“This will be the decade of high business IQ,” Kohl said. “Previous decades have been about improving production and operational efficiency, but now those things will have to come together through business marketing, finance and risk management.”
The next 10 years could be a decade of financial extremes, and there are many factors toying with the dairy farm’s bottom line.
Macroeconomic trends with mega-disruption potential
Current inflation rates are shocking in comparison with the past 30 years of low inflation, when the highest rate during that time was a mere 5%.
“When you compare inflation to the 1970s, it got up to 12 to 15 percent. During World War II, it went to 20 percent,” Kohl said. For the short term, energy supply and demand and the Federal Reserve’s response to interest rates are on his watch list for inflation indicators. “My contention is this: The Fed is going to raise interest rates to cure inflation. Our government and governments around the world created inflation by the generous stimulus checks, and we basically have too much money chasing too few goods.”
He expects as many as six or eight adjustments to interest rates by the Federal Reserve, which could increase lender rates by 3% to 4%. He also expects inflation to cool off by mid-decade.
Environmental, social and governance (ESG) come together to create a quagmire of policy based on trending thought. Major retailers are benchmarked and scored on ESG because of activist investors serving on boards of directors who must remain responsive to consumer demands. Kohl says that Europe is five years ahead of the U.S. in this realm, but the trend is quickly becoming mainstream here. An example from Sweden includes a requirement for dairy producers to have cattle on pasture six hours per day for five months. By 2030, Sweden’s farmers must cut their commercial fertilizer use by 40% and chemical use by 50%.
Kohl criticizes the U.S.’s position in pulling out of Trans-Pacific Trade Agreement, basically leaving the U.S. without a trade policy. “One in six days of milk production now goes into the export markets, so right now without a trade policy and people always talking of expansion, high milk prices could quickly cure high milk prices,” he said.
The oil and energy complex and the move to green energy sources are high on Kohl’s watch list. “Every recession has been preceded by high energy costs,” he said, citing the government’s incentivization of green energy initiatives while discouraging coal and fossil fuel use. “Look at what’s happening on the other side of the world. China’s backing off (on green energy) and, in fact, they’re going back to coal. What’s happening is: You’ve seen gas prices go up, and 30 percent of our fertilizer comes out of China.”
Labor shortages have created a $15-per-hour minimum wage without having to enact policy. However, the labor shortage will lead to greater automation, which will likely lead to job shortages later in the decade. For example, Walmart is committed to cutting their labor by 30% by 2030, leaving fewer employment possibilities for their employee demographic.
A benefit of increased technology and engineering will be the data and information gathered through robotics. This explosion of data and information from automation will be an opportunity to improve profits from understanding and implementing the data.
Weather in extremes will require more attention to soil health. “The incidence of 2-inch rainfalls in 24-hour periods has increased fourfold in as many years,” Kohl said, indicating that soil health and how fields respond to extreme weather events will not only benefit the farm but will likely gain significant traction in future farm bills.
The just-in-time-delivery supply chain will continue to challenge both producers and consumers. “Just-in-time inventory management makes all of us vulnerable,” Kohl said.
The decade of economic divide
As a decade of economic volatility looms, trying to manage a farm or business by the news from Washington, D.C., or abroad will bring a person down emotionally. “There are things we can’t manage,” Kohl said. “Good managers will focus on the things they can control, like finances, nutrition, calf management and operational efficiency.”
Kohl says to adapt, innovate, focus and follow the process – gaining efficiency before expanding. Adopting biologic fertilizers like poultry litter or letting marginal rented land go are examples of change and innovation Kohl is implementing on the dairy farm and creamery in which he is partnered.
High-octane business strategies
Line-by-line budget management and cost analysis will be essential to keep costs trimmed. Eighty percent of the farm’s financial story will come from the cash flow statement, and accurate statements will be more important than ever as a business analysis tool and for managers and lenders. It bears repeating that knowing the cost of production is huge, and something more than 50% of farmers cannot answer. Projecting outcomes will be a moving target, and Kohl recommends building in an extra 25% into the cash flow for this year.
Planning, execution and monitoring of plans will take as much as 10% of a manager’s time, requiring follow-through and commitment, he said. Consider conducting a Strength-Weakness-Opportunity-Threats (SWOT) analysis using farm support people, including lenders, veterinarians and others who can help energize the process and bring fresh ideas.
Interdependence is a direction many farm businesses are embracing, using outside influencers to provide feedback on the farm’s performance. An outsider’s objective analysis can often provide a fresh infusion of input those closest to the daily business operation can overlook. It is a growing trend that is helping farm businesses achieve results throughout their business.
Sensitivity analysis or projections are valuable time investments to make, even if costs and market prices are unknown. It will show how different marketing and price scenarios will play out in the business. “Good and bad decisions compound over time,” he said.
Kohl says it is also important to pay attention to “the soft stuff” such as downtime, establishing farm goals and working as a team. Personal attention and commitment to health, exercise, meditation and recreation, along with good nutrition, are the core of what will keep the mind fresh and alert to face challenges.
“This is the important stuff,” Kohl emphasized, reflecting on successful businesses that carve out time for these principles, not only for themselves but across the employee spectrum.
Finally, a positive mindset and continued learning through reading, relationships and learning how other businesses stay successful and relevant will help farms continue a pathway to success during economic turbulence.
Critical business factors to discuss
David Kohl, professor emeritus, Virginia Tech University, lists seven business management factors that are critical to having meaningful conversations regarding the farm’s capacity to weather financial extremes:
• Cost of production
• Cost of production by enterprise
• Goals – business, family, personal
• Record-keeping system
• Projected cash flow
• Financial sensitivity analysis
• Understand financial ratios and breakevens
