The next decade will be one of continued volatility and uncertainty for farmers, but overall, agriculture—particularly for grain producers—offers opportunities like it seldom has before. "The opportunity to position yourself has never been better," said Danny Klinefelter, ag economist at
Texas A&M University. Volatility and uncertainty create both risk and opportunity, but there are actions producers can take to minimize risk.
1. Structure debt appropriately. Low interest rates create an opportunity to structure debt appropriately so farmers don’t get caught by rate hikes, Klinefelter said at the Iowa Farm Bureau Federation’s Economic Summit. Long-term fixed rates carry a slight premium compared with short-term variable rates, but it might be worth it. "Think of that as an insurance premium," he said. "Interest rates can change very, very quickly."
2. Use the correct accounting measure. "Cash accounting lags accrual accounting by two to three years," he said. As a result, cash accounting can give a false measure of where the farm is financially. Producers also need to be concerned about counter-party risk. For example, on larger loans, your lender might be participating with a larger lender. "You need to know who the participating lender is," he said.
3. Be aware of macro factors. Beyond these basic financial management issues, producers need to be aware of macro factors that can impact their business. Chief among them is the lack of fiscal discipline in Europe, the U.S. and even China that could impact not only global economic growth, but demand for agricultural goods. In February, China had a trade deficit of $31 billion, the highest since 2000. "China is worried about inflation. It has dropped interest rates three times this year," Klinefelter said.
4. Watch energy trends. Looking at energy trends, Klinefelter said that "ethanol has reached its zenith." Global social unrest could impact agriculture too—70% of all oil and 60% of all fertilizer is produced by politically unstable countries. Klinefelter forecasts both input and output volatility in the decade ahead.
5. Seek out new business arrangements. Klinefelter predicted that successful farmers will avail themselves of alternative business arrangements, such as alliances, joint ventures, pooling arrangements and peer groups. Land values will flatten out, and need to. The 15% to 30% increase of the past three years in some areas means that land nearly doubles in value every three years, which is unsustainable without hyper-inflation.
- September 2012