It’s a volatile time in agriculture. While commodity prices are high and working capital has increased, many factors are squeezing profitability margins, including rising interest, inflation, input and fuel costs. Plus, economic indicators show a possible recession on the horizon.
Bell Bank’s 6th annual ag conference – AgViews Live – drew record numbers of attendees for the second year in a row as producers and others in ag gathered to learn from Dr. David Kohl, an educator and speaker on agriculture and the economy, and Lynn Paulson, Bell’s director of agribusiness development, how to handle the economic shockwaves and what to expect going forward.
Here are the top 10 takeaways from this year’s conference:
- Most producers are doing well, so be wary.
Most ag producers are in excellent financial shape with last year being many producers’ best year ever, but much of that came from increased commodity prices and government payments, and producers’ percentage of working capital as a percent of revenue isn’t as high as it was during the last super-cycle.
- Food shortages could lead to food nationalism and social unrest.
Russia and Ukraine produce 29% of wheat, 14% of corn and 80% of sunflowers globally, and the day after reaching an agreement to allow grain exports, Russia struck Ukraine’s most important port. David explained that food shortages lead to food nationalism, where countries take care of themselves before they export, and hunger can lead to social unrest, followed by military conflict and terrorism.
- Input shortages will have a big impact on 2023 cash flows.
With Russia and Ukraine providing 30% of nitrogen and potash, as input shortages continue driving up prices, producers may need to consider alternatives.
- Rising interest and inflation rates will squeeze profitability.
As interest rates rise, so does the national debt, and as money is needed to pay it down, less may be available for ag programs. Higher interest rates also mean a stronger dollar, which hurts exports.
- Higher fuel prices have led to consumers spending and traveling less.
Both Lynn and David said it’s not realistic to expect to “flip a switch” on fossil fuels. While green energy is becoming a secondary concern to the economy in some nations, ethanol and soybean aviation fuel could be part of the solution.
- Signs of a recession are looming.
Out of the 10 leading world economic indicators David watches, 6 are warning of a recession, and if it’s global, our trading partners may have limited income to purchase imports.
- Labor shortages will likely lead to job shortages.
Labor shortages are unlikely to end anytime soon, which will likely lead to increased automation and job shortages in 4 or 5 years.
- Equipment shortages are likely to continue.
B.J. Knutson of Titan Machinery and Daryl Shelton of RDO Equipment said labor, driver and supply chain shortages are affecting equipment availability, and they don’t expect they’ll have enough stock for possibly another 2 years. With supply chain constraints, some growers are holding equipment longer than they otherwise would, and even acquiring lower-tiered emission units, further increasing used equipment demand.
- Technological advances in equipment improve productivity but may impede producers’ ability to repair the equipment themselves.
Smarter machines are helping producers deal with labor shortages, increase efficiency and reduce chemical and fertilizer applications. In order to do so, equipment has become so advanced, many producers no longer have the on-farm expertise to do their own repairs, especially considering the tight labor market. Both manufacturers and dealers support producers’ right to repair, but they do not support equipment modification, due to emissions and safety concerns.
- Improve your liquidity to preserve wealth and position yourself for opportunity.
Working capital is a powerful asset to cushion yourself during a downturn and prepare yourself for possible opportunities, such as the purchase of land, which continues to be of high value.