The Florida Agriculture Financial Management Conference held recently in Orlando brought some of the best minds in ag economics together to provide growers with financial planning advice, which is critical in today’s business environment. Farm Credit of Florida hosted the event with support from a USDA specialty crop block grant and other industry supporters, including Florida Grower. Two days of workshops provided growers with hands-on practical tools they can use in their business operations.
A Global Web
The world-renowned ag economist Dr. David Kohl hosted a workshop titled “Reading the Numbers and Decision Making in the Wild World of Global Economics.” His take-home point: Ignore what’s going on in the global economy at your own peril.
“Finance is so much about psychology,” he said, opening his presentation. “I will tell you up front, the more I travel, the less I know. This world can humble you fast, and it is very difficult to get your arms around what’s going on and how it will affect your business.”
Just because it is hard to keep a handle on the global macroeconomics, Kohl said it is in a grower’s best interest to stay plugged in. Kohl went on to explain that we are experiencing a global synchronized economic slowdown. This is occurring as agriculture (particularly commodities) has benefited from an extended super cycle. But, he warns global events could threaten that long run.
He said the global economic slowdown is occurring on three fronts. The first front is the European economy, which makes up 26% of global GDP. Kohl noted that 12 of the 17 EU nations are now in recession along with Great Britain. And all are carrying high levels of debt.
“You better watch what Germany does,” said Kohl. “German Chancellor Angela Merkel is up for re-election in 2013 and she has put all her political capital in keeping the Euro together. The Germans are not happy with her, asking why they should bail out the Greeks and Spaniards.”
Because of the turmoil, he said there is a 35% chance the Euro breaks up. If that happens, the dollar will be strong, followed closely by China’s yuan, which could make a play as a more dominant currency.
China is the second front in the economic slowdown. According to Kohl, China’s economic engine has been growing at a blistering pace for years. “We’ve never had a country grow so strong for so long,” he says.
China’s economic health is closely tied to trade with Europe. Because of problems in the EU and reduced demand for Chinese goods, along with a lagging U.S. economy, China’s growth rates are falling.
Kohl noted when China is booming, it wants three things — food, fiber, and fuel. American agriculture has benefited greatly from this demand. But, he cautioned the prospects of rural America are tied to emerging economies. If China and other emerging economies’ growth rates collectively drop below 3%, it means those countries are in recession and commodities collapse. “The bottom falls out and we are looking at $50 per barrel oil and $3 to $4 per bushel corn,” he said. He continued that the current growth rates of these countries had fallen to 4.8%.
The third front in this global slowdown is uncertainty over U.S. fiscal policy, taxes, health care, and regulation. Kohl noted the Federal Reserve has promised to keep interest rates low until 2014. He warned not to be comfortable with that promise. “Our rates could increase and it might be out of Mr. [Ben] Bernanke’s (Federal Reserve chairman) hands.
Given the three fronts of the global economic slowdown, Kohl suggested growers need to be prepared for extreme market volatility and the potential for rapidly increasing inflation.
So what to do? Kohl said cash is king in this environment. He recommended that growers keep one to two months of expenses in cash in the bank. And, he said it is extremely important to have a disciplined financial and business plan. As a rule of thumb for financial planning, 60% of profits should go toward building efficiency, 30% should be dedicated to build working capital, and 10% should be spent on having fun. He noted that those who have a solid financial plan can come out on the other side of hard economic times stronger and even buy up assets of those who didn’t have plans at 50¢ and 60¢ on the dollar.