Well-managed beginning farms can thrive in uncertain times
Have cash available and be ready for opportunities.
If it's possible to sum up a frenetic, wide-ranging workshop by ag finance expert David Kohl, that's the core message he gave to more than 20 young farmers and ranchers and their spouses in Omaha Thursday.
The energetic Virginia Tech professor emeritus offered tips on surviving volatility at the "Side by Side young and beginning conference" held by Farm Credit Services of America this week.
Kohl, who was wrapping up an eight-week speaking tour, is the voice of experience on farm financial management. He helped write uniform financial ratios for farmers and ag lenders during the farm debt crisis of the 1980s.
He invested in and helped turn around a now profitable dairy farm that sells bottled milk and ice cream directly to consumers.
Kohl offered his Omaha listeners a new paradigm for the early 21st century:
"You're going to see volatility, but volatility in the extremes," he said.
No one knows whether the economy will continue to rebound or slip back into a double dip recession, but with a heavy government debt load weighing on the economy, "we're going to muddle along for the next decade," he said.
Yet that doesn't mean there won't be opportunities.
"Some of the best business models were developed in the 1980s and the 1930s," he said.
But businesses with cash will be the ones that can take advantage of those opportunities.
Kohl acknowledged that cash is usually hardest for young farmers to come up with. "It's difficult to get. I've been there. I've done that," he said.
Since many farm families depend on off-farm income, having savings is vital when unemployment is high, he said. The real unemployment rate, if you count discouraged worker who've given up looking for jobs and those who are underemployed, is about 16%.
"Make sure you have four to nine months of cash, particularly if you're dependent on off-farm income," he said.
And farms and ranches should have at least 20% working capital, and ideally more than 30% working capital, he said.
"Cash and working capital are going to be king and if you don't have it, you know who shows up on your door? Mr. Murphy," he said, referring to Murphy's Law, which says, roughly, that anything that can go wrong will go wrong. Sometimes the unexpected can wipe out a business.
He advised a three-pronged strategy to protect against risk--protecting revenue with crop insurance and hedging, working to keep cost inputs as low as possible, and managing interest rates.
"While interest rates are low today, they could change tomorrow," he said.
Right now, core inflation is about 1.5% in the U.S. economy, he said.
"If you hear on the nightly news that core inflation is going to two, two-and-a-half, three percent, your interest rates are going up," he said.
And it's possible that interest rates might rise even without high inflation in order to keep attracting foreign buyers of U.S. debt, he said. Once interest rates start to rise, they could hit double-digit rates, he said, but a more likely range might be 8% to 10%.