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Commodity pricing and global economics

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The next few articles in this column will be based on questions that have been uncovered during 20 weeks of travel and engagement with a wide variety of groups inside and outside of agriculture. The responses will be a “quick hitter” approach rather than an in-depth response for spring and summer reading.

What tools are needed to adjust business planning to account for global markets and volatility?

It appears that for most commodities we are in an economic cycle of tightening margins and extreme economic volatility. Human emotions can run in high gear while objectivity may be placed on the back burner. With that being said, one of the most important tools is the cash flow budget. The cash flow should be prepared at least on a quarterly basis, even if revenues are only received annually because expenses are incurred year-round.

To account for economic volatility as a result of global election outcomes, sanctions tariffs, or weather, scenario planning is necessary. This includes various production, price, cost, and interest rate assumptions. In today’s economic environment, a wide variety of parameters are necessary to provide the financial outcomes or possibilities. A best, worst, and average case planning exercise can assist in determining a marketing and risk management program and specific levels of coverage or pricing alternatives. Our dairy creamery provides another level of scenario planning called the “best of the best.” This challenges employees, managers, and owners to stretch goals that are periodically assessed throughout the year.

Decision making

After one knows the cost and breakeven parameters, some producers will rely on a marketing advisor or service to assist in decision-making. This is analogous to assistant coaches or scouts providing valuable input. These advisors must understand your goals, which should be in writing to be measured and are an important part of the communication process. Despite the best advice, sometimes outcomes may be negative. The key is to learn from the mistakes, conditions, and variables that led to negative outcomes and do not repeat them.

Profit plan

Finally, if you make money, have a profit plan. Profits will need to be allocated in different areas of the three-legged stool. In a volatile economic environment, one must allocate profits to build working capital reserves. To do this, you must pay income taxes and balance the three-legged stool with a prioritized capital expenditure program.

The current economic environment will require your “A” game to develop a business and financial plan that is both executed and monitored.

The opinions of David Kohl are not necessarily those of Farm Progress.

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