Dealing with roller coaster economics

by Sally Colby

Dr. David Kohl, professor emeritus, Virginia Tech, said we’re in a time of roller coaster economics, and encouraged business owners to maintain a management mindset.

“Ag business owners will have to manage several major aspects of their business over the next three to four years,” said Kohl. “We have economic volatility in extreme. That not only gives us a financial challenge but an emotional challenge.” Having a good business IQ is critical, and requires managing prices, working line by line on cost management and managing interest rates.

Kohl noted critical tidbits for business owners. “Managing interest rates is something business owners haven’t had to do for the past 10 years,” he said. “You’re going to have to be adaptive because competition requires you be there. American agriculture is in a danger transition – between now and 2035 we’re going to have $35 trillion worth of assets change hands in the U.S.”

Roller coaster economics begins with a historical look. “If we go back about 12 to 14 years,” said Kohl, “we were in a great commodity super-cycle. What was going on has only been replicated three other times since 1910. We have a convergence of events – the convergence was a weak dollar because coastal economies were in recession.”

Another crucial economic aspect is that communist countries tend to create an economic bubble. “In the 1970s it was Russia and the Soviet Union,” said Kohl. “It’s China this time, building infrastructure. China has raised the level of emerging nations like Brazil, Russia, India, South Africa, South Korea and Mexico. Their purchasing power doubled in 15 years. If your purchasing power doubles, you eat better. Your clothes are better and you drive more wheels. It brought unprecedented profits to agriculture.”

Kohl cautioned business owners to be alert to the phrase “you’re in a new normal” in economics because change is about happen. “Remember that 80% of the economics is about human behavior,” he said. “This is why the geeks get it wrong with models, and even the feds get it wrong.”

In 2020 and 2021, ag saw unprecedented profits thanks to help from the government. “One of the things I see is entrepreneurism and not loaded with government payments, which is good,” said Kohl. “But we’re heading toward the downhill of the roller coaster. You say ‘That sounds like gloom and doom’ but no – good business managers will do well in the downside.”

A relatively new requirement for consumer products is the requirement benchmark ESG – environmental, social and government. “This is occurring because large company boards are often filled with activist investors,” he said. “Consumers are also demanding it.”

Kohl predicted gas prices will continue to rise. “It’s one of the things that’s impacting inflation that isn’t going away,” he said. “Eight out of every 10 dollars you spend on your business in agriculture is somehow connected to energy and oil.” Kohl recalled 9/11 and the subsequent promise from the administration in power that the nation would become energy independent in 25 years. “We did it in 10 years,” he said. “We did it with fracking and ethanol. What’s happened is that policy is getting unraveled. In every recession since 1969, except two, it was oil and energy prices that kicked in the recession. When prices go up at the fuel pump, we cut back.”

Regarding the labor shortage, Kohl said every major company in the U.S. plans to reduce labor by 30% through automation by 2030, and jobs will require a different skill set – managing data, critical thinking and communication. “If you have those three skills, you’ll be employable in the future,” he said. “Data and information will give you the competitive edge.”

China is always in the big picture, and it’s because our biggest ag trader is China – the second largest economy in the world. “What’s happening in China right now is 29% of its economy revolves around real estate,” said Kohl. “Nine percent of Chinese adults own homes but many own homes that haven’t been built and developers are going bankrupt. We should watch that because it could ripple through the world economy.”

The adaptation of technical innovation is an art and a science, said Kohl. “It’s the 5% rule,” he said. “What are three ways you’re going to become 5% better? What we have found in studying businesses over the years is businesses that are very successful are 5% better in many small areas. They sweat the small stuff.”

Is your business bringing on the next generation of human horsepower? “That is going to be very critical,” said Kohl. Businesses need people who show up to work on time, follow directions and get along with people. “If you get those three things, the key is retaining them. What are you doing in your job culture to retain?”

Kohl reminded business owners to “get better before you get bigger” and make use of interdependent advisory teams. “In the future, you’re going to be interdependent and deal with people,” he said. “One of the best management practices I’m seeing in agriculture now is either formal or informal advisory teams – you occasionally meet and exchange ideas. Productivity separates the great from the good.” Kohl suggested 10-20% of a time budget should be spent on planning – operational, financial, business and marketing.

Cash flow is 80% of a business plan, but Kohl said this year, overestimate costs by 25% and have a profitability plan. “Remember the 60-30-10 rule – 60% of your profits go to build efficiency first, 30% to build working capital and 10% is ‘funny money,’” he said. “You also have to have a people plan. Your success is about people – getting the right people around you is critical.”

He advised business owners not to work more than 2,500 hours a year in the business, and no more than 500 hours in outside organizations. “If you do,” he said, “one of three things will happen: your business will go down, your family will go down and your mental, physical and spiritual health will go down.”

A firm believer in simplifying life outside the business, Kohl suggested shutting off technology for at least two hours a day. “Exercise, take a walk and watch your diet.”

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