Managing the economy and business cycles can go a long way in helping farmers profit in good times and mitigate bad times. However, you must fully understand these concepts before administering them.
understand the cycle
The agricultural sector's economic cycle is an environment outside of farmers' control and includes factors such as weather, commodity prices and interest rates, explained FCC Vice Chairman and Chief Economist JP Gervais.
Business cycles have periods of marked highs and lows. Predicting their tipping points with any accuracy or consistency is nearly impossible, he says. Fundamental factors change and the cause of the rise and fall of the previous cycle and its duration alone are insufficient to predict what will happen next time.
In contrast, the business life cycle is the strategic environment in which a business operates, with stages such as start-up, growth, maturity, stability, or decline.
“These are decisions I'm making and I have control over,” Gervais says.
Cycle management
Farm owners can be proactive about the cycle rather than reacting to it.
Farm owners can be proactive about the cycle rather than reacting to it.
For example, when prices are low in a business cycle, an expansion phase may be initiated in anticipation of rising prices. Or you might invest when interest rates are historically low.
Think of cycles as either progress or regression. There is no neutral position. It's important to keep your foot on the gas and think about how to make the most of the current situation.
“Write down your short-term and long-term goals,” Gervais recommends. “Think about your key success metrics – things that you can objectively measure in terms of achieving the goals you have set for your business. Next, think about how your business measures up against these critical success factors. Evaluate whether it is working.”
Managing risk
There is also a risk management component to these decisions. “It’s not about not taking risks, it’s about understanding the risks you take and how to mitigate them,” says Gervais.
Business cycles teach us that good times don't last forever. Due to the overall growth of the past 15 years, some of the generation X and beyond farmers often lacked years of experience that was simply aimed at limiting losses.
The weather challenges experienced throughout 2021 have changed the game for many producers and highlighted the importance of ensuring they have a strong foundation in management skills. This includes knowing:
Understanding these risks requires planning and analysis. Gervais recommends that you select your farm's business dimensions and evaluate the impact of several scenarios.
“For example, when thinking about financial risk, assess how different stages of the economic cycle affect your ability to service debt, cash flow, and your ability to expand and execute on different strategies.” he says.
from agri success Article by Richard Kamchen.
