By: Dr. Kohl
In my travels I frequently mention to groups that the older I become and the more I travel, the less I seem to know. The world is a big place, and it is often difficult to grasp and “get your arms around” all the factors that impact business and family decision making. Let’s take some of the global challenges and opportunities, and bring them down to your kitchen table, iPad, or board room.
Anyone involved in agricultural decision making needs to keep the emerging markets, often called the BRICS nations of Brazil, Russia, India, China, and South Africa on their radar screen. These nations have represented 50 percent of world economic growth since the year 2000, and therefore have contributed to increased global demand for food, fiber and fuel. The growth of these nations has resulted in a “Swiss cheese” agricultural economy. That is, certain segments and enterprises that align with these nations’ demands have had growth and have become “islands of prosperity.” However, others in the agriculture industry, particularly segments of the protein sector, have experienced elevated input costs, margin compression, or negative margins.
In your decision-making, remember, the 8-5-3 Rule. If the GDP (gross domestic product) of the BRICS nations grows at approximately an 8 percent rate, commodity prices will do well, everything else equal. However, if they slide to a 5 percent growth rate, expect a 20 percent reduction in commodity prices. If the GDP growth of these nations falls to a 3 percent rate, it is an indicator of recession for the BRICS, so expect major correction of commodity prices.
A key variable that could impact the BRICS’ growth rates is how the European economy handles sovereign debt issues. The European region is one of China's largest customers. Recently China eased bank lending requirements in an attempt to stimulate growth in response to the slowing of its economy, partially due to decreased exports. If the euro was to break up, this could result in a ripple effect through the world economy. Currency valuations and trade agreements would be in a turbulent mode.
Another factor one must weigh in global economics is that the BRICS nations have avoided a period of adversity so far, unlike others around the world. For example, the euro sector was doing fine until the world economic collapse shocked its nations and banking system, resulting in discourse amongst the sector. If an adverse political, military, or social event was to descend on China and the rest of the BRICS, surprising their economies, the implications could be immense for U.S. agriculture. History has shown the way a nation handles adversities is similar to an athletic team aspiring for championship. An adverse event will either knock them off track, or they will gather strength and come back stronger. Only time will tell if or when this will occur.
The ever-present “black swan” of oil prices will be a factor in agricultural decision-making for an extended period of time. Maintain close surveillance on issues in the Middle East, particularly involving Israel, Iran, and Saudi Arabia. Any disruption could result in a spike of oil prices, possibly to as high as $200 per barrel. While the probability is small, this planning aspect needs to be considered.
Shifting focus to the developed countries including the U.S., business models and planning must be developed for a 1 percent to 2 percent GDP growth rate for these regions of the world, with the constant threat of recession. Several major headwinds to these countries are high levels of federal debt, an aging population, and expensive entitlement programs. These factors, along with a dismal housing market and high rates of unemployment, will be the variables that contribute to slow to modest growth at best for industries and enterprises tied to developed countries’ economies.
While my comments thus far may sound somewhat negative regarding global economics, opportunity abounds for the agricultural industry. One must conduct financial scenario planning to outline strategies and actions given volatile times. Next, if your operation is profitable, develop a plan to allocate profits to their best uses, and build reserves of working capital and cash in case of financial adversity. Position your business for the next opportunity with a disciplined growth strategy. Yes, global economics are intimidating and sometimes difficult to comprehend; however, sound, disciplined decision making in conjunction with a strong relationship lender and team of advisors will be critical in navigating the global economic whitewaters.