July 19, 2022
Tips for Managing your Business in an Inflationary Environment
Topping news headlines is inflation and its impact on the U.S. economy. As measured by the Consumer Price Index, inflation is currently running in the 8% range and prices are rising at a rate we haven’t seen since the early 1980s. The causes are complex and range from the impact of the COVID-19 shutdown to the Russian invasion of Ukraine and supply chain disruptions around the globe. We recently interviewed several Farm Credit East business consultants for their strategies to help producers manage through the current inflationary environment.
Keep your revenues and margins in mind and think about your return.
While input costs have risen significantly, particularly fertilizers, be careful about cutting back too much. Remember, output prices have risen, too. So, while that fertilizer bill may be shocking now, think about your output and your gross margin. Don’t skimp up front and hurt your revenue in the end.
However, there is also a point of diminishing returns. Whether you’re fertilizing crops or feeding cows, there is a point where the cost of that additional input doesn’t pay for itself anymore. Know that point for your farm. Keep in mind that cost of production will vary by farm and your individual circumstances.
Finally, plan for increases. Look at scenarios and think about what to do if various inputs rise. Then budget and manage your cash flow accordingly.
Efficiency is more important than ever.
Spending money on efficiency might make more sense now than ever before. With the rising cost of labor, consider investments to improve efficiency, such as those in technology, facilities and people.
At the same time, don’t lose your labor pool in the midst of rising wages. Keep up with wage rates and give your team the training and the tools they need to work effectively and efficiently.
Test your soil — and engage your team!
Don’t pay for fertilizer that’s not needed. Prioritize better fields – your inputs will be most effective on your best ground. Engage with agronomists or crop consultants. More than ever, it’s worth paying for some good advice.
Talk with your loan officer about interest rates.
Rising interest rates make higher debt levels more difficult to manage. It might make sense to lock in a fixed rate on some of your debt if you have variable rate debt. Note that this is more of a risk-management strategy than a way to save money. Expected increases are already “baked into” fixed rates, but you’ll be guarding against unexpected further increases.
While managing inventory is especially tricky right now, it may make sense for your business. We will likely continue to see more price increases before we’re out of this cycle, so it may be beneficial to order and store nonperishable inventory. In some cases, prepaying might improve your negotiating position and allow you to lock in costs. Prepayment can also be used for tax management. Alternatively, you can seek to contract input costs rather than prepayment. However, keep in mind the cost of storage.
Some agricultural businesses may be able to enjoy good profit margins if they’re able to use last year’s inputs, secured at lower costs, to produce this year’s product that will be sold in a higher price environment.
Stay in tune with markets.
As input costs rise, there is no guarantee of a higher price to offset those costs. This is often the case later in an inflationary cycle. At some point, you may end up buying in advance and find out later you could have saved money by delaying a purchase in a declining market. Don’t judge yourself too hard.
Instead, risk manage your sales price at some point in the cycle. Early in the cycle, focus on locking in input costs. Further in the cycle, consider locking in or protecting the price of what you sell. Crop or dairy farms can use CME trades to do this or deal with a local grain market that is willing to contract. In dairy and crop, the crop insurance products can provide a government subsidized program that will provide the ability manage the risk of crop prices/milk prices with less downside risk.
Financial management is crucial.
Now is the time to optimize your liquidity and try to keep your debt manageable. Keep room on your lines of credit and debt capacity.
Additionally, now is probably not the time for expansion. Debt, inputs and construction are expensive right now, and real estate seems to be at a peak. Try to optimize your current situation and facilities first.
No one really knows exactly when it will happen, or to what degree, but we’re likely to see a slowdown in the economy or a recession. Position yourself now to withstand a downturn.
Take care of yourself.
As with any stressful time, it’s important to keep things in perspective. Be sure to take care of your health — physical and mental. Avoid getting too focused on the downside and know who you need to talk to when you are feeling pressure. For additional resources, learn more about Farm Credit East’s Customer Assistance Program — a program free to all customers, their employees and their family members. Learn more at FarmCreditEast.com/CAP.
Thank you to Farm Credit East business consultants: Mark Mapstone, based in Cortland, NY; Denise Russo, based in Williston, VT; Gregg McConnell, based in Geneva, NY; and Ethan Robertson, based in Auburn, Maine, for their contributions to this article. To read the full article, originally printed in Farm Credit East’s July Knowledge Exchange Partner, click here.
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