Long-term money is getting more expensive. Figure out what impact a three to four per cent rise in interest rates could have on your operation.
The way I see it, trying to make sense of the forces affecting markets right now is a waste of time. Some farmers are into panic selling. Others are sticking their heads in the sand and refusing to take a hard look at the future. It’s been a rough ride, there’s no doubt about that, but with any luck, we’re entering the final leg of market exhaustion before they start to turn around.
From talking to farmers the past month, I know a whole lot of them have jumped out of their investments. In my opinion, a severe downturn is the absolute worst time to do that. But a lot of people are so demoralized that they decide to bank on risk in a downturn and take a loss.
There are lessons to be learned here. If you’re a producer who sat through all the highs last spring and summer and did nothing, the current financial slump is going to be a tremendous hurt. Maybe you were one of the producers who watched high after high go by, hoping for an even higher high. If that’s the case, there is no immediate solution to having done a poor job of managing earlier this year. What you can do is take a hard look at last year. You’ll learn a lot about your management style and how you make decisions, especially selling decisions.
Compare notes with other people, especially your contacts outside agriculture, who can give you some perspective. We trust our colleagues in ag, but in a downturn this deep, you want to tap into experience and insight in many different industries.
At PMG, we’re getting lots of calls from people saying: “I didn’t do anything last spring, now what do I do?” And there really isn’t an answer to that question right now. We’re sailing through uncharted waters. On the Chicago exchange, wheat is hovering around $5.43. This hurts when you consider where we were in April, and hurts even more if you didn’t market last spring.
The only partial solution is
to take stock of your situation now, look into the future, choose a path and stay on it. Here’s where you start: Do your numbers for the 2009 season and start identifying all your “what-if” scenarios. What if interest rates go up? What if you can’t extend your credit? What if you get poor crop conditions?
If you’re diligent, it might be possible to work a few things in your favour. Right now, I’d carefully monitor, but not necessarily book, new crop inputs. If you have somebody to help you do this, all the better. A lot of input prices are expected to drop 40 per cent. Fertilizer has taken quite a hit. The demand for inputs like fertilizer and seed is going to change substantially in this downturn. And I think we’re going to see a slowdown in the expansion of seeded acres in a lot of areas. It’s too early to guess how big the reaction to this financial crisis is going to be, but it could get ugly.
Take a hard look at your variable interest rate loans. Brush up on the policies surrounding your interest rates and how quickly you can lock in. Variable rates up until the crash have been a good idea because rates have been flat or moving sideways. But long-term money is getting more expensive. Figure out what impact a three to four per cent rise in interest rates could have on your operation. When we start crawling out of this financial pit, we’re going to be dealing with hyperinflation as a result of the dollars being injected into the banking system.
To reduce the chances of making an impulsive mistake, don’t watch the screen everyday — that’s going to be a painful process. Think about taking a holiday sooner rather than later. Step away from it all for a period of time. Given the current financial mess, it won’t be one particular item that will drive the 2009 crop year. We’ve got the Canadian dollar dropping. We’ve got oil dropping. Nothing is untouched. If you’re contemplating selling out, it might not be a bad idea to shut off your computer screen and avoid any major market moves until we get some stability back.
Even in the midst of market turmoil, we should set our sights on opportunity. The expression “champagne tastes but a beer pocketbook” may work in the farmer’s favour. China is developing a taste for beer. Import demand is expected to increase steadily to about 3.4 million tonnes (53 per cent of world trade) by 2011. And let’s remember that the world malting barley trade is expected to increase from about 4.5 million tonnes to 6.4 million tonnes by 2011. Canada’s share of world trade is also expected to increase from 28 per cent to 32 per cent. If people are crying in their beer about the markets, let’s hope it’s our quality malt barley that props them up.
Gary Pike is president of PMG. PMG provides management, marketing, business planning advice and coaching to members who represent 2.5 million acres in Western Canada. To find out more about PMG and how to become a member, visit www.agcoach.caor call us toll free at 1-877-410-7595.