2015 could be the year interest rates start to increase after a seven-year run of little change. Watch for several things that may indicate interest rate changes. First, look for continued decline in unemployment rate, and particularly wage and employment growth. Second, watch for continued growth in the U.S. economy in terms of gross domestic product (GDP) above 3%. Finally, if inflation rate increases to 2% or 2.5%, the Federal Reserve may raise interest rates. With two of these three conditions currently met, mid-summer is the likely timing of interest rate increases.
How low can oil prices go? Some are predicting the WTI oil price in the high $30 per barrel range. Others, such as T. Boone Pickens, the famous oil magnate, are indicating prices may rise back above $100 per barrel in 12-18 months. Yes, this is quite a range to consider in cash flow planning. With approximately 80% of all expenses on farm and ranch businesses connected directly or indirectly to oil, this variable needs close consideration in the risk management angle of a business. Some proactive grain producers I have talked with have locked up to 50% of their energy costs as a risk management strategy. As a frame of reference, in 1998 oil prices were at $8.74 per barrel!
Will 2015 be the year of farm land value and cash rent decline? While farm real estate values are linked to local and regional dynamics, another soft margin year for producers could result in declines in some areas of 10 percent to 20 percent. This will most likely affect land that has marginal productivity, issues related to infrastructure or use of technology, or limited moisture in specialized grain areas.
Will 2015 be the year of gut checks and transition? Continued lower commodity prices will be a wake-up call for younger producers and “alpha dog” aggressive growth producers of the past decade. It will be interesting to see how the dynamics of land rents and values play out when large blocks of land come on the marketplace.
Will 2015 be the year older producers who have made more money in the last seven years than the prior 30 or 40 years of farming decide it is time to transition out of the industry? What opportunities could this create? In my travels I have noticed more senior producers are asking questions and discussing options of phasing out before the downward cycle gains momentum.
2015 may be the year of diversified farms. In recent years, specialized growth was the most popular strategy. Will efficient midsize farms that focus on diversification of crops, livestock, and other commodities be the business model that is most profitable?
Finally, there is usually some unknown shock or black swan that raises its ugly head. Like a linebacker blitzing unexpectedly or a safety or cornerback that is out of position but intercepts the ball resulting in an upset, football and business are very similar in some ways. Whether it is a cyber-attack, a food scare, a major economic or financial crisis, or a military or terrorist attack, these events occur unexpectedly. Having a plan that is both resilient and agile will be the theme for 2015 and beyond, regardless of size, enterprise, or location of your agricultural enterprise.
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